Key Takeaways

  • An OEM software license defines the terms under which one company (the OEM) produces and distributes software or components for integration into another company’s products.
  • Clear provisions around branding, payment, IP ownership, warranties, and confidentiality are critical to avoid disputes and protect both parties.
  • Compliance with licensing terms is essential to prevent legal penalties, revenue loss, and reputational damage.
  • Agreements should outline scope of use, sublicensing rights, liability, support obligations, and termination conditions.
  • Strong IP and data security clauses safeguard proprietary technology and prevent misuse or reverse engineering.

The OEM license agreement exists between the various parties to address issues of branding, confidentiality, payment, quality assurance, and timeframes.

An original equipment manufacturer (OEM) is a company that makes parts that may then be marketed to another manufacturer. For example, if Company A manufacturers cords that can be used as phone chargers, and Company B manufacturers cell phones that provide Company A’s cords with the purchase of their phones, then Company A is an OEM. Company A will manufacturer the cords using the branding and specifications stated by Company B. While Company B is going to be ultimately focused on a relationship with the consumer, Company A, as the OEM, is focused on a business to business (B2B) relationship; their consumer is another company.

While an OEM is largely concerned with their relationship with their business clients, it is sometimes possible for individuals to purchase items directly from the OEM. For example, if you are someone who knows a lot about cars and has the capability of making repairs yourself, rather than going to a mechanic, then you may choose to purchase that muffler or new radio directly from the manufacturer. As such, consumer relationships are a growing area for companies that may otherwise be considered OEM’s.

The two largest industries in which an OEM applies are the car industry and the tech industry. For example, if you buy a new Honda from a licensed Honda retailer, the muffler may not have been manufactured by Honda, but rather by an outside OEM. Another example is when you buy a Sony computer at Best Buy that comes with Microsoft Windows already installed. Microsoft is then the OEM.

Additionally, the muffler manufacturer ultimately does not have much (if any) input as to the final design of the car, and Microsoft probably is not too interested in the color of the computer. Additionally, should the muffler not work or should Microsoft Office not function correctly, it is the responsibility of Honda or Best Buy to make any necessary repairs. The OEM license agreement has ensured that the muffler or software was properly made, and then, in turn, installed properly by Honda or Sony.

What to Consider

If you are in a position of entering into an OEM license agreement, there are many factors to consider. While this type of B2B relationship can be highly valuable in helping you grow your business, you will also want to ensure that you are being diligent in protecting your brand. This is true for all parties involved.

Things to ask both yourself before entering into such an agreement include:

  • Branding. Will the OEM provide your company’s brand on the item they are manufacturing or will they insist upon their own? In some cases, this may not matter much: most average drivers do not see their muffler or pay much attention to it, so Honda may not particularly care if the muffler manufacturer insists on putting their own brand on the item. However, people do see their cell phone chargers all the time. As such, it may end up being a point of contention for the cell phone company if the manufacturer of their cords expects their own brand to be prominently stamped on it.
  • Marketing. Is the OEM going to expect any publicity for being the manufacturer of a component of your product? If so, how does that affect your own brand and how will that expectation affect your own marketing plan.
  • Payment. Will the OEM be paid per piece they manufacturer or per piece that ultimately gets sold with the final product. If it’s the former, are you financially prepared to provide payment for unsold merchandise?
  • How long will this relationship last? Given all of the details that go into an OEM agreement, no company wants to be jumping around from one manufacturer to the next. It creates headaches for the companies involved, and customers will notice changes, at least in more visible components such as phone chargers or computer cords.
  • Confidentiality. Is the OEM permitted, for their own business purposes, to advertise that they produce X for your company? If so, in what arenas? Is this something that will be limited to trade publications and conferences?
  • Intellectual property protection. How much access to your company’s intellectual property is the OEM going to have? What additional measures will you be taking to ensure that your intellectual property is protected? Additionally, as an OEM, what measures are being taken to protect your intellectual property, depending upon the level of access the other company may have.

While there are a great many things to consider, entering into an OEM license agreement can be a strategic way to grow your business, if you are asking the right questions.

