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Key "License" Terms in Software as a Service (SaaS) Agreements
Practical Law Legal Update 0-598-1925 (Approx. 4 pages)
Key "License" Terms in Software as a Service (SaaS) Agreements
by Practical Law Intellectual Property & Technology
| Published on 03 Feb 2015 • USA (National/Federal) |
A discussion of some of the key issues raised by the permitted use provisions of Software as a Service (SaaS) agreements. This Legal Update identifies some of these material provisions and how they differ in nature from on-site software licenses.
Software as a Service (SaaS) arrangements are increasingly replacing on-site software licensing for many IT applications. Migrating software applications to the cloud can have significant cost and operational advantages. However, to skilfully negotiate and draft SaaS agreements, counsel must understand not only the legal issues that are common to software license and SaaS agreements, but also those that differ. Key among these SaaS issues are the nature and scope of permitted use.
The SaaS "License"
The permission to use SaaS services is sometimes referred to as a license. However, this does not, standing alone, mean that the SaaS customer receives a license under any intellectual property (IP) rights in the service software. Many consider SaaS agreements purely service agreements under which the customer obtains a right of access to the provider's software services, and not a license to or under any IP rights. Following this reasoning, SaaS providers often refer to their grant of the privilege to use the SaaS services as a "consent" or "authorization" rather than a "license." If, in fact, permission to access and use SaaS services is not an IP license:
- To the provider's potential detriment, unauthorized access to or use of the SaaS services would not, without more, constitute copyright or other IP infringement, although it may be a theft of service, trespass to chattels or violation of the Computer Fraud and Abuse Act (CFAA) (18 U.S.C. § 1030).
- To the customer's potential detriment, if the SaaS provider enters into bankruptcy and rejects or stops performing the SaaS agreement, the customer would have no right to:
- compel the provider to continue to perform the SaaS services because section 365(n) of the Bankruptcy Code protects only the right to continue to use "licensed intellectual property" and not services; or
- take possession of a copy of the software's object or source code and seek to self-host the software or outsource its hosting to a third-party service provider, unless the SaaS provider has granted the customer a direct license to the service software under an escrow agreement.
Scope of Permitted Use
SaaS agreement permitted use provisions commonly include most or all of the following:
- The SaaS services. The permitted use provision should clearly identify the specific service applications the customer may use.
- The number of authorized users or other defined extent of permitted access or use. The agreement may permit, for example, use of the services by:
- the entire customer organization (an enterprise-wide authorization);
- a stated number of unnamed users or concurrent users; or
- specifically identified users.
- Non-exclusivity. While SaaS services may be provided on an exclusive basis, they are typically provided to many customers in a multi-tenant model of software service distribution.
- The authorized facilities, technologies and means for accessing and using the services.
- The territory of permitted access and use.
- The term (duration).
- Transfer and Assignment. SaaS provider's form agreements typically prohibit or impose approval rights, restrictions and conditions on the customer's transfer of its rights under the SaaS agreement. For sample SaaS agreement assignment clauses and explanatory notes and drafting tips, see Standard Documents, Software as a Service (SaaS) Agreement (Pro-customer): Section 21.8 and Software as a Service (SaaS) Agreement (Pro-provider): Section 16.8.
- Non-production use. The provider may grant the customer the right to use the SaaS services for testing, training, system repair or other non-production purposes (commonly free of charge).
- Purpose, use, market or field of use restrictions. The provider may restrict the permitted field of use, for example, by limiting use to the customer's specific business sector, market or industry.
The customer must ensure that the scope of the authorized territory, access and use is sufficient to support its intended current and future use of the SaaS service.
For more information on SaaS agreements, including an analysis of the major legal, technical and commercial issues to consider when negotiating and drafting these contracts, see Practice Note, Software as a Service (SaaS) Agreements.