Licensing Agreements: What Every IT and Service Business Needs to Know

Licensing Agreements Key Takeaways:

• A clear definition of the scope—including all rights, duration, and territories—is foundational to the agreement’s value and prevents commercial risk.
• Proactively manage financial exposure by using Limitation of Liability and Indemnity clauses to set clear monetary caps and define defense obligations.
• Safeguard intellectual property and competitive advantage with robust confidentiality provisions and explicit restrictions on use and disclosure.
• A well-crafted agreement is a strategic commercial instrument that creates enforceable pathways for revenue generation, partnerships, and growth.

For service and information technology companies, license agreements are a primary mechanism for revenue generation. Through these contracts, a company grants customers specific rights to its products, services, or intellectual property. This structure permits a single asset to be licensed to multiple parties concurrently, establishing a consistent source of income.

A well-drafted agreement is fundamental to this process. This article outlines the essential terms and clauses for structuring, negotiating, and interpreting these vital business instruments.

Key Terms of License Agreements

A license agreement’s terms dictate the rights and obligations of the licensor (the provider) and the licensee (the customer). When these terms are ambiguous, parties expose themselves to legal, compliance, and financial risks. The following nine provisions are foundational to any robust license agreement.

1. Scope of the License

This provision is the core of the agreement, defining the precise boundaries of the rights granted. It must clearly articulate:

• Permitted Use: The specific purposes for which the licensee can use the asset (e.g., for internal business purposes only).
• Nature of the Grant: The character of the license (e.g., exclusive or non-exclusive, revocable or irrevocable, transferable or non-transferable).
• Duration: The length of the license term, which can be perpetual or for a fixed period (such as a multi-year subscription).
• Territory: The geographic regions within which the license is valid.
• Authorized Users: The individuals or entities permitted to use the license (e.g., the licensee, its affiliates, or specific employees).

The grant is almost always qualified by a set of restrictions to prevent misuse. These typically prohibit the licensee from modifying, selling, reverse-engineering, or transferring the product or service in violation of the agreement.

These restrictions may include not:

• Using the product or service in conjunction with unauthorized third-party products.
• Modifying, selling, altering, circumventing, assigning, or transferring the product or service to any third party in violation of the agreement.
• Decompiling or reverse-engineering the product or service.
• Using the product or service to provide outsourcing services to third parties.
• Permitting unauthorized third parties to use the product or service.
• Using the product or service for any purpose not authorized in the agreement.

2.  Indemnity

An indemnity clause allocates risk between the parties. Typically, the licensor agrees to defend the licensee against third-party claims arising from the use of the product or service, such as a claim that the licensed software infringes another party’s patent. A licensor’s indemnity obligation is often conditioned on the licensee using the product or service subject to the terms and conditions of the agreement; the licensee not breaching any provision of the agreement that gives rise to an indemnity claim; the licensor’s gross negligence, fraud, or misrepresentation being the reason for the indemnity claim.

The performance of the indemnity obligation may be further contingent on the licensee’s and licensor’s compliance with the established indemnity procedure. This procedure may include certain conditions listed below:

• The licensee is responsible for notifying the licensor of the indemnity claim.
• The licensee will permit the licensor to take control of the defense and settlement of the indemnity claim.
• The licensee and licensor will assist and cooperate with each other in processing the indemnity claim.
• The licensor shall not settle any indemnity claim without the consent of the licensee.
• The licensor shall appoint counsel of its option or in consultation with the licensee.

Conversely, there are exceptions where the licensor’s indemnity obligation will not apply, such as

• Use of product or service in violation of the license terms and conditions
• Use of product or service for any unauthorized purpose
• Use of product or service in conjunction with third-party products which are not suggested or approved by the licensor

3.  Limitation of Liability

This provision manages a party’s financial exposure in the event of a breach. It has three main components:

(i)        Cap on direct damages

Parties agree to a monetary limit on liability for direct losses. This cap is often tied to the license fees paid over a specific period (e.g., the preceding 12 months) or set as a fixed amount. Generally, the parties may agree on a monetary cap along the following parameters:

• License fees paid by the licensee for a specific time period (e.g., license fees paid during the last twelve months) or without any time period
• Specific monetary value (e.g., the maximum liability is capped at $1 million)
• Two, three, or four times the license fees paid by the licensee.

(ii)       Special damages disclaimer

The purpose of this disclaimer is to expressly exclude the liability of a party for special damages (such as indirect, consequential, exemplary, punitive, or any other special damages).

(iii)      Carve-outs for unlimited liability

Certain claims are typically excluded from the monetary cap because the associated risk is too great. These “unlimited liability” carve-outs often include breaches of confidentiality or indemnity obligations, or claims arising from fraud or gross negligence.

4.  Warranty

Typically, when it comes to a license agreement concerning a product or service, the licensor will provide a warranty for the product or service, as applicable.

• Product warranty: The licensor will provide a warranty that the product will work as per the functionality specified in the user documentation.
• Service warranty: The licensor will provide a warranty that the service will be performed professionally by qualified or competent professionals.
• Remedies: Generally, the primary remedy for a product defect or deficiency in the service is rectifying such defect or deficiency. In case of the licensor’s inability to rectify such a defect or deficiency, the final remedy could be to refund the license fees paid.

