Key Takeaways:
- Clearly defined IP clauses in SaaS agreements prevent costly misunderstandings and protect company assets.
- Strategic sublicensing and exclusivity clauses ensure control over software use and mitigate potential risks.
- Properly crafted arbitration and liability clauses limit exposure and provide a roadmap for handling disputes effectively.
Vague intellectual property (IP) definitions and weak clauses in SaaS agreements are a recipe for disaster. It’s not just about listing what’s protected. It is also about locking down every angle to prevent misuse and litigation. If you’re not meticulously crafting your IP clauses, you’re leaving your company exposed.
Here are six IP clauses that you need to watch out for in SaaS agreements to ensure ironclad protection.
1. Clearly Define Your IP
Every SaaS agreement must include a comprehensive IP clause that clearly defines the intellectual property involved. Specify which elements are patented, trademarked, or copyrighted, and ensure these distinctions are unambiguous.
For example, Microsoft’s terms and conditions meticulously defines its patents, trademarks, and copyrights, and specifies exactly which products a licensee has access to. This level of clarity is crucial. Vague IP definitions that are open to broad interpretation can lead to costly legal disputes.
2. Sublicensing
As a licensor, it is essential to clearly define how your IP rights may be utilized by a licensee. The agreement should explicitly state who is responsible for maintaining, managing, and ensuring the effectiveness of the software, particularly in cases of sublicensing.
Sublicensing is a critical aspect that licensors must carefully consider. In the event of misuse of your software, what obligations will you impose on the licensee? Who will be liable if there are issues with the software? What if litigation arises due to actions of the sublicensee? All these factors must be thoroughly addressed, making it imperative to have clear and well-defined obligations and sublicensing terms in your agreement.
3. Exclusivity
Exclusivity clauses for software can be sector-specific. For example, if a pharmaceutical company has a sector-specific exclusivity clause agreement with your software, then your software can’t be used by any other pharma company.
At times, exclusivity clauses can even be service-specific. In this case, the pharma company might be the only one able to use it to cure cancer, but you can offer your software to other pharma companies to cure diabetes.
Both sector- and service-specific exclusivity clauses can limit the usage of software. While these clauses allow licensors to charge a premium for exclusivity, it is crucial to carefully weigh the potential benefits against the limitations imposed. Therefore, licensors must consider the balance of exclusivity and flexibility before finalizing such agreements.
4. Non-Compete and Right of First Refusal (ROFR)
Although rare, one risk in SaaS agreements is that a licensee might reverse engineer the software and develop a competing product. To prevent this, licensors should include a non-compete clause in the contract.
In other instances, your licensee can improve on your version (v1) and come up with their version (v2) of the software. In such cases, you can limit their right to use the v1 version but you cannot limit the right to the development of their version (v2).
To safeguard your interests, it is important to include a Right of First Refusal (ROFR) clause in the contract. This clause ensures that you have the opportunity to make the first offer on any new versions before the licensee can offer them to others.
5. Limitation of Liability
The software can be used in various ways. In case your software is misused by a third party, your liability as a licensor needs to be limited. Limitation of Liability clauses restrict certain types of claims or set a maximum limit on the amount of monetary damages that can be awarded to a user.
To safeguard your interests and minimize potential liabilities, it is essential to include both an indemnity clause and a Limitation of Liability clause in the agreement. Additionally, it is advisable to impose a cap on damages, as permitted by law, to further protect against excessive claims.
6. Arbitration
Although most agreements include an arbitration clause, a common mistake is failing to clearly define the ‘venue’ and the ‘seat’ of arbitration.
The venue refers to the physical location where the arbitration proceedings will occur, while the seat determines the legal jurisdiction governing the arbitration process. For example, the venue might be San Francisco, but the seat, or governing law, could be Singapore. It is essential to carefully consider both elements and explicitly outline them in your arbitration clause.
Additional Considerations
- Have a clear start and end date of the contract. Licenses are often ‘auto-renewed’ in the SaaS sector. While auto-renewals are fine, they have to be ‘at the ask’, i.e., Someone from the licensee team needs to send a written request to auto-renew the contract.
- From a licensee POV, it makes sense to have a ‘right to buy’ clause in the contract, so that at the end of the contract, especially long-term ones, you have the choice to buy the software.
- If you are a licensee, then you should know what rights the licensor owns. This would give you some flexibility to use the software at your discretion.
The message is clear: every clause counts. Neglecting any of these critical IP provisions could mean the difference between protecting your company’s interests or watching them crumble. It’s important to examine every detail to ensure your SaaS contracts are bulletproof.
