Don’t Use License Agreements for Software as a Service

Most IT contract drafters know the difference between a software license agreement and a technology services contract. In a license, the customer gets rights to copy and use software, while in a services contract, the customer gets a service, like tech support or IT consulting. But software as a service (SaaS) seems to throw a wrench into the gears. Which is it? Fortunately, the newish landscape isn’t actually all that confusing (or all that newish). A SaaS agreement is a services contracts, pure and simple. It doesn’t call for a software license.

The confusion stems from the central role of “software” in software as a service. You can cut through that confusion by asking what the customer will do with the software. If the customer puts a copy of a software on a computer — downloads it, installs it from a disk, etc. — the deal calls for a license. Copyright law gives the software’s owner a monopoly over the right to copy it (to “reproduce”), so the customer needs a copyright license to make a copy and put it on a computer. But in a SaaS deal, the customer doesn’t put software on a computer, or copy it at all. The software sits on computers run by the vendor (possibly in a third party data center), and the customer merely accesses it, usually via the Internet. With no copies, copyright plays no role in the transaction, so the customer doesn’t need a copyright license. Rather, the customer needs a simple promise: “During the term of this Agreement, Vendor will provide Customer with access to the System.”

In other words, the customer gets a service in a SaaS deal, not software. The vendor just uses software to provide the service.

The distinction has implications for several clauses in a SaaS agreement:

  • The Prime Clause/Promise: The customer should get a subscription, not a software license. The customer gets a right “to receive the Service” or “to use the System” so long as the subscription lasts. You actually could describe the vendor’s offering as “a license to the Service,” and lots of companies do. But that suggests some kind of intellectual property license. If you’re the vendor, you don’t want even to imply that your customers get IP rights to your precious software. And if you’re the customer, you’re not likely to benefit from unclear terms. Either way, you’ll write better contracts — and keep things clearer in your own head — if you avoid licensing language. (For sample language, see The Tech Contracts Handbook (2nd ed.) Chap. I.E.1, Cloud Services Subscriptions — as well as the connected sample terms posted in our clauses archive.)
  • Maintenance: You don’t need it! In a maintenance clause, the vendor agrees to fix problems with installed software and to send updates and upgrades, so the customer’s copy doesn’t fall behind those of other customers. In a SaaS deal, the customer doesn’t have a copy. The vendor keeps the software and provides it as a service, and that obligation already involves maintaining the software, by definition. (But see below re SLA’s.) Plus, the customer has no copy to fall behind other customers’ copies and so no need for updates and upgrades. When the vendor updates the software on its computers, all customers benefit (in most cases).
  • Data Management & Security: Data management and security play a more important role in SaaS deals than in most software licenses. The customer’s sensitive data generally sits on the vendor’s computers, along with the software, rather than on the customer’s computers. That’s why many SaaS contracts include a data clause, addressing the vendor’s obligations for managing data and for keeping it secure. (Be sure not to use an NDA for data security! See my post on NDA’s vs. data security clauses. And for more guidance, see The Tech Contracts Handbook (2nd ed.) Chap. II.H, Data Management and Security — as well as the connected sample terms posted in II-H of our clauses archive.)

Of course, your deal may involve both SaaS and installed software. A SaaS vendor may provide its main offering online but also give its customer a software application to install on the customer’s computer — something that helps that computer interact with the online service, for instance. Don’t let that confuse you. What you need there is a software license covering that one installed application, wrapped into the larger services (subscription) contract. The license and its supporting terms should address the installed application only, not the software the vendor keeps on its own computers and uses to run the service.



© 2011, 2016 by David W. Tollen. All rights reserved.

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