People sometimes forget that when you click “I Accept” or “I Agree”, you are entering into a legally-binding contract with the software company or website owner. And usually, the terms of the contract are extremely one-sided in favor of the Licensor. Particularly when your business purchases software licenses, simply clicking “I Accept” or “I Agree” without fully understanding the legal consequences of the contractual terms can put your company at significant financial risk.

For example, when you download and install iTunes, did you know you are agreeing to protect Apple by paying any damages and legal fees involved if Apple determines you have breached the License Agreement? You may be surprised at how easily you could inadvertently breach the terms of the Agreement if, say, you burn an audio playlist to a disc eight times rather than the permitted seven. If Apple sued you, you are contractually bound to travel to the courts in California to defend yourself (all while paying the associated court costs and legal fees). If, on the other hand, installing iTunes crashed your entire network and cost you thousands or even millions, you contractually agreed that you will not sue Apple and that Apple has no liability to you for any damages. Also, like most other license agreements, Apple’s agreement permits Apple to change the terms of the contract whenever and however it wishes, and you are bound to the new terms by continuing to use iTunes.

What’s the lesson for companies? To avoid potentially astronomical legal fees and substantial financial liability,always negotiate your software license agreements to obtain terms favorable to your company.

There are a number of clauses you almost always want to include in an agreement between your business and a software company/Licensor:

  • Indemnification for your company: The contract should clearly define the protections and obligations of each party to the agreement in the event of a dispute. For example, if the software company is sued by a third-party who claims the company stole his code for use in the software, as a user of the software, your company may also be named in the lawsuit. To protect your business in such an instance, include a clause requiring the software company to defend, indemnify, and hold harmless your company against all costs (including attorney’s fees) associated with the litigation.
  • Limitation of Liability clause: Almost all license agreements limit the liability of the Licensor, generally to the cost of the software. Include a statement in the license agreement that your company’s potential financial liability is also so limited.
  • Choice of Law provision: Choose the state in which your business is located as the state law and venue for any litigation arising under the license agreement. This will prevent large travel costs and will allow you to work with an attorney with whom you are familiar, rather than having to locate counsel in the state in which the software company is located.
  • Establish Ownership of Intellectual Property: If your company is developing software or using it to create, ensure the license agreement clearly spells out the ownership of your company’s intellectual property (data rights and copyrights). Most standard agreements provide that the Licensor owns development and software creations. Avoid costly future litigation by establishing who owns what prior to use of the software.
  • Warranties and Service Level Agreements: If your business is relying heavily on a specific software program, ask the software company to provide a warranty or service level agreement for the proper functionality of the software. For example, if your business cannot make widgets during any software downtime, request the software company to commit to a maximum amount of downtime each month, and to compensate your business if the downtime exceeds the agreed-upon levels.

The above list of clauses is certainly not exhaustive. Each software license agreement should be tailored to the specific needs of your business while understanding and limiting the business’s potential liability to the fullest extent possible. Even if the software is free, your company’s potential legal and financial liability may be unlimited. Always negotiate your license agreements!