Tech & Sourcing @ Morgan Lewis


For companies with numerous affiliates, and for a wide variety of third parties that provide services on behalf of companies and their affiliates in the ordinary course of business, crafting a sufficient license grant in software agreements is an often-overlooked concern. In many software licenses, licensors grant the contracting entity the right to use software, but the license may be silent on affiliate and/or third-party use or expressly prohibit third parties from using the software. If affiliates or third-party providers need to use the software for the licensee’s benefit, the licensee could potentially be in breach of the agreement.

What then do software customers need to consider when crafting a comprehensive license grant?

  1. Corporate structure. It is important to recognize that a company’s contracting entity may not be the same entity as those that employ software end users for many reasons, including potential tax and liability implications. Thus, companies should consider whether the software license grant should include usage rights for affiliates and potentially certain unaffiliated entities (e.g., joint ventures and strategic alliance partners). Licensees should review affiliate definitions because they come in several varieties, including definitions tied to "control" of the entity and definitions tied to ownership percentage thresholds. Additionally, licensees should consider including users in the event of an acquisition or divestiture (with the right to potentially split license rights in the event of a divestiture) and should review the license grant and related definitions to determine if they are broad enough to cover the actual and potential usage.
  2. Third parties (including staff augmentation, contractors, and consultants). In today’s marketplace, many companies rely on third parties to provide operational and technology services. Individuals who provide these services may be located on-site and use third-party systems or a potential licensee’s systems or may access the software remotely. The license grant should include access and usage rights for third parties that provide services to or on behalf of the licensee. If such third parties provide services that require remote access or installation of equipment not owned by the licensee, the license should be reviewed to determine if there are any restrictions on such usage.

As companies enter into more complex staffing and provider arrangements, they may need to review their licenses to access if the usage and access rights are broad enough.

This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.