A SaaS license agreement could be called a hybrid between a software license agreement and a “Software as a Service,” or SaaS agreement. A SaaS software agreement is a services contract and doesn't require a software license. The confusion lies in the usage of the word “software.” By asking what the customer plans to do with the software, you can eliminate the confusion. If the customer plans to install a copy of the software on his or her computer, download a version, etc., then the customer needs a software license.

Intellectual property laws dealing with copyrights give the software's owner the exclusive rights to reproduce or copy the software, so the customer needs his or her own copyright license to have a copy on his or her own machine(s). Typically, however, most SaaS deals don't call for installing software on a computer at all. Instead, the vendor keeps the software on its computers or at a third-party data center, and the customer can access it through the internet.

Because there is no additional copy being made, copyrights don't enter the negotiations. Essentially, the customer has access to a service with a SaaS agreement, not the software itself.

Why Software as a Service Agreements Are Popular

SaaS agreements are replacing on-site software licensing in the IT industry. This is primarily because keeping software applications in the cloud can provide:

  • Operational advantages
  • Cost savings

The problem is that in order to negotiate a great SaaS agreement, the contract drafter needs to understand the legal nuances between the two. Two major issues fall under the scope of permitted use and the nature of the contract.

Many people consider SaaS agreements as service agreements because they are accessing software through rights rather than a license with any IP benefits. Therefore, vendors often grant “consent” or provide authorization versus granting a software license. The agreement will then cover what rights the customer has to use the software and what limitations are in effect.

The vendor must also:

  • Provide support services
  • Ensure it complies with necessary requirements

The data the customer supplies remains his or her own property, which can be specified to be confidential as a whole. In exchange for these services, the customer pays a fee.

Scope of Permitted Use in SaaS Agreements

Including all the necessary information related to scope of permitted use is extremely important within SaaS agreements, as it should:

  • Have the permitted use provision clearly state the aspects of the application the customer is authorized to use.
  • Define the number of authorized users.
  • Address whether it's an exclusive or nonexclusive agreement.
  • Address the allowed locations and facilities, territories, and technologies authorized to access the service.
  • Explain how long the scope of permitted use is good for.
  • Describe how transfer and assignments are handled.
  • Address the purpose and field of use restrictions.
  • Explain if any nonproduction access is allowed, such as the right to use the SaaS free of charge for training, testing, system repair, etc.

Other SaaS Agreement Clauses

Traditionally, vendors give customers a subscription rather than a software license. For the duration the subscription is active, the customer has a right to:

  • Receive said service
  • Access the system

Some people call this a license to the service, but it almost suggests some type of copyright license. As the proprietary owner, you don't want to even imply that your customer has intellectual property rights to your protected software.

If you're the customer in this deal, vague terms are of no benefit to you, either. It's important to draft a contract that is clear and avoids any terms regarding “licensing.”

Software license agreements have maintenance clauses wherein the vendor agrees to resolve any issues with the software and ensure it's always updated and upgraded, so the customer doesn't fall further behind other users. This doesn't apply to a SaaS deal, since the customer doesn't retain his or her own copy. When the vendor makes an upgrade or an update on its own computers, the customer should automatically benefit in most cases (depending on the terms of the agreement).

What's important to consider in a SaaS agreement is an SLA, or a service level agreement. These typically address what the approved time frame is for fixing errors or resolving performance issues such a speed or latency.

Data security and management are important in SaaS agreements. Customer's sensitive data resides on the vendor's computers with the software, rather than locally on the customer's machines. This is the reason you'll find most SaaS contracts include a clause on how data privacy is managed.

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