Archive for the ‘5 Minute FAQ’ Category

5 Minute FAQ: License Agreements vs. SaaS Agreements

Thursday, August 26th, 2010


Photo Courtesy NASA

Q: Computing used to be based on the model of the end user running another party’s software on its local computer through a client-server or fat client architecture. Now the business model is moving increasingly towards cloud computing and software as a service. If the end-user no longer has someone else’s software on his computer, does that mean the license agreements are no longer necessary?

First, let’s start off with some definitions. Cloud computing means computing where data is input and stored on a remote third party’s computer, on the Internet or “cloud.” Think Facebook. Software as a service or “SaaS” is a subset of cloud computing where not just data is stored, but also processed via a specific application in the cloud, which is often being used concurrently by many other users. Think Salesforce.com and Google Apps. The end user of SaaS pays a fee over the time of usage, using a subscription or utility model, in contrast to local software where the cost is usually paid all upfront. Also, since the SaaS user does not possess SaaS intellectual property, but accesses it remotely through a Web browser, it pays for access to, rather than use of, the IP.

Q: Well, that was my question. If there is no license of third-party IP, then is a license agreement even necessary?

I was not ignoring your question. You are correct– although there is technically no license involved in an SaaS business model, a user agreement most definitely is necessary, call it what you will. At the end of the day, the difference between an SaaS agreement and a typical end user software license agreement is more a matter of degree than kind. The meta-theme of a software end user license agreement is, “We allow you to use our intellectual property as long as ____ .” The meta-theme of an SaaS agreement is, “We allow you to access our service as long as ____ .” Despite the difference business models, large chunks of both kinds of agreements are interchangeable, because the software licensor and the SaaS service offeror are addressing many of the same business risks. Also, note that some SaaS offerings require installation of software on the local client in combination with access through a web browser, in which case the agreement would be a hybrid even closer to a traditional software end user license agreement.

Q: In what ways is an SaaS agreement different from an EULA?

Obviously, the SaaS agreement would not contain license grant language, except if it were a hybrid, as noted above. Also, an SaaS agreement needs to address business risks that are specific to a cloud environment, such as:

  • Performance and uptime guarantees and/or SLA’s
  • Data privacy and security
  • Data backups and disaster contingency
  • Data portability, especially in case of nonrenewal of the SaaS agreement
  • Term, termination, and renewal provisions, given the periodic nature of the SaaS subscription model

Besides the license grant provision, a typical SaaS agreement also often omits common EULA provisions relating to maintenance, support, and updates, because it is usually done behind the scenes by the service offeror, on a multi-user basis.

5 Minute FAQ: Open Source Licenses

Thursday, May 13th, 2010

Q: What is an open source license, and why is it important?

There are many kinds of open source licenses with a great variety of terms and conditions – Creative Commons License, GNU General Public License, Sun Community Source License, and many others. Open source licensing is becoming an increasingly important business model to distribute creative works (below). As explained in the Licensing Glossary, generally speaking an open source license is one that allows broad rights to use, modify, and distribute copyrighted material without payment of a royalty, so long as the user does not place proprietary restrictions on later users of his content. For example, the Terms of Use of popular online encyclopedia Wikipedia state that, “you can use content from Wikipedia projects freely,” as long as users make their own contributions freely available to others. In the context of software, an open source license is one that complies with the ten requirements of the Open Source Initiative, including: 1) “free” redistribution (“free” as in no downstream proprietary restrictions, and “free” as in no royalties on the original or revised code); 2) inclusion of or easy access to detailed source code; 3) the right to create and distribute modifications and derivative works; and 4) no inclusion of “downstream” license restrictions that reduce or undercut the other open source terms, i.e. once open source, always open source, no matter who adds what later on in time. Although open source software is often called “free software,” that is not quite accurate. One of the best known examples of an open source software license, the GNU General Public License, does prohibit royalties, but also permits licensors to charge a small fee for the physical act of transferring the software, as well as service fees for warranties and maintenance. In the context of licensing of text and images, the GNU Free Documentation License and various Creative Commons licenses are guided by similar open source concepts.

Q: Why would anyone just give away their creative work under an open source license?

Why indeed. The success of the open source licensing model is one of the most fascinating phenomena of the digital age. Sophisticated products with major market impact are available for free under open source licenses: the Firefox Internet browser; the Wikipedia online encyclopedia; and Apache server software. Although traditional forms of intellectual property protection are based on the assumption that the profit motive (self interest) is the greatest driver of innovation, open source licensing is based on the assumption that unrestricted sharing of knowledge and innovation (collaboration) best begets further knowledge and innovation. There is also a hybrid business model, based on the “give away the razor for free to make money selling the razor blades” concept. In some cases, for-profit businesses contribute to open source software so they can sell associated databases, or maintenance, or hardware—several distributors of the open source Linux operating system sell warranties and maintenance to go with their version of Linux, while several sellers of smartphones “give away” the open source Android software that runs them. (Smartphones running Android outsold Apple’s popular iPhone during the first quarter of 2010.)

Q: What happens if the user ignores the requirements of an open source license, for example by charging a license fee for its altered version of the open source material?

