The Old: Buying a Perpetual License
A decade and half ago, companies would only buy perpetual license agreements for their business software. When purchasing software, there was and still is a tangible ownership feeling associated with owning the software. If companies have the upfront capital to purchase the software, running on sporadic big paydays, perpetual license agreements for software may be more advantageous.
The New: Subscribe to Software
The growing trend of companies to subscribe to software has cut into the success of buying a perpetual license. Subscription revenue in the software industry is growing at a much faster 5-year 2011-2016 growth rate than perpetual license revenue — 17.5% versus 4% respectively. With companies not having such large amounts of cash on hand, this option may be more attractive. Additionally, with renewed subscription, a relationship can form between the vendor and the customer, with the vendor forced to show the added value of the product during each renewal.
The debate is far from settled and depends on the unique circumstances of the business. There comes a point in time when the subscription becomes more costly than the perpetual license agreements. A perpetual license often covers one year of maintenance free of charge and then costs would start accumulating. On the other hand, maintenance for subscription renewals are discounted or included with the free upgrades. A perpetual license uses large capital to purchase software that could alternatively be used for a for deferred tax credit.
With more companies entering into subscription license agreements, there are more customized agreements instead of boilerplate language. Lawyers therefore serve a key purpose in advising their client on signing off to the most advantageous license agreements. What lawyers need to do is advocate on behalf of companies against software vendors to receive better terms of control over access, use, and resale of information for their clients. This software is generally not over-the-shelf software with non-negotiable terms. Rather, it is software tailored to specific businesses with unique agreements that a lawyer should review.
When reviewing license agreement, lawyers should focus on the “use” section of the agreement. Then, lawyers can provide clients with specific answers to where and how often you can install the software? Can you copy, modify or redistribute it? All of these answers will help prevent the company from risk of copyright infringement. Additionally, vendors can change terms at will or withdraw access if stipulated in the secured license agreements, which is another reason why it is important that lawyers review these agreements. Lawyers should reduce liability through including indemnification provisions that limit exposure if the software infringes on a third party’s intellectual rights. In the case of potential data breach issues involving software, attorneys should examine the liability coverage. For all these reasons, lawyers should advise companies of the potential risks and remedies available when entering software license agreements.