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General Software Licensing Strategies – Part 2: Risk Allocation and Warranties

Software licenses have to allocate various risks between licensors and licensees.  In fact, it is essential early on to figure out what will happen should things not go as planned.  Risk allocation is allocated, in part, through the warranty clauses.  A sample provision is as follows:

“WARRANTIES. Licensor represents and warrants that (i) Licensor is the owner of, or has the right to enter into this Agreement on behalf of the owner of, all right, title, and interest, including copyright, in and to any or all of the Licensor Products, (ii) Licensor has the full right and power to enter into this Agreement, (iii) the use of the Licensor Products as authorized herein does not violate the rights of privacy or publicity, constitute the invasion or infringement of any other personal or property right, including without limitation, any intellectual property right, of any third person, firm, corporation or other entity, and (iv) the Licensor Products furnished by Licensor to Company have been tested by Licensor and are free and clear of any and all viruses, bugs, or other errors that cause the Licensor Products to not operate in the manner intended, or which is intended to prevent such operation at any time. Licensor further warrants that during the term of this Agreement the Licensor Product will remain error free in all material respects. Licensor will use its best efforts to correct any errors or problems in the Licensor Product.”

There are many different types of warranty provisions for many different situations.  Some jurisdictions may even require the provision to be conspicuous, or written in all caps or bolded to draw attention to it.  The sample warranty above is a commonly used provision with fairly standard provisions.  Parties are welcome to further allocate risks and modify the provisions as they please.

An important warranty is the warranty of non-infringement (or sub-part iii in the sample).  This provision allocates the risk of potential intellectual property infringement suits onto the licensor.  It is the licensor’s duty and job to warrant that the licensor owns or otherwise has rights to the intellectual property.  Otherwise, the licensee, not the licensor, would accept the risk of potentially expensive lawsuits.

Such a provision is often considered fair because the licensor is in a better position to determine whether he owns the intellectual property rights or whether there may be potential infringers.  For example, if the licensor knows that he copied the software, then he cannot truly warrant against non-infringement.  Licensees may similarly be unwilling to accept software that is open-source or accept software without some assurance from the licensor that they are not infringing.

It is also important to note that many sellers of computer software will use the words “as is” in describing the warranty.  The term essentially means that no matter how bad the software is, how badly it damages your computer, or how badly it works, the licensee accepts that software “as is” without any warranties.  The rationale is that no software is error-free, and that the licensor does not have any control over the hardware or other software used by the end-user.

If a licensor breaches the warranties, various forms of damages may be available.  Lastly, it is important that the warranty clause be coupled with an indemnification clause, if necessary.

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