Whether you’re a founder thinking about using third party software
for your start-up, or thinking about how best to structure licenses to
your software, it’s important to consider how “Software as a Service” or
“SaaS” licenses differ from traditional software licenses and
understand the legal issues related to using them.
Traditional software licenses are structured to permit a licensee to
receive and use a copy of the licensed software on their own servers and
systems. This arrangement presents both technical and economic
drawbacks. To name a few:
The software has to be tested and certified to operate on various platforms.
Updates and maintenance require a structured distribution process.
The licensee often has to justify a large initial capital outlay to “purchase” the license.
As software applications transitioned from the conventional
client/server model to browser-based delivery, developers realized that
providing applications as a “hosted” software service (known as
“Software as a Service” or “SaaS”) is a more efficient approach because:
Customers essentially subscribe to the SaaS and are able to treat the license costs as periodic expenses over time.
The developers can provide bug fixes and updates to all the licensees at once.
With the advent of cloud-based services that provide storage,
processing and other core services for application developers, the
developers no longer need to provide the platform on which their own
But, along with these benefits come certain legal issues that need to
be addressed when providing or procuring SaaS-based applications. These
A licensor granting licensees access to network services, servers,
application code and data within its infrastructure should be clear
about limits to the rights being granted, and what explicit restrictions
there may be related to user access, including access by affiliates,
consultants, shared user IDs, off-line access, etc.
A licensee using a hosted service to process and store its
confidential data should ensure that there are proper warranties in
place regarding the security of their data, consistency with privacy
policies, as well as clear processes related to data breaches, disaster
recovery and termination services when and if the licensee decides to
change service providers. This is especially crucial in instances where
the licensor has contracted with third party infrastructure providers
and can pass on warranties and limitations to its licensees.
Licensees should understand that very little opportunity exists for
custom development, but often professional services are available for
implementation, training, etc., and often the licensor will document
programming interfaces that allow for third-party application
development and integration. In some instances, “private-labeling” of
an application may be offered for larger implementations.
Terms regarding pricing support, service levels and potential
credits for downtime may be more flexible given the “subscription”
Traditional indemnities may not be appropriate, as the “system” and
“use” is occurring on the licensor’s property, licensees may be
uploading content on to licensor’s systems, and many services may be
provided by third parties.
Licensors should tie liabilities to amounts collected under the
agreement over some reasonable period of time, and expressly disclaim
statutory warranties and indirect/consequential damages.
In short, while many of the provisions of SaaS-based license
agreements are similar to traditional software agreements, the new
distribution of responsibilities among the licensor, licensee and other
service providers should warrant a thoughtful review of the terms and
conditions to ensure a proper allocation of rights, risks and
protections among the parties.