The terms of software license agreements can lead to disputes that have significant consequences for both licensors and licensees. For a licensee, a dispute that results in the licensor's sudden suspension or termination of the licensee's authority to use the licensed software can significantly harm the licensee's ability to conduct its business.

For a licensor, disputes with a licensee can result in the licensee's nonpayment or setting off of license fees. This could deprive the licensor of significant operating revenue necessary to recoup the costs of developing the software and to invest in the development or acquisition of new products and services.

The licensing parties' counsel must therefore be aware of the license provisions that commonly lead to software license disputes to allow them to better anticipate and manage the associated risks.

When negotiating and drafting the terms of a software license agreement, the parties frequently overlook how the language used to express these terms could be subject to conflicting interpretations that result in a dispute. Using unclear or ambiguous terms in the agreement can fuel material disagreement over whether a licensee is in compliance with the license terms.

The main provisions in a software license agreement that often lead to disputes include:

Software license agreements typically limit the scope of the license in several ways, for example, by restricting:

The licensor often structures these limitations in the software license agreement to reflect the software's licensed purpose and to help segment the software's different markets and maximize its market value.

Licensors usually seek to limit the extent to which licensees can access the software. For example, they may permit a licensee to access the software only:

The parties may dispute the intended scope and application of these restrictions if the software license agreement does not clearly set them out. Disputes can also occur when the agreement does not include a mechanism to accommodate a shift in how or how much the licensee uses the software.

Disputes often also arise in arrangements where the software license agreement fails to clarify if the license access limitations are meant to cap either:

Licensors typically limit the purposes for which the licensee is authorized to use the software by including a permitted use clause in the software license agreement. This clause can limit a licensee to using the software for "internal use only" or set out a detailed list of permitted uses. For example, the permitted use provision can specify that the licensee may use the software for back office processing, but not for the provision of products or services to third parties.

However, the language setting out these limitations can be vague. For example, a licensee could interpret the term "internal use only" to allow it to:

Licensees should be wary that licensors may bring a claim for copyright infringement in addition to one for breach of contract if it is alleged that the licensee has used the licensed software for a purpose other than its permitted use.

For a sample of a standard permitted use provision, see Standard Document, Software License Agreement (Pro-licensor): Drafting Note: Permitted Use.

Pricing and payment terms are among the most common provisions in software license agreements that lead to disputes. Issues that often arise in this context relate to:

Disputes can also arise in situations where the software license agreement is silent or otherwise fails to clearly identify the individuals or class of individuals permitted to access and use the software.

The most common situation involves terms that allow only the licensee's employees to access the software, excluding from access the licensee's third-party agents, contractors or advisors. This type of restriction can be impractical and troublesome for licensees that rely heavily on independent contractors to handle tasks relevant to the software's intended purpose.

In addition, conflicts often ensue when a software license agreement does not specify the means for identifying authorized users (for example, by listing specific employees in an attached exhibit), if required by the licensor.

Software license agreements usually restrict the licensee from transferring or sublicensing the software to third parties. However, licensors sometimes permit licensees to transfer or sublicense the software, for example, if the licensee:

In these circumstances, conflicts often occur when:

For a more in-depth discussion of these and other contract terms that commonly arise in software license disputes and practice tips for managing the associated risks, see Practice Note, Software License Disputes: Managing the Inherent Risks.