Successfully Negotiating Software License Agreements

by King & Spalding

Constantly looking for ways to increase productivity and efficiency, the energy industry is increasingly looking to innovative software solutions from technology vendors. This article offers suggestions for a company to follow when negotiating a software license agreement. A software license negotiation is a complex process where a licensor and licensee seek to establish a relationship allowing the use of certain intellectual property, namely licensor's software programs. This process requires the parties to demonstrate organization, planning, communication, flexibility, patience, and frequently, compromise. While it is especially critical to conduct this process in an organized and careful manner prior to signing an initial license agreement, it can be just as important to address these issues in the context of a license renewal, assignment, or re-negotiation.

Strategies and Tips

  1. Make sure that you understand critical terms and the particular needs of the end-users. Before engaging in detailed conversations with a licensor, you should first make sure that you understand the business goals for the software licensing arrangement. There are licensing terms that could be critical to the company (such as ongoing maintenance and support, access to source code if there is a termination, or definition of authorized users for example). The attorney should also seek to understand the evolving needs of the company's information technology ("IT") systems to ensure that the license adequately meets applicable technology requirements.
  2. Let the business people get involved. One of the best assets for an attorney in a license negotiation is a licensing manager or IT expert (usually someone within the business or organization that has particular expertise on the software or the requirements needed for the licensed software). Often this person can work with the licensor to settle the business terms of the deal in advance. This person can also assist with negotiating the business terms, which may include identifying the specific intellectual property that is relevant (i.e., the particular software version) or the nature of the access that is required and the related reporting and performance measurements that apply.
  3. Identify persons who will serve as a voice for the client and communicate with your "team." In some cases, a company may want its IT expert to handle the negotiations and only have a legal review; in other cases, a company may wish for an attorney to handle all communications and negotiations. Regardless, a company should plan this role in advance and make sure that its representatives are communicating on a regular basis.
  4. Seek control of the negotiation if possible, but recognize the relative bargaining position of each party. The parties should generally always seek to establish a process through which they can discuss difficult issues in a professional manner with all parties focused on getting the deal done. In some cases, the circumstances may allow you to establish control of the process by explicitly mandating ground rules for discussions. In other situations, a more measured and delicate approach may be appropriate. This dynamic can also be affected by the particular personalities of the negotiators and the relative bargaining positions of the parties.
  5. Create and regularly update a chart or matrix of key provisions. This step can be a highly effective and valuable tool for the negotiation of multiple license relationships. For a company establishing a new operation or business endeavor, it can be very helpful to establish a list of terms that it considers standard and non-negotiable. Such terms might include the ownership of newly-created intellectual property or the non-assignability of license agreements. It may be useful to set out a matrix that the company can use to compare and contrast the terms and conditions of similar or related license relationships. In this way, the company can pursue a level of consistency in these licenses and provide some perspective if a "standard term" needs to be changed. This matrix will require updating and organization, but can be an essential tool in the negotiation process.
  6. Consider and plan for potential future expansion and possible worst case scenarios. Always a challenge in a contract negotiation, the parties need to include terms and conditions that address future positive and negative scenarios for the licensee. Hypothetically, if the license is successful and the company wants to continue the arrangement or expand its scope, the licensee will appreciate the inclusion of caps on license renewal fees or options for assigning or sublicensing the software to related parties. Similarly, if the deal is unsuccessful or develops into a potential liability, the licensee will be glad to have limitations on damages and restrictions on indemnification provisions. With companies frequently moving operations to the "Cloud," it also becomes increasingly more important to keep license relationships flexible enough to address these new circumstances. Of course, the company should always seek to identify and review these potential outcomes in advance of the actual license negotiations.
  7. Conduct appropriate due diligence regarding relevant intellectual property. Often overlooked by small to mid-size licensees, one of the most critical tasks in establishing a license relationship is confirming that the relevant software or intellectual property is properly-owned and not subject to potential third-party claims. Even if the licensor is willing to sign appropriate warrantees regarding its ownership of relevant intellectual property, the licensee should still spend time and resources reviewing and confirming information provided by the licensor regarding the identity and nature of the intellectual property. There are many online resources and professional services available today that allow a company to check these issues before a final license is signed.
  8. Don't forget taxes. Do not forget to consider the role of taxes in the license relationship. Make sure that you have considered what tax provisions will apply to this license relationship based on the subject matter and the jurisdictions in which the software will be accessed. In many cases, getting a tax professional involved is necessary to ensure this issue is properly handled.

Bryan D. Adams
+1 713 276 7322
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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