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Software Licensing and SaaS Agreements

The modern day business model is shifting towards cloud computing and Software-as-a-Service (“SaaS”) agreements. This new trend allows customers to treat licensing costs as expenses that can be paid over time. SaaS also provides a solution to bug fixes, glitches, and the updating of licenses simultaneously. With the shift to cloud computing, developers are no longer required to provide a platform on which their own application runs.  However, confusion exists about the differences between software licensing and SaaS agreements.

What is the difference between software licensing and SaaS?

A software-licensing model involves the software company to offer a software program in the form of an electronic download or CD-Rom. This software then must be downloaded, installed, run, and operated on hardware before being used by one or more users. This software may be installed on hardware.  It often offers services like training, maintenance, and technical support. On the contrary, in the SaaS model, the company does not make a physical product. It only makes the product accessible through “the cloud” which acts as a hosting platform. One or more users can still access the product, but it must be done through cloud computing services.  As such, external services are not provided because they are expected to be included as part of the hosting platform’s service and support experience. As a result, SaaS acts as a service subscription model and not a physical product.

What are some of the legal concerns associated with SaaS?

Since there is a different distribution of responsibility between the parties involved in the switch from software licensing to SaaS, precautions should be taken to protect the rights of the interested parties. Licensees in particular need to confirm there are warranties in place that ensure the protection of their confidential data. Warranties should be explicit about data breaches, disaster recovery, and termination services in the case that the licensee wants to switch to a different service provider. The licensee should understand that SaaS does not imply an opportunity for custom content development, as this is dependent on the chosen SaaS product.  Users must ensure that the right to development and integration can be conducted with a third-party application via the licensor’s programming interfaces.

Should the switch to SaaS be made?

Despite the security threats that come with the management of sensitive data and modern interface of SaaS, the subscription model is often crafted to make the process easier for the customer. With the use of some traditional licensing language, the users are the ones who ultimately choose to accept the terms of use.  However, before users switch to SaaS, they should consider certain factors.  Research and evaluation should be conducted about training and support options, including, but not limited to, compatibility, security, and liability.  Additionally, inquiries should be made about Service Level Agreement (SLA) negotiations.  Before a business invests in a SaaS system, it must be aware of the return on investment (a/k/a “ROI”) and risk of transferring its information on a third-party’s server. However, with the proper education, maintenance, and security, SaaS can serve as a viable option.

At our law firm, we assist clients with legal issues related to software licensing, cloud computing, and related regulations. You may contact us in order to setup an initial consultation.