How to pick the best licensing model

How to pick the best licensing model

IT Advocate: Software Gotchas.

My clients often find themselves frustrated with the default model offered in IT suppliers’ standard terms and conditions for software licensing. Taking some time to select the model that is best suited to your organisation when you negotiate the contract can pay dividends when your circumstances change and you want to adjust your usage of the software.

The licence is important as it determines how you may use the software. If you use it in a way that is not contemplated by the scope of the licence you risk both infringing the intellectual property rights in the software and being sued by the owner (who may not be the licensor), as well as breaching the licence agreement and being sued by the licensor.

If you have not agreed how use of the software outside the scope of the existing licence is to be priced, you may find yourself having to ‘agree’ to a price with the supplier at a time when you have already committed to the software and have an immediate need for further use. It is generally not the most competitive circumstance in which to negotiate an additional licence fee.

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Beware the number of users

The most common IT licence we see limits use of the software to a number of ‘users’. This in itself can be ambiguous, as users can be a reference to ‘concurrent users’ — the number of users using the software at any given time — ‘named users’, being particular individuals, or even the number of people who may potentially use the software, such as the number of employees you have. Which of these restrictions is intended should be made clear in the drafting of the licence. The model that best suits your needs will depend on the circumstances, including pricing.

It may be, for example, that you only ever need one person using your accounting package at any given time and that is all you want to pay for. A concurrent users model, allowing a specified number of users at once, is always preferable to a model which lists the specific names of an equal number of people who can use the software, assuming the price is the same.

There is no better time to negotiate fee consequences of increased usage than at the time of entry into agreement when the competitive tension should be at its highest

Regardless of the user model, your agreement should ideally make it clear what happens if you wish to increase the level of usage. For example, you may wish to increase the number of named or concurrent users, or you may have an increase in the number of employees. In each of these cases it is preferable if the agreement of the licensor is not required for the increase, that the procedure for effecting the increase is clear (eg by notification), and that there is certainty around the fee consequence of the increase. There tends to be no better time to negotiate fee consequences of increased usage than at the time of entry into the licence agreement when the competitive tension should be at its highest.

You should ensure that any procedure for an increase in users works at a practical level. For example, in a large organisation the number of employees may increase weekly. You do not want to have to issue a notification each week, or inadvertently exceed the scope of the licence which may lead to an intellectual property infringement claim by the owner or a right for the licensor to claim damages for breach of contract or terminate the licence agreement altogether. Rather, it is preferable to have a self-audit and ‘true up’ mechanism for employee-related restrictions that occur at regular intervals, such as annually.

If, however, you select a named user model, it is in your interest to have the ability to modify the users conveniently as required.

Although licensors are less likely to agree to it, you should also consider whether or not commercially you can reach agreement on a fee decrease to result from decreased usage in the software, for example by decreasing the number of concurrent users from time to time. Again, it is preferable that the quantum of decrease be agreed at the time the licence is entered into.

Licence limited by technology

It was common for a period to limit software use to a number of central processing units (CPUs). The model seemed logical enough at the time but ran into trouble when multi-cpu computers were released and licensees found themselves arguing that they really did not mean to pay fees on a per CPU basis even though that is what the contract said.

Some licensors have persisted with restricting software use by reference to technology, and in some circumstances it may be appropriate. However, you should always consider the prospect that the technology model will become outdated, and try and insert mechanisms to deal with it. Of course, the shorter the licence term the less likely it is to be an issue.

Any technology descriptions should be sufficient for a court (with appropriate experts if necessary) to determine if your organisation’s use falls within it. It also helps if the lawyers and your commercial procurement people can understand it. Occasionally, the use is restricted by reference to a volume of transactions that take place using the software and they should also be capable of clear identification —the number of Optical Character Recognition scans performed by software, for example.

The same scalability issues that exist with restrictions based on users also apply to restrictions based on technology.

An unlimited licence

Suppliers are often loath to grant it, but often the best licence to procure for your organisation is one that allows unrestricted use of the software. That is not to say that you should always pay for unlimited use; rather, the permission should extend to such use if you desire it. This means that you will not inadvertently breach the agreement or infringe the intellectual property rights in the software by increasing the use of the software.

In these circumstances, however, it is important that the licence agreement clearly set out the fee consequences of increased or decreased use, and you will have to carefully manage use to ensure your organisation is not liable for greater fees than intended.

Other limitations — and the cloud

Each of the licences granted under the above models may be further limited by geography — for example, by restricting use to a particular site — or for a particular purpose, such as running a particular type of business. As with the other restrictions, ensure these limitations are acceptable and scalable with clear fee consequences as appropriate. You should also ensure any backup or disaster recovery use is expressly contemplated by your licence scope.

Finally, more and more software is being delivered out of the ‘cloud’. The same issues apply with respect to the licence scope when using software in the cloud as when you use software locally, although it is often not expressly dealt with in cloud services agreements. Ideally, as with more traditional software agreements, the scope of the licence would be carefully selected and negotiated to reduce the risk of conflict or angst should circumstances change over time.

David Downie is a partner in the intellectual property group of law firm, McCullough Robertson. For more information please contact him at

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