Software licensing: it ain’t necessarily so…

porgyIt ain’t necessarily so
The t’ings dat yo’ li’ble
To read in de Bible,
It ain’t necessarily so.*

The theme of today’s sermon is the commercial supply of software, and the contracts that are used for such supply.
Typically, such contracts provide for a licence to use the licensor’s intellectual property. As a result, software licensing is commonly thought of as a type of IP or technology licence. However, in IP Draughts’ view, there are flaws in this approach. Many software supply agreements are closer, conceptually, to a sale of goods than to an IP licence.
Grant
In many technology licence agreements, the licence grant is at the heart of the agreement, often placed “front and centre” in clause 2. Much thought is given to defining the intellectual property that is to be licensed, the types of licensed product that may be made and sold under the licence, and any field and territory restrictions.
By contrast, the software licence agreement will often not get into the question of what IP is being licensed. This omission would be extraordinary in most technology licensing, but in software licensing it is regarded as normal – the customer doesn’t care what IP is being licensed, as long as it won’t be blocked off from using the software in accordance with the terms permitted by the agreement. This is because what the customer is really buying is a product; the IP licence is secondary.
Supply of product
In many commercial software supply agreements, the heart of the agreement is the supply of a product, and associated terms, including specification, warranties, delivery, acceptance, and ongoing support. The agreement will usually include licence terms, but they tend to be ancillary to the main commercial provisions. Because software is an electronic product, which can be reproduced virtually without additional cost, a supplier will usually wish to place limits on the use that can be made of the software. The price charged for the software may be based on the extent of use that the customer is permitted to have under the contract. A convenient contractual mechanism for setting these limits is to grant a limited IP licence.
A distinction should be made between supply of software to an end user (under an end-user licence) and supply of software to a business that will distribute copies of the software, or incorporate it into another product for supply to an end user. The recipient under either type of agreement will typically be permitted to use the software under written licence terms which set limits on the permitted use.

Implied and express terms

The use of a licence mechanism in software supply is understandable, for several reasons. It provides a way of limiting the use that the customer can make of the software, which enables the supplier to maintain some control over reproduction of the software and to establish robust pricing models. Perhaps it points the courts away from the idea that software should be treated as the sale of goods, which might have unfortunate consequences for the supplier, including:
  1. The application of laws on “exhaustion of rights” and “non-derogation from grant” – but over time these areas of law are encroaching on software supply – eg see the UsedSoft case.
  2. The incorporation of implied warranties into the contract, eg in the UK warranties of title and quiet enjoyment under the Sale of Goods Act 1979.  Similar warranties can be found in some other jurisdictions, eg countries that have incorporated the UN Convention on the International Sale of Goods into their national law.

As previously mentioned on this blog (see last link above), the implied warranty of quiet enjoyment has been held to have been breached if a purchase of goods is sued by a third party for IP infringement. It might be argued that industry practice deals with this issue explicitly, so that it is not necessary to get into academic discussions about whether software is goods for the purposes of sale of goods legislation. The issue is dealt with explicitly in software licence agreements that include (as many do) either a warranty of non-infringement of third party IP, and/or an indemnity against liability arising from such infringement.

The practice of including such warranties and indemnities is much less commonly encountered in technology licensing, particularly in the case of early-stage technology licensing. This contrasting practice reflects, in IP Draughts’ view, the reality that software supply is very close to a supply of goods and not very close to a licence of technology.

 

Competition law

A little over ten years ago, there was much fanfare over the inclusion of software copyright licensing in the 2004 EU Technology Transfer Block Exemption Regulation. Previous versions of the regulation (they tend to be replaced and updated every 10 years or so) had focussed only on patent and know-how licensing.  Ten years later, the European Commission has had second thoughts, and the 2014 version of the regulation, and associated guidelines, clarify that most software licensing should be considered under the block exemption regulation for distribution of goods. Rhetorical question: could this be because software supply is much closer to the sale of goods than it is to technology licensing?

 

Convenience of lawyers?

A possible reason why software supply is thought of as an IP transaction lies in the organisation of law firms. Complex, technology-related contracts are often dealt with by a specialist department of the law firm, sometimes called an IP and IT department, or a TMT department, or similar.

IP Draughts' father bought one of these in 1979, and IP Draughts programmed it to perform invoicing and payroll functions.

IP Draughts’ father bought one of these in 1979, but applications software wasn’t available. IP Draughts programmed it to perform invoicing and payroll functions, saving the programs onto cassette tapes.

Software supply agreements have only been around since the 1980s, and when they first appeared it was understandable that lawyers and their clients struggled to fit the facts of software supply into a conventional commercial law category. Established law and practice in relation to the sale of goods didn’t quite fit the new technologies. 30 years on, we should be more confident about treating commercial software supply as a variant on the sale of goods.

 

*Written by Ira Gershwin, from Porgy & Bess

2 Comments

Filed under Licensing

2 responses to “Software licensing: it ain’t necessarily so…

  1. Fred, agreed, thanks for your comment

  2. Mark – this article makes a very good point. However I think the reason why IP lawyers get involved in software licensing is because in this day in age many software supply agreements are hybrid agreements i.e. they combine the traditional supply of software, supply of hardware, supply of software as a service, supply/licensing of content and supply of other professional services. The problem is that in a complex deal it is difficult for a non specialist lawyer or the client to identify each type of supply and where they are identified it is challenging for a non-specialist to stitch them together into a coherent draft.

    Very often you need someone who understands the software business to disentangle the complexity before starting to draft a contract.

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