Key Takeaways

  • A SaaS license may differ significantly from traditional software licenses by granting access rather than ownership or local installation rights.
  • SaaS licensing models vary (subscription-based, usage-based, feature-based, etc.) and impact pricing, scalability, and customer experience.
  • Key elements in a SaaS license agreement include service access terms, usage limits, data rights, security provisions, and renewal conditions.
  • Misclassifying SaaS agreements as traditional licenses can affect IP enforcement and rights during vendor insolvency.
  • Businesses should evaluate SaaS license types based on use case, pricing flexibility, and legal protection.

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.

SaaS License Management Considerations

Effective SaaS license management ensures compliance, minimizes costs, and prevents oversubscription or underutilization. Key best practices include:

  • Tracking Usage and Entitlements: Implement software asset management tools to monitor user access, usage frequency, and license consumption.
  • Auditing for Compliance: Conduct periodic audits to verify that software is being used according to the license agreement’s terms.
  • Automated Renewals and Alerts: Use automated workflows to manage contract renewals, avoid unintentional lapses, and optimize negotiation timelines.
  • License Reclamation: Identify and deactivate unused accounts or reassign licenses to active users to maximize license efficiency.
  • Vendor Management: Maintain clear communication with SaaS vendors regarding changes in usage, upgrades, and license needs.

Organizations that actively manage their SaaS licenses can reduce wasted spend, enhance security, and remain compliant with contractual obligations.

SaaS License Pricing Strategies

SaaS vendors often align their pricing strategies with customer value and market demand. Some common pricing approaches include:

  • Flat-Rate Pricing: A single, all-inclusive fee for access to all features and services. It’s easy to understand but may not scale well for high-usage clients.
  • Tiered Pricing: Offers multiple service levels with increasing features and pricing. Ideal for segmenting customer types based on business size or feature needs.
  • Per-Feature Pricing: Charges customers based on the specific features or modules they use.
  • Pay-as-You-Go: Ideal for variable workloads, this model charges customers based on actual usage.
  • Per-Active-User Pricing: Customers only pay for users who actively use the software during the billing cycle.

Selecting the right pricing model can significantly affect customer acquisition, retention, and long-term profitability. Vendors should match pricing to the value delivered and monitor usage data to adjust as needed.

Key Clauses in a SaaS License Agreement

A comprehensive SaaS license agreement should address the following critical components:

  • Access Rights: Define what services are being provided and whether the access is exclusive, non-exclusive, or limited by geography or time.
  • User Limitations: Specify the number of permitted users, types of users (e.g., internal employees, contractors), and any restrictions on simultaneous use.
  • Data Ownership and Portability: Clearly indicate who owns the data generated or input into the platform and the process for data retrieval upon contract termination.
  • Security and Compliance: Outline vendor responsibilities regarding data security, encryption, regulatory compliance (e.g., HIPAA, GDPR), and breach notification protocols.
  • Service Level Agreements (SLAs): Include performance guarantees, uptime commitments, support availability, and remedies for failure to meet SLAs.
  • Termination and Renewal Terms: State notice periods, automatic renewal conditions, refund policies, and what happens to user access upon termination.
  • Intellectual Property (IP) Protections: Clarify that access to the software does not imply IP transfer, and describe what constitutes IP infringement or misuse.

Having these clauses well-defined ensures the SaaS license provides not only technical access but also legal clarity and operational confidence.

Common SaaS Licensing Models

There are several types of SaaS license models that vendors use to grant customers access to their cloud-based services. Understanding these licensing structures can help ensure alignment between software capabilities, customer needs, and pricing expectations:

  • Subscription-Based Licensing: Users pay a recurring fee (monthly or annually) to access the software. This is the most common SaaS model, offering predictable revenue for vendors and budgetable costs for customers.
  • Usage-Based Licensing: Customers are billed based on actual usage (e.g., per API call, storage usage, or number of transactions). This model aligns costs with consumption, making it ideal for scalable environments.
  • Per-User or Seat Licensing: Charges are based on the number of users. It is simple and predictable, often used for internal business applications.
  • Feature-Based Licensing (Tiered): Access to features depends on the tier selected (e.g., Basic, Pro, Enterprise), with higher tiers offering more capabilities.
  • Freemium to Paid Conversion: Offers limited features for free and charges for upgrades. This model helps attract new users and convert them over time.
  • Concurrent User Licensing: Restricts the number of users who can access the service simultaneously, rather than limiting the total number of registered users.

These licensing models may also be customized depending on the customer’s scale, industry, or compliance requirements. Vendors should clearly define the chosen model in the SaaS license agreement to avoid disputes and ensure enforceability.

Frequently Asked Questions

  1. What is a SaaS license?
    A SaaS license grants users the right to access and use cloud-hosted software under specific conditions, rather than owning or installing it locally.
  2. How does a SaaS license differ from a traditional software license?
    Traditional software licenses typically involve local installation and a transfer of limited IP rights, while SaaS licenses provide access to software hosted by the vendor.
  3. Can SaaS be licensed per user?
    Yes, many SaaS providers offer per-user or seat-based licensing models that charge based on the number of individual users with access.
  4. Do SaaS licenses include data ownership rights?
    Not necessarily. Most SaaS agreements separate software access from data rights. The agreement should explicitly state who owns the data and how it can be retrieved.
  5. What happens if I exceed my SaaS license usage limits?
    Exceeding usage limits may result in additional charges or service restrictions. Terms related to overages should be clearly outlined in the agreement.

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