2. License Grant and Term

a. License Grant

The best license from the perspective of the licensee is the broadest license, one that enables use of the licensed software across the licensee's entire enterprise and by all users authorized by the licensee, including without limitation, employees, agents (such as outsourcers, consultants and independent contractors), and all other affiliated entities. Most licenses, however, are drafted in terms of allowing only the licensee to use the software. Consider expanding the license to include all of the individuals and entities that must have access to and use of the software.

Some Vendors may object to the inclusion of the licensee's affiliates in the license. One way to address this concern is attach a current list of the licensee's affiliates and limit future affiliates that may use the software to those entities in which the licensee owns at least a fifty percent interest. In many instances, this will be sufficient to gain the licensor's approval to add the licensee's affiliates as users of the software.

Attention should be given not only to the users who will have access to the software, but also the licensed or permitted uses of the software. Most form vendor agreements are written in terms of allowing the licensee to use the software for "its internal purposes only" or similar highly restrictive language. Such a restriction will likely not encompass all of the licensee's intended uses for the software. A better, more encompassing approach is to draft the license in terms of permitting the licensee to use the software for "its business purposes."

b. License Term

Licenses that permit the licensee to use the software for only a limited period of time, typically one to five years, should be disfavored. This type of license is referred to as a "term license." Such a limitation will require the licensee to pay a new license fee upon expiration of the term to continue use of a product that may have become important to its business operations. At that point, after several years have passed since the initial installation of the software, the licensee will have little leverage in its license "renewal" negotiations. Such term licenses are relatively rare, and the more typical, and accepted form of license is a "perpetual" license. Such a license entitles the licensee to use the software for an unlimited time without paying an additional license fee and limits the relevance of "term" discussions to issues of maintenance and support. ^[3]

If a perpetual license cannot be negotiated or is inappropriate for a given transaction, the term license should be drafted in such a way that the licensee may, in its discretion, renew the license for a defined period of years. For example, the agreement could have an initial term of three years and, thereafter, the licensee may, at its option, renew the license for up to five consecutive one year renewal terms. For further discussion on this approach to drafting term provisions, see Chapter 7.

Note that in the form vendor agreement it is not possible to tell from the face of the document whether the license being granted is perpetual or term. This is a common problem found in many vendor form agreements. The licensee should ensure the license is revised to reflect the type of license being purchased: perpetual or term.

In some instances, the parties will have negotiated for some software products to be licensed on a perpetual basis and other products to be licensed on a term basis. In such a circumstance, the parties must clearly define the products in each category. This is typically done in the exhibit to the agreement that lists the specific applications being licensed.

The following illustrates potential revisions to the limited license grant provided in the form vendor agreement:

Example Revision:

2.1 License Grant. Subject to the terms and conditions of this Agreement, Vendor grants to Customer a world-wide, non-exclusive, non-transferable (except as provided herein), ^[4] ~~limited~~ license to use the Licensed Software solely for Customer's ~~internal~~ business purposes, ~~subject to the number of licensed concurrent users~~. For purposes of this Section, the term "Customer" shall include Customer and its affiliates and their respective employees and authorized contractors and agents. Customer may make a reasonable number of copies ~~one copy~~ of the Licensed Software in machine-readable form for disaster recovery, backup and archival purposes only. Customer shall reproduce and include the copyright, trade secret, or other restrictive and proprietary notices and markings from the original on all copies. All copies will be subject to the terms of this Agreement.

^[3]See the discussion of support and maintenance terms in Chapter 7.

^[4]See discussion of assignment in Chapter 8.