3. License Restrictions

Every license agreement includes a list of restrictions or limits on the licensee's use of the software. Most of these exceptions are generally acceptable to licensees. They relate, in large part, to unauthorized modification and distribution of the software, removal of the vendor's proprietary notices (e.g., copyright and trademark notices), reverse engineering, and licensee's use of the software to serve as a service bureau for unrelated third parties. Two of these restrictions bear further discussion: reverse engineering and service bureaus.

Most commercial software developers treat the source code to their products as their most valuable proprietary information. They protect this information at all costs and only make it available to their licensees in the event of bankruptcy ^[5] or other unusual circumstances (e.g., the vendor elects to discontinue to support for the product). Absent one of the foregoing circumstances, only the object code version of the software is delivered to the licensee.

To prevent the licensee from potentially reverse engineering or decompiling the object code to obtain the source code, licensors include strict prohibitions in their license agreements against such activities. In general, these prohibitions are entirely appropriate and necessary to protect the licensor's intellectual property rights. There are, however, circumstances under which a licensee may need the ability to reverse engineer the software. This need typically arises when the licensee desires to interface the licensed software with another application or system. In such cases, the licensee will request the Application Programming Interface ("API") from the licensor to create the interface. If the licensor refuses to provide the information (potentially because the licensor desires to charge a substantial fee to create the interface itself), the licensee may have the right under the law to reverse engineer the software for the sole purpose of obtaining the necessary interface information. To protect this right, the licensor's prohibition against reverse engineering must be qualified with the licensee's right to engage in such activities to the extent permitted under applicable law.

"No service bureau" provisions are common in software licenses and ordinarily do not pose a substantial restriction on the licensee's use of the software. Keep in mind, however, that in some circumstances, the ability of a licensee to serve as a service bureau for its affiliates or other related businesses is critical. As such, this issue should be carefully considered in every license agreement. Ask the question, "Will we need the ability to process the data of any other entities?" If so, the provision should be revised to specifically permit the licensee to serve as a service bureau for those entities.

Example Revision:

2.2 License Software Use Restrictions. Except as permitted in this Agreement, Customer's use of the Licensed Software shall be subject to the following restrictions:
1. The Licensed Software shall be used solely for Customer's ~~internal~~ business purposes ~~and only by authorized concurrent users~~;
2. Customer shall not cause the Licensed Software in any way to be disassembled, decompiled or reverse engineered, ~~except to the extent permitted by applicable law~~, nor shall any attempt to do so be undertaken or permitted;
3. Customer shall not make the Licensed Software available for access or use by any person or entity other than Customer's employees and authorized contractors and agents, including, but not limited to, acting as a service bureau. Notwithstanding the foregoing, Customer may serve as a service bureau for its affiliates; and
1. Copy, translate, port, modify, or make derivative works of the Licensed Software.

^[5]See discussion of escrow provisions in Chapter 8.