A SaaS software license agreement is used when a company's proprietary software is being licensed to a licensee. This tends to differ from a regular SaaS agreement, which doesn't include a software license.

Why would a SaaS vendor prefer to grant a license versus authorized access to the software? One reason is that in the event of unauthorized access, the vendor cannot claim an IP infringement unless there was a prior license granted.

Software Licenses Versus SaaS Agreements

Much like with the technology itself, the drafting of tech contracts is getting more complex; however, the applicable legal theories remain similar. When a software license agreement is used, the licensor maintains a legal interest in the intellectual property such as:

  • Patents
  • Copyrights
  • Potential trade secrets
  • Any other related rights.

A license grants rights in limited use. Software licenses can be nonexclusive or exclusive. They can also be limited as to:

  • A geographic region
  • The right to transfer and sublicense
  • Storing and making copies
  • A limited capacity for use and access

This is predicated on the fact the software has to be locally installed or downloaded on the licensee's computer, network, or platform.

Typically, this type of license doesn't apply to SaaS agreements since the customer is not installing or downloading the software, but rather remotely logging into the vendor's servers to use the software, typically online. The vendor or authorized providers host the software on their servers or in the cloud.

Even without a software license agreement, the vendor has the potential for a valid claim for:

In the event of bankruptcy, a vendor may cease the performance of contractual obligations, which includes any outstanding SaaS services. There is a chance a court could compel a vendor to continue providing contracted services, but only if they're covered under an intellectual property license. This is because Bankruptcy Code Section 365(n) protects the customer's right to continued usage of “licensed intellectual property." It does not protect the contracted services.

With typical SaaS agreements, there is no tangible software available and there is no separate maintenance because it's typically bundled as part of the service agreement, in addition to technical support and hosting. The important difference is the fact that a software license provides a product that is tangible, whereas a SaaS agreement is based on a service.

For those who draft software contracts, confusing SaaS agreements and software licenses are a common occurrence. If the person drafting the contract is unclear on the nuances of each, it's not going to be a good contract.

Important Notes on SaaS Agreements

These types of agreements are becoming far more common and are replacing traditional software licensing for IT applications. There are operational and cost advantages with migrating applications to the cloud.

To be a skilled negotiator and an expert in drafting these types of contracts, you need to understand the legal issues that are commonly seen in both SaaS agreements and licenses. Two major points are the:

  • The nature of what constitutes permitted use.
  • The scope of what constitutes permitted use.

Sometimes SaaS services are referred to as a license. However, it doesn't mean the customer has a license under any intellectual property rights.

Scope of Permitted Use with SaaS Agreements

There are several key things to note about SaaS agreements and permitted use:

  • The permitted use provision needs to pinpoint the specific services the customer is entitled to use clearly.
  • How many authorized users are granted permitted use or access?
  • Is this exclusive or nonexclusive? Most services are provided to multiple customers.
  • What is the territory, authorized facilities, means, and technology for permitted use?
  • How long is use granted?
  • Institute and explain transfer and assignment rights.
  • Does the customer have nonproduction use so he or she can use SaaS services to complete testing, system repair, training, or other uses that are nonproduction related, and therefore, free of charge in most cases?
  • What is the allowed purpose and restrictions?

It's important to verify if the scope of permitted use, especially as it relates to territory, access, and use, is enough to support both current and future intended use.

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