There’s a fascinating discussion over at the AdamsDrafting blog about we lawyers and the language we use to draft software license agreements. The article dissects the contract language which has evolved and which we routinely use in licensing software.

Here are some of the questions being discussed:

• Is a license the entire contract, or is a license a subset of the entire contract, where the contract contains other terms and responsibilities? Does a license agreement continue if the license is terminated?
  

• Can a perpetual software license be terminated? If it can be terminated, what does the word ‘perpetual’ mean?

• What’s the difference, if any, between a ‘fully paid-up’ license and a ‘royalty-free’ license?

And my favorite questions of intellectual property law contract interpretation:

• Who is excluded by an “exclusive” software license? and What’s the difference, if any, between an exclusive license and a transfer of ownership? Is an exclusive license the same thing as “I promise not to license to anyone else?”
  

I’m going to write briefly about these last issues.

The term “exclusive license” frequently confuses many software companies licensing their software to multiple clients — and also frequently confuses clients of the software companies. Customers of software developers always want exclusive rights to everything being provided by a software consultant that didn’t come in a box off the shelf at Fry’s.

And sometimes software companies oblige them. Here’s the reasoning: “We won’t give this away to your competitors or anyone else — you will have an exclusive license agreement with us.” And in agreeing to this, the software company has just excluded itself from continuing to use what it thinks it has merely licensed to a single client and promised not to license to anyone else. (In many cases this can have the undesirable effect of putting the software developer in the status of an infringer by continuing to use portions of the materials it developed, in its work for its other clients.)

An exclusive license excludes the licensor
An exclusive software license excludes the licensor as well as the rest of the world. In other words, when the owner of rights in software gives an exclusive license to his customer in a software license agreement — the owner has just excluded himself from whatever rights he just gave to his customer.

To me, this use of “exclusive” is plain dictionary English and is not ambiguous (and this is where I differ from Professor Eric Goldman, who stated in his comments to the AdamsDrafting article that the meaning of “exclusive” can be ambiguous). It’s my professional opinion (and the opinion of many other software licensing attorneys) that “exclusive rights” has a special meaning in the context of a software license agreement and that the term refers to and reflects intellectual property law concepts of “exclusivity.”

All software contains intellectual property (although not all intellectual property in software is protected).

Some software is patentable or contains patents (most does not). All software is copyrightable. And apart from open source software, all software contains trade secrets. In a software license agreement, the ownership of these intellectual properties is not transferred to the customer — the use of them is licensed to the customer, on specific terms, requiring continuing compliance with the terms of the license, or the license will be terminated.

Both the US patent law and the US copyright law provide for the creator of rights (and subsequently any owner of the rights) to enjoy “exclusive” rights. In the copyright law context, the owner’s right to exclude others means that unauthorized use of the owner’s exclusive rights equals copyright infringement (except in the important case where the use is minimal enough to be protected by the law as “fair use” of the copyright). In the patent licensing world, inventors who intend to continue using their technology grant an exclusive license to their customer, but simultaneously reserve a right to use themselves. This type of license language is called a “grantback” clause. Particularly in the last case — a grant coupled with a grantback — it’s obvious that the granting back of a license to the creator is to explicitly avoid cutting off the creator’s rights in the intellectual property.

The law of mutual mistake
I see the “ambiguousness” of the word “exclusive” as maybe a reference to a common problem in dealmaking which is called “mutual mistake” in the law of contracts. Mutual mistake is a doctrine that says that a contract is void if the parties thought they had the same deal in mind, when actually the thing that was the subject of their agreement was not actually the thing they thought it was. Here’s a specific example that comes from a famous 19th century case:

Smith and Jones are farmers. Jones wants to buy a fertile cow, Rose, from Smith; and the price he is willing to pay reflects the fact that the cow is fertile. Jones and Smith make an agreement for Jones to sell Rose to Smith at the agreed-upon price. It turns out that the cow, Rose, is actually not fertile.

Both parties have made a ‘mutual’ mistake. The whole point of their agreement was the transfer of a fertile cow, not just the transfer of Rose the cow. Rose the cow turned out not to be a fertile cow. Jones would not have paid the price he paid, or agreed upon that price, for a non-fertile cow. The court found that this contract was voidable due to “mutual mistake.”

Similarly in the software development context — both the software developer and the software developer’s client may believe that an “exclusive” license only excludes everyone who is not a party to the software license agreement — in other words, that it does not exclude the software developer itself. But they use the terminology “exclusive agreement” or “exclusive software license” when what they really mean is “an exclusive license with a grantback license” or “an exclusive license where the licensor reserves rights to continue use” or more simply: “I promise not to license to anyone else.”

I’ve never seen a software license agreement considered by a court to be voidable for mutual mistake (technically, this is because this is specifically prevented by other language in most contracts which allows a court to rewrite the terms of the agreement to save the contract from being voided — sometimes called a “savings” clause or a “blue pencil” clause). Whether or not a savings clause exists, software developers who carelessly use the term “exclusive license” when they really intend to keep using the technology, are risking a court’s decision that the plain legal meaning of “exclusive license” excludes the licensor.

Careless license language and warranties of title
Now let’s extend this thought further down the line to the next set of adverse consequences.

Software development company ABC Inc. gives an “exclusive license” to their client XYZ Inc. for software developed and implemented at XYZ under the Software License Agreement between the parties. Both of them intend simply that ABC will not license this particular implementation of the software to anyone other than XYZ. However, the software license agreement doesn’t say that. Now ABC goes on to the next client and signs an agreement with FGH Inc. in which ABC “represents and warrants” that it has the ownership rights necessary to grant an exclusive license” to FGH (this is called a “warranty of title”), and the software being exclusively licensed by ABC to FGH includes the core development tools that ABC licensed to XYZ and which ABC uses in its development projects for every client.

ABC no longer has any rights to legally give away to FGH, because it transferred them all by contract to XYZ. In this case, ABC starts out from Day One in its software license agreement with FGH in breach of the contract — it is saying that it can give away rights that it does not have. If this contract lands in a court dispute, FGH will probably be able to get back every dollar paid to the software developer ABC.

“I promise not to license to anyone else”
Moral of the story: “I promise not to license this to anyone else” IS NOT the same thing as “I grant you an exclusive license.”

I get about two calls a month about contract interpretation from a software development company or a customer licensing custom developed software.

The person on the other end of the phone has typically picked up a form document called “License Agreement” from some place on the Internet like docstoc.com or has been handed a form prepared by a business attorney inexperienced in software development and intellectual property license terminology.

If questions are now being raised and a contract has already been negotiated — or signed — the answers to those questions are almost never good.

Software development is an expensive proposition: it’s worth spending 5 to 10 percent of the value of the contract (or if you are a developer, the fees from a couple of customer licenses) as “insurance” to make sure that the software license agreement says what the developer and customer think it does.