5.  Confidentialiy

Confidentiality is a vital provision that protects the confidential information exchanged between the parties is adequately secured and treated as confidential by the parties. The confidentiality provision will have certain important sub-clauses, such as:

(i)        Confidential information definition: This sub-clause defines what constitutes confidential information. Without a clear definition, ambiguity can arise about which information requires protection. Certain qualifiers determine whether the information is considered confidential, such as:

• being marked or identified as confidential;
• oral information being reduced to writing;
• information disclosed under reasonable circumstances reflecting its confidential nature;
• information relating to a discloser or transaction.

(ii)       Exceptions to confidential information: This provision clarifies that the recipient is not obligated to treat information falling under any of the stated exceptions as confidential. The following are standard exceptions:

• Information that is available to the public.
• Information that is available or known to the recipient prior to receipt of the confidential information from the discloser.
• Information that the recipient receives from a third party.
• Information that the recipient independently develops.

(iii)      Restrictions on use and disclosure: Restrictions will typically be imposed on the recipient’s use or disclosure of confidential information to ensure confidential information will be used for permitted purposes and disclosed to permitted persons only or as otherwise required or requested by law.

(iv)      Return or destruction of confidential information: This provision requires the recipient to return or destroy all confidential information in their possession upon termination of the agreement or upon written request of the discloser. However, the recipient may retain confidential information as required or permitted by the discloser.

(v)       Permitted copies: Depending on the nature of the transaction, the recipient will be permitted to retain the confidential information to comply with legal, compliance, regulatory, record retention, backup, archival, or other legal and permitted purposes.

(vi)      Protection period: The recipient’s obligation to protect confidential information remains in effect for the ‘protection period.’ This period may be a fixed term of a defined number of years or be perpetual.

6.  Term and Termination

This provision defines the term of the agreement, including the parties’ termination rights and the effects of termination.

(i)        Term: The term of the agreement is the duration within which the agreement will be in effect and binding on the parties. This may be for a fixed term or perpetual.

(ii)       Termination rights: This provision will define the right of a party to terminate the agreement. Termination rights may include:

• Termination of the agreement for a material breach of the agreement.
• Termination of the agreement for no reason, just for convenience.
• Termination for insolvency.
• Termination for payment default.

(iii)      Cure period: The ‘cure period’ is the time provided to the breaching party to rectify any breach of the agreement. Failure to cure the breach within this period may result in termination of the agreement.

(iv)      Notice: It is advisable to have termination of the agreement tied to the condition of issuance of prior notice of termination to ensure each party involved knows that the agreement is terminated. The absence of notice of termination means that the party who did not terminate the agreement may not be aware that the agreement has been terminated.

(v)       Effect of termination: Termination of the agreement may have the following consequences:

• The license will be terminated, and the licensee will no longer have the right to use the license unless otherwise permitted by the licensor.
• The license keys or confidential information will be returned or destroyed.
• Payment of any license fees due to the licensor will become due.

7.  Assignment

This provision governs a party’s ability to transfer its rights and obligations under the agreement to a third party. Assignment is typically prohibited without the other party’s prior written consent, with a common exception for assignment to an affiliate or a successor in the event of a merger or acquisition.

8.  Governing Law

Governing law will be the law pursuant to which any dispute relating to the agreement will be decided. Jurisdiction refers to the geographical location of the courts that have the authority to adjudicate disputes related to the agreement.

9.  Survival

This clause ensures that certain provisions remain in effect even after the agreement terminates or expires. Obligations related to confidentiality, payment, and limitation of liability are common examples of provisions that survive.

Final Thoughts

License agreements are a vital part of the service and information technology industries. They allow parties to share their products, services, or intellectual property with others, expanding their reach and generating revenue.

By clearly defining the key terms, you establish clear expectations, allocate risk appropriately, and protect your intellectual property. A thoughtfully structured agreement prevents disputes and transforms a standard legal document into a strategic asset that supports innovation, partnerships, and sustainable growth.

FAQ About License Agreements

Based on the article and general legal principles, here are the answers to those questions.

What are the most common license agreements?

In the technology and service industries, common license agreements are structured around the type of asset being licensed. These frequently include:

• Software as a Service (SaaS) Agreements: Contracts that grant customers the right to access software hosted by a provider, typically on a subscription basis.
• End-User License Agreements (EULAs): Terms presented to an end-user for the installation and use of a software application on a local device.
• Patent or Technology Licenses: Agreements that grant rights to use a specific patented invention or proprietary technology.
• Content Licenses: Contracts for the use of creative works, such as images, articles, music, or video, in a publication or other media.

What is an in-license agreement?

An in-license agreement is a contract where a company obtains the rights to use another party’s intellectual property, product, or technology. It is the perspective of the licensee—the party that is “licensing in” an asset. This is the opposite of an out-license agreement, where a company grants rights to its own assets to another party. Companies use in-licensing to acquire necessary technology or incorporate third-party components into their own products without developing the asset internally.

Are license agreements legally binding?

Yes, a license agreement is a legally binding contract, provided it contains all the necessary elements of a valid contract. This means there must be an offer, acceptance of that offer, consideration (something of value exchanged between the parties), a mutual intent to be bound, and a legal purpose. When properly executed, the terms of a license agreement are enforceable in court.