Most IT contract drafters know the difference between a software license agreement and a technology services contract. In a license, the recipient gets rights to copy and use a software application, while in a services contract, the recipient gets a service, like tech support or IT consulting. But software as a service (SaaS) seems to throw a wrench into the gears. Which is it? Fortunately, the new landscape isn’t actually all that confusing (or all that new). SaaS agreements are services contracts, pure and simple. They don’t call for software licenses.
The confusion, of course, stems from the central role of “software” in software as a service. You can cut through the confusion by asking what the customer will do with the software. If the customer puts a copy of a software application on a computer—downloads it, installs it from a disk, etc.—the deal calls for a license. Copyright law gives the software’s owner a monopoly over the right to copy it (to “reproduce” it), so the customer needs a copyright license to make a copy and put it on a computer. But in a SaaS deal, the customer doesn’t put software on a computer, or copy it at all. The software sits on the vendor’s computer and the customer merely accesses it via the Internet. With no copies, copyright plays no role in the transaction, so the customer doesn’t need a copyright license. Rather, the customer needs a simple promise: “During the term of this Agreement, Vendor will provide the System to Customer.”
In other words, the customer gets a service in a SaaS deal, not software. The vendor just uses software to provide the service. The vendor operates like an Internet service provider (ISP). Earthlink and Comcast and other ISP’s use millions of dollars of software to give their customers Internet access. But they don’t give their customers copies of that software. Rather, they provide a subscription to the service made possible by that software.
The distinction has implications for several clauses in a SaaS agreement:
- The Main Transactional Clause: The customer should get a subscription, not a software license. The customer gets a right “to receive the Service” or “to use the System” so long as the subscription lasts. Of course, you can describe the vendor’s offering as “a license to the Service,” and lots of companies do. But that suggests some kind of copyright license, and it’s hard to predict what a court will do with it if the parties get into litigation. You’ll write clearer contracts—and keep things clearer in your own head—if you avoid licensing language. (See the notes below for sample SaaS transactional clauses.)
- Maintenance: You don’t need it! In a maintenance clause, the vendor agrees to fix problems with installed software and to send updates and upgrades, so the customer’s copy doesn’t fall behind those of other customers. In a SaaS deal, the customer doesn’t have a copy. The vendor keeps the software, and the vendor’s promise to provide it as a service already involves maintaining it, by definition. (But see below re SLA’s.) Plus, the customer has no copy to fall behind other customers’ copies and so no need for updates and upgrades. When the vendor updates the software on its computers, all customers benefit (in almost all cases).
- SLA: You should consider a service level agreement (SLA) for a SaaS contract. Most SLA’s address time-frames for fixing errors or minimum performance standards—speed, latency, etc.—or both. (See the notes below for sample SLA’s.)
- IP Indemnities: SaaS customers generally don’t risk suits about copyright infringement, including open source suits, because they’re not copying any software. So they usually don’t need indemnities against copyright suits. Of course, the flip-side is that vendors don’t face much risk if they grant copyright indemnities. Patent indemnities, however, can play a key role in SaaS contracts because the customer could get dragged into a patent suit, even without copying the software. Some vendors grant patent indemnities only, others grant broad IP indemnities, and still others grant no indemnity at all. (See the notes below for sample indemnity clauses.)
- Data Management & Security: Data management and security play a more important role in SaaS deals than in most software licenses. The customer’s sensitive data generally sits on the vendor’s computers, along with the software, rather than on the customer’s computers. That’s why many SaaS contracts include a data clause, addressing the vendor’s obligations for managing data and for keeping it secure. (Be sure not to use an NDA for data security! See my recent post on NDA’s vs. data security clauses. And see the notes below for sample data clauses.)
Of course, your deal may involve both SaaS and installed software. A SaaS vendor may provide its main offering online but also give customers a software application to install on their computers—something that helps the computer use data from the online service, for instance. Don’t let that confuse you. What you need there is a small software license agreement wrapped into the larger services contract. The license and its supporting terms should address the installed application only, not the software the vendor keeps on its own computers and uses to run the service.
Notes & Resources:
- For sample clauses, see the following resources on the Tech Contracts Chalkboard Contract Forms & Resources page: (a) “Online Terms of Service, Software as a Service” downloadable form, particularly the transactional clause in Subsection 2(a); (b) “Indemnity” downloadable form; (c) and “Data Management & Security” downloadable form.
- The Tech Contracts Handbook addresses: (a) SaaS transactional clauses in Chapter I.F; (b) SLA’s in Chapter II.B; (c) indemnity in Chapter II.K; and (d) data management and security in Chapter II.I.
© 2011 by David W. Tollen. All rights reserved.