Until recently, it was not clear if there was any penalty to ignoring the requirements of an open source license. Opponents of open source licensing had previously argued that if licensors gave their product away for free, then even if licensees ignored the terms of the license, there were no damages. But in Jacobsen v. Katzer, the Court Of Appeals for the Federal Circuit put legal teeth in the open source licensing model, by ruling that violation of an open source license was not just a breach of the license, but might also be a copyright infringement. The case involved software developed by physics professor and model train enthusiast Robert Jacobsen to program decoder chips that control model trains. Jacobsen made the software available under the open source Artistic License. Matthew Katzer and Kamind Associates copied several of Jacobsen’s files into their own commercial software, but in violation of the license terms, did not include a notice of attribution to Jacobsen. While Katzer and Kamind conceded that Jacobsen’s software was copyrighted, they argued that since the Artistic License permitted them to copy the files, there was no copyright infringement, at worst only a breach of the license terms. The CAFC disagreed, ruling that since the attribution requirement was drafted as a condition under which the license was granted, copying in violation of a condition was not excused by the license, and was therefore a copyright infringement. The case is significant not only because it is the first major case validating the concept of open source licensing, but also gives open source licensors a much more effective means to enforce the license. Although contract damages are normally calculated on economic harm suffered by the injured party (and therefore difficult to prove when a product is given away for free), under copyright law, creators can collect damages and attorneys fees based on the infringer’s profit, or under a fixed formula called statutory damages. Furthermore, copyright law allows the licensor to pursue licensees of the licensee, while contract law normally does not. Thus, the Jacobsen case gives real teeth to open source licensing—however, at this time it is limited to cases under the jurisdiction of the Federal Circuit. Although the Jacobsen case makes it much easier for open source licensors to get damages to enforce license terms, an important open question is how easily they can get injunctions to enforce open source license terms, for example an injunction ordering a licensee to disclose its source code to the public, or even shutting down all further distribution of the licensee’s software.

5 Minute FAQ: When Is An Agreement a Contract?

Sunday, February 14th, 2010

A contract is an agreement that is legally binding, and can be enforced in court.

Q: So what are the magic ingredients that make an agreement a legally binding contract?

First, there must be a concrete, bona fide offer, for example, “I will sell you those shoes for $25”.  But if the seller had said instead, “I am not selling those shoes, but if I did I would probably sell them for $25,” then no contract can result.  (This is similar to the language used in a letter of intent, which is also not legally enforceable.)

Second, there must be an acceptance that matches the offer on at least the main terms, such that there is a “meeting of the minds”—“I will buy those shoes for $25.”  If there isn’t a match, then the reply to the offer might be considered a counteroffer (“I will buy those shoes for $20”) which requires its own acceptance.  Note that an offer can be accepted not only with words (oral or written), but also with actions, for example handing over the $25.

Another necessary ingredient is “consideration,” not in the sense of the parties being nice to each other, but in the sense of each party bargaining for a benefit, including the ever popular “money.”  Which sounds like it would always apply, because who makes an offer for which he does not seek a benefit in return?  But for example, an offer of a gift (“I will give you $1 million because you are a lovely person”), even if promptly accepted with a hearty “yeah baby!” would not “normally” be legally binding, because there is no bargained-for benefit to the gift-giver.  “Normally,” because there are exceptions where offers that lack consideration can still become legally binding.

Finally, some kinds of agreements must be in a signed writing to qualify as a contract.

Q: In some cases? You mean oral agreements can be legally binding?

Yes, if there is a valid offer, acceptance, and consideration, then most oral agreements qualify as contracts.  Certain kinds of important agreements are required to be in a signed writing.  In fact, the laws of every state except Louisiana require five kinds of agreements to be in a signed writing: 1) agreements to pay the debt of another; 2) agreements to sell or transfer real property; 3) agreements to get married; 4) agreements that cannot be completely performed within one year; and 5) agreements for the sale of goods (not services) worth more than $500.  These laws are descended from the English Statute of Frauds enacted in 1677.

In addition, assignments (transfers of ownership) of patents, copyrights, and federal trademarks are all required by law to be in a signed writing.  This often applies to exclusive licenses of patents, copyrights and trademarks, because they are often deemed equivalent to transfers of ownership. Also, a work made for hire contract with a non-employee must be in a signed writing.

Q: So oral agreements are okay?! Doesn’t that contradict what you are always saying?

I said oral agreements could be legally binding, but they are definitely not okay.  Trust me when I say— in case of problems, there will always be a conflict over just what was agreed to.  Any agreement concerning anything of value should always be in writing.  I wholeheartedly agree with the quote variously attributed to Yogi Berra and Samuel Goldwyn: “A verbal contract isn’t worth the paper it’s written on.”

Q: Can a series of e-mails discussing deal terms be considered a contract?

Absolutely.  And under the federal Electronic Signatures in Global and National Commerce (E-SIGN) Act and the largely complementary Uniform Electronic Transactions Act enacted in 47 states and the District of Columbia, an electronic signature in a business or commercial record will be given the same legal effect as a handwritten signature if it is: 1) a sound, symbol, or process; 2) attached to or logically associated with an electronic record; and 3) made with the intent to sign the electronic record.  So an e-mail agreement could be legally binding even if it concerned one of the five “Statute of Frauds” categories of agreements.  Typically, the problem will be figuring out whether in the back and forth of e-mails there was ever truly a meeting of the minds—an offer of terms that was substantially accepted by the other side.

Q: Putting this in the context of license agreements—are so-called “clickwrap” and “shrinkwrap” software license agreements legally binding?

Yes, they can be.  If the licensor made the terms of the license clear and visible to the licensee, and gave the licensee an opportunity to manifest its acceptance, either by removing the shrinkwrap on the install disc or clicking a “Yes, I Accept These Terms” button on a website before downloading the software, then the licensee will be bound by the license terms.  On the other hand, courts have ruled that where the license terms were on a submerged screen not visible from the download screen, then the downloader is not legally bound.  Similarly, if the license terms were not clearly and completely visible to the buyer/licensee before he removed the shrinkwrap, then he would not be bound.  I will examine some of these cases in greater detail in future posts.