Friday, February 3, 2012

Software Indemnities, Confidentiality, Limitation of Liability, Insurance

Similar to the purchase of products, with the licensing of software the licensee will still want the licensor to provide both a general indemnification against personal injury or property damage that is caused by the product of the negligence of the licensor’s personnel. The importance of the general indemnification will vary based upon two factors. One is whether the licensor’s personnel will be traveling to the Licensee’s site and doing business there, such as performing installation. The second factor would be what the risks would be in the use of the application and whether third parties could be impacted. It’s best to err on the side of caution and include it. As software is a copyrighted material, the intellectual property infringement indemnity is important. As with products if there is a claim of infringement you want the licensor to either get a license to use the product, or change the product so that it is non-infringing. For products
the various options to correct the infringement may have a significant cost impact to the buyer so you need to establish a priority in the actions. As the cost to make corrections to software is usually minimal to the licensee, it shouldn’t make any difference whether the licensor gets the rights to use the software or whether they modify it to make it non-infringing as you already have the commitment that it must meet the specification. Licensors may want the right to provide a refund rather than having to license of correct the infringement. They may even want to have that refund be on an adjusted basis where they will pay less, based upon the period during which you used it. In determining whether the refund approach would be acceptable you would need to consider all the investments that you have made to use the software; where and how the software will be used and what the impact would be if you were no longer able to use it. Offering to provide you with a refund in the event of an infringement may only cover a small portion of the cost to you. My preference is to not agree to a refund as a cure for infringement so if they are unable to get the license or are unwilling to make the change it constitutes a breach of the agreement where I can collect damages. To make sure that the types of damages that you can sustain and claim aren’t limited you need to carve the indemnities out of any limitation of liability provision.

Most of the time in licensing software the licensee is not sharing any confidential information with the licensor. The licensor in sharing both the software and documentation already has the protection of both of those being copyrighted. As such the only time a licensor should want you to maintain confidentiality responsibilities is when they are providing you with highly sensitive information such as source code or they are allowing you to make copies of the materials. For things like source code a licensor may want you to manage that as confidential. If you were to agree to that, a normal standard would be that you agree to manage that in the same manner as you manage your own confidential information. As to copies you should have the right to make copies for both archival use and for disaster recovery purposes. If you make copies the licensor will also want to protect their intellectual rights in those materials by requiring you to include copyright and proprietary legends on any licensed copies. As the licensor considers those materials to be confidential they will further want you to return or destroy materials upon termination. The exception to that should be for situations where you as the licensee are terminating the license for cause where in your termination for cause provision you would retain the right to use the software and documentation on an as-is basis. If you agree to hold any of the materials as confidential you should establish a term after which they no longer need to be maintained as confidential and you would also want to include the traditional confidentiality exemptions such as the information becoming public through no fault of the licensee.

Limitation of Liability.
Limitations of liability for software licenses are no different than for the purchase of goods. They traditionally involve three elements. What type of damages may be claimed by the parties. Are there any clauses in the license where there is an exception or carve out from the limitation on the types of damages that may be claimed. The last element is whether there is a financial limit on the amount of damages that may be claimed. The indemnifications should be carved out of the limitation of liability as those are not direct damages that the licensee sustains, those are third party claims. Further as they are third party claims the licensee has no ability to control the amount of those claims so all a limitation will do is make the licensee potentially liable for the licensor’s acts. As to other potential sources of liability the licensee should consider the impact a breach may have and the types of damages they might sustain to determine whether other section of the license need to be carved out and what’s appropriate if there is a breach. Licensors may want to limit their liability to what you paid for the license. Licensees need to think about what the financial impact would be if you weren’t able to use the software. The licensee may have much greater invested than what they paid for the initial license fee.

Insurances Required of Licensor
Traditional insurances that a buyer may want a supplier to provide when you purchase goods is no different than what the licensee should want the licensor to provide under a software license. To make them more acceptable or applicable you can always make them conditional requirements. For example a licensor may not want to be forced to carry automobile insurance in the amount you require, especially if they won't be using automobiles in performing work for you. To deal with that you could make that requirement a conditional commitment such as: “To the extent Licensor uses a vehicle in the performance of installation, acceptance testing or performance of services for Licensee, Licensor shall carry automobile liability insurance ……” In establishing it as a condition, if the licensor does none of those they don’t have to maintain the insurance or maintain it at your required limits.