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Why Subscription Service Agreements Are Often Replacing License Agreements

Why Subscription Service Agreements are often replacing License Agreements, and legal issues to consider as a result.

softwareserviceBroadly speaking, there are two fundamental categories when it comes to computer software: licensed applications and software as a service (commonly referred to as “SaaS”). The difference between the two is straightforward in theory, but confusing them can have severe legal consequences for users and providers alike. This is especially significant given that many business transactions and agreements involve an IT-related deliverable or component, whether it be in the form of IT-development services, data processing or storage services – alone, or as part of a product or services offering. For readers not already familiar with SaaS, the next two paragraphs delineate the difference vis-a-vis the traditional model: When you download a certain program, the company (i.e. service provider) behind the software typically issues an end-user license agreement, granting you the right to use a copy of the software. When you subscribe to access a program online, you enter into a different contract: a subscription service agreement. Any software you pay for and that is hosted remotely could be considered a subscription service. Most of us have signed countless instances of both agreements: Apple’s iTunes program, for instance, comes with a EULA, as does Spotify. Both are examples of licensed, downloadable software, even though Spotify depends on access to data stored in the cloud to deliver music to listeners. By contrast, Adobe Creative Cloud, Salesforce, Oracle, and even LinkedIn are examples of SaaS, and each has a service agreement to which users agree by signing up. More and more providers are beginning to phase out licensed offerings in favor of the subscription model. Why? For one, subscriptions generate more revenue upfront and over time. They also offer some consumers a way to access cost-prohibitive software. Rather than shelling out close to $1000 for a copy of Photoshop, you can now pay $19.99 per month for the same features through the Creative Cloud. While often convenient and beneficial for parties on either side, subscriptions also have legal ramifications none of us can afford to ignore. Whether you are a provider or user, be sure to understand how your obligations and rights differ under a subscription service agreement compared to a license agreement. If you are engaged in a business transaction that involves a software component or an IT-based deliverable, here are three clauses that should be considered in any service agreement:

Warranties and Disclaimers

What does the company actually provide to subscribers? Can the company guarantee the service will continue running uninterrupted and error-free? When drafting or accepting an agreement, both parties need to consider the realities of cloud-based computing: who is responsible for loss of data due to an Internet outage, along with what amount of interruption is considered acceptable and to what degree. In the event of a breach of warranty, a provider may want to remit a portion of the subscription fee back to the user as a credit. At the same time, providers should be careful to clarify it is not responsible for delays caused by the user’s Internet provider or applications installed on the user’s device.

Privacy and Data Security

How much access does the provider have to the user’s data? What steps will the provider take in the event of a cyberattack? Are there other vendors and subcontractors involved, and if so, what are their roles and locations? Well-drafted privacy and security provisions give users peace of mind and help providers mitigate risk by avoiding culpability for system vulnerabilities.

User-created Content

Who owns content created and stored in the software? This is a contentious issue for SaaS users and providers, and practices vary: some companies retain rights to all user-created content while others grant users ownership. The same goes for users’ ability to export and transfer their data. Whichever side of the equation you stand on, be sure to nail down both parties access to content, as ambiguities can lead to messy legal disputes (not to mention bad PR). These are only a few examples of the various service agreement clauses that vary dramatically from those found in license agreements. Others include liability, indemnification, and of course, payment structure. If you have any questions about software agreements, an attorney can help. Click here to learn more about how Offit Kurman’s Intellectual Property practice group works with businesses to protect their IP assets, draft contracts, and resolve disputes. To get in touch with an IP attorney, click here.