A Practical Guide to Software License Agreements: Fees and Related Issues – Media, Telecommunications, Computers, Entertainment


Canada: A Practical Guide to Software License Agreements: Fees and Related Issues

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Software license agreements generally require the customer to pay a fee for the software license and related services, which fee is generally based on the term of the license and the manner in which the customer is authorized to use the software, as well as applicable taxes and withholdings. Customers need to understand the total cost of ownership of the software over its expected life cycle.

TYPES OF FEES

  • Software license fees: The price of a software license generally reflects the value the customer will get from using the licensed software, depending on the length of the software license (perpetual or term) and how the customer is licensed to use the software (for example, the purposes for which the licensed software may be used and the number of authorized software installations and end users). Software license fees are generally payable in advance, either on a one-time basis (for a perpetual license) or on a periodic basis (for a term license). Customer may have the option to increase the scope of the license (for example, by adding additional software installations or end users) by paying additional license fees, either in advance or periodically in arrears over a basis of “tune-up”.

  • Maintenance and support costs: Fees for software maintenance (bug fixes/updates and upgrades) and technical support (troubleshooting advice/assistance) generally reflect the nature of the services and their value to the customer. Maintenance and support fees are often calculated using a formula (for example, a specified percentage of the corresponding software license fee) and are usually payable in advance on a periodic basis.

  • Additional service charges: Software vendors typically charge fees for additional services, such as implementation services and training. These charges are often based on a fee schedule or calculated on a time and material basis using the supplier’s applicable hourly/daily rates.

FEE INCREASE/PRICE PROTECTION

Most software vendors periodically change their pricing to keep up with inflation and changing market conditions. Software license agreements often impose time-limited restrictions on the vendor’s ability to increase fees, which can be particularly important for customers who plan to use the licensed software and associated services for many years. .

TAXES AND DEDUCTIONS

Software license agreements generally require the customer to pay all applicable taxes and duties on fees payable under the agreement. Software license agreements also often include a “mark-up clause”, which obligates the customer to pay the full fee without any withholding or deduction, and provides that if the customer is required by law to make a withholding or deduction on the payment of a fee, the customer will “gross up” the payment so that the amount actually received by the seller (net of withholdings and deductions) is the full amount of the specified fees.

REPORTS/AUDITS/APPLICATION

Software license agreements often require the customer to provide the vendor with periodic reports regarding the customer’s use of the licensed software (for example, number of installations and users) so that the vendor can verify that the customer has paid all applicable software license fees. Software license agreements typically allow the software vendor to perform audits of customer facilities and records to confirm the accuracy of customer reports and verify customer compliance with the license agreement. Certain Licensed Software requires periodic reactivation using Vendor-provided license keys or codes, which Vendor may be authorized to withhold if Customer fails to pay applicable fees or provide required reports. Software license agreements usually allow the software vendor to terminate the license if the customer does not pay the required fees.

RECOMMENDATIONS

When negotiating a software license agreement, a customer should understand the total cost of ownership of the software over its expected life cycle. This requires the agreement to specify all fees payable for the software and related services, assign responsibility for taxes and withholding taxes, and place appropriate limits on fee increases. The customer should also understand its obligation to provide periodic reports to the software vendor and the vendor’s remedies for late payment.

About BLG

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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