Termination and Post-Termination Obligations

Every OEM software license should specify how and when the agreement can be terminated and what happens afterward. Essential considerations include:

  • Termination triggers: Breach of contract, insolvency, or mutual consent.
  • Post-termination actions: Secure deletion or return of proprietary materials, cessation of distribution, and continued confidentiality obligations.
  • Transition assistance: In some cases, a short-term support period may be required to ensure a smooth transition for end-users.

Clear termination clauses reduce uncertainty and provide legal remedies if the partnership ends.

Warranties, Support, and Liability

OEM software license agreements should clearly allocate responsibility for performance, maintenance, and liability. Common provisions include:

  • Warranties: Define performance guarantees, including uptime, functionality, and compatibility standards.
  • Maintenance and support: Outline the level of technical support provided, response times, and software update responsibilities.
  • Indemnity and liability limits: Protect both parties from damages caused by third-party claims or product failures.
  • Dispute resolution: Include provisions for mediation, arbitration, or jurisdiction to resolve conflicts efficiently.

These clauses establish accountability and help prevent costly litigation.

Compliance and Legal Considerations

Software compliance is more than a contractual issue — it’s a legal imperative. Failure to adhere to licensing terms can lead to lawsuits, fines, and reputational harm. Companies should:

  • Conduct regular audits: Ensure that all distributed software aligns with the terms of the OEM software license.
  • Maintain documentation: Keep detailed records of usage, sublicenses, and distribution to demonstrate compliance.
  • Understand export controls and data laws: If the software is distributed internationally, the agreement must address compliance with relevant regulations, such as export restrictions or data privacy laws.
  • Include indemnification clauses: Protect your company from liability if the OEM violates IP laws or licensing terms.

Proactive compliance management reduces risk and builds trust between licensors and licensees.

Intellectual Property and Confidentiality Protections

IP protection is often the most sensitive component of an OEM agreement. Because the OEM may require access to source code, proprietary APIs, or integration documentation, robust safeguards must be built into the contract:

  • Ownership clauses: Clearly state that all intellectual property rights remain with the original owner unless explicitly transferred.
  • Restrictions on reverse engineering: Prohibit decompilation, disassembly, or reverse engineering of the software to protect trade secrets.
  • Data security obligations: Require the OEM to maintain stringent cybersecurity measures when handling proprietary data.
  • Confidentiality provisions: Limit disclosure of sensitive information and specify remedies for breaches.

These terms ensure that proprietary technology is not misused and that the competitive advantage of the licensor is preserved.

Scope and Rights of an OEM Software License

An OEM software license sets the foundation for how the licensed software or technology can be used, distributed, and integrated into another company’s products. Defining the scope of use is critical to preventing misuse and potential legal exposure. Key aspects typically addressed include:

  • Usage limitations: Specify whether the software can be bundled, modified, or sublicensed, and under what conditions.
  • Territorial and market restrictions: Clarify where the licensee can sell the product (e.g., globally or within specific regions) and whether certain industries are excluded.
  • Distribution models: Define whether the software will be delivered as pre-installed, downloadable, or embedded in hardware.
  • Duration and renewal: Establish the term of the license and any renewal or termination provisions.

Clear articulation of these points prevents conflicts over scope creep and ensures both parties operate within agreed parameters.

Frequently Asked Questions

  1. What is an OEM software license?
    An OEM software license allows one company to integrate another company’s software into its own product under agreed terms, often for resale or bundling.
  2. Who owns the intellectual property in an OEM agreement?
    Typically, the original developer retains ownership unless rights are explicitly transferred. The licensee only receives usage rights under defined conditions.
  3. Can OEM software be sublicensed?
    Only if the agreement permits it. Most contracts restrict sublicensing to protect the licensor’s IP and control distribution channels.
  4. What happens if OEM license terms are breached?
    Breaches can lead to contract termination, financial penalties, and potential legal action, including damages for IP infringement.
  5. How long does an OEM software license last?
    Duration varies based on the agreement. Licenses can be perpetual, fixed-term, or renewable, with specific conditions for termination and extension.

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