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How to Navigate Software Legal Agreements

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Technology is progressing so rapidly that laws regarding software can’t keep up, creating complex legal issues for both software companies and customers to navigate, a New Orleans-based technology lawyer told tech industry representatives recently at the Louisiana Technology Park.

Parker Smith, an intellectual property and technology lawyer with the firm Stone Pigman, gave an overview of software legal agreements during the Tech Park Academy event.

“We've been having some really exciting developments in the industry that are affecting law and agreements between parties in interesting ways … and we have to get creative in how we deal with those developments,” he says.

Smith says technology companies need to understand the legal strategies surrounding the development, ownership and monetization of digital operations before they start engaging with companies or vendors. He outlined three common types of contracts for software development, highlighting key factors to consider with each.

Development Agreements

Software development agreements typically involve a software firm that is hired to develop a customized software product or add-on. This type of arrangement is essentially a professional services agreement, Smith says.

Smith says that in these cases, developers should try to disclaim as many warranties as possible — for example, not promising in the contract that they have not infringed on any other software, which is nearly impossible to verify. “Of course customers are going to push back and want you to be liable for everything,” he says.

Software Licenses

Software licenses grant another party the right to use a company’s software, but Smith said it’s important to understand the limitations of these types of agreements. “It’s really about saying ‘I have intellectual property rights in this software and I will not sue you if you do x, y and z,’ ” he says. “It’s not granting them ownership; it’s not giving them anything else besides promising not to sue.”

These agreements are commonly based on a lump-sum fee, the number of users or the amount of downloads by the company. Smith says if developers are imposing some kind of variable fee — based on the number of users, for example — they should ask for audit rights in the agreement, which would allow them to verify that the customer is paying the correct fees.

Software as a Service

The third contract type, software-as-a-service agreements (SaaS), are a delivery model in which software is licensed on a subscription basis, centrally hosted and accessed through the internet or a private connection. Smith says these types of agreements are rapidly growing in popularity and offer considerable benefits for companies developing software.

“This is generally the better route,” he says. “For a software developer, if you can host everything on the internet, if your customer is not getting the code and you’re able to flip a switch and turn off the service, that’s a very strong position to be in.” But he says that large customers who enter into SaaS agreements will typically fight very hard to keep developers from being able to turn off the service for nonpayment or other issues.

Smith says the top drawback for SaaS is the potential risk of hosting customer data on your own servers, particularly as government regulations over personal data continue to evolve and penalties for breaches become increasingly strict. “All these things need to be weighed in the risk evaluation,” he says.

Whatever contract method developers take, Smith urged that developers focus on their best options rather than what they feel is fair. “Contracts are about leverage,” he says. He also encouraged companies to seek professional legal advice long before a legal dispute arises.

“I guarantee you it will be cheaper than litigation,” he says. “A few thousands dollars on the front end will save you tens of thousands of dollars, if not hundreds of thousands of dollars, in litigation down the road.”

Stephen Loy