Software Reseller Agreements: A Guide to Negotiating and Drafting

A software reseller agreement is a legal agreement outlining the rights and responsibilities between the owner of software (the “publisher”) and a person or business wanting the right to sell or license the software to third parties (the “reseller”). A software reseller agreement is sometimes referred to as a “software distributor agreement” or a “software distribution agreement”.

The software reseller agreement contains important terms and conditions relating to the rights and responsibilities of the reseller. Although each software reseller agreement will vary depending on a variety of criteria, here are some key terms that will need to be addressed:

Agent vs. Sales Representative vs. Reseller

Although software reseller and sales representative are often used interchangeably, from a legal perspective, they are very different. However, the lines between these distinct roles are often blurred.
An agent is a legal representative of the principal (which, in this case, would be the software publisher), which includes employees of the publisher. Thus, the agent is legally authorized to enter into contracts on behalf of the software publisher – which would include software licenses to end users. Although sales employees are often paid a commission as part of their compensation, they often receive a base salary, employee benefits, and their expenses are paid by the employer.

A benefit of using an employee to sell software is that the employee should be focused on selling the employer’s products – not competitors. In addition, the employee will devote all of their time to selling on behalf of the employer. Of course, the employer must bear the cost of the employee’s salary, benefits and expenses. In addition, the employer could be liable for any injury or damage caused by an employee. Finally, if the employee is based on a state or country outside of the employer’s base of operation, by having an employee in the foreign jurisdiction, the employer could be responsible for compliance with the employment, tax, and other laws of that foreign jurisdiction.

By contrast, an independent sales representative is not legally empowered to execute end user licenses on behalf of the software publisher. Instead, the representative will negotiate terms with the prospective licensees, but the software publisher will enter into a software license agreement directly with the end user. The representative is compensated with a sales commission, which is typically a percentage of the license fee associated with the software license.

A key benefit to using an independent sales representative is that the publisher is not responsible to pay a salary or incur any other costs of the independent sales representative except a commission – and that is only paid if and when the independent sales representative makes a sale.

Of course, an independent sales representative might also represent other products – including those which compete with the publisher’s software products. As such, the publisher cannot count on the loyalty and focus of the independent sales representative to be the same as one of the publisher’s employees.

In some instances, the publisher may cover some of the independent sales representative’s costs, provide equipment or office space, and event pay a monthly retainer. These factors might cause the independent sales representative to be treated as if it were an employee under local law, which could cause lots of headaches for the publisher. Of course, if the independent sales representative were a corporation, LLC or other entity instead of an individual, the publisher would not have to worry about that since only individuals can be considered employees.

Like an independent sales representative, a software reseller is independent of the publisher and does not have the ability to enter into contracts on behalf of the software publisher. In a traditional reseller arrangement, the reseller will pay a fee to the software publisher for the right to resell or sublicense the software. The difference between this fee and the fee the reseller charges the end user will be the software reseller’s compensation. However, because software resellers often are compensated via a commission-style arrangement, this can be a source of confusion as to the true role of the reseller.

As such, the agreement between the software reseller should clearly establish the reseller’s role and distinguish it from that of either an employee or independent sales representative.

In addition, if third parties mistakenly believe the reseller to be an agent or employee of the publisher, actions and agreements signed by the reseller could be considered binding on the publisher, itself. To avoid this, the publisher should ensure that the reseller does not represent itself as an employee of the publisher. This often happens when the reseller uses a title like “VP Sales for Latin America” on business cars and email signatures, typically along with the publisher’s name and logo. The publisher should require the reseller to clarify its relationship with the publisher when dealing with third parties, using a title such as “Independent Reseller.”

Exclusive or Non-Exclusive Software Reseller

Most commercial software reseller agreements are non-exclusive, meaning that the publisher may grant others the right to resell the software. In some situations, a software reseller agreement may be exclusive, which would prohibit the publisher (or any of its other resellers) from reselling or distributing the software to certain end users.

The terms of exclusivity are often limited by geography (“the United States”) or by industry or “field of use” (e.g., education, healthcare, etc.) Thus, the publisher would be permitted to grant licenses to people outside the scope of the exclusivity.

Whenever any form of exclusivity is granted, the publisher should insist on including performance requirements in the software reseller agreement. This could provide that exclusivity is contingent on the reseller selling a certain number of licenses or producing a certain level of revenue each year. For new markets, the performance requirements are often stair-stepped and increase each year over the term of the agreement.

Software Reseller Agreement Payment Terms & Renewals

Compensation to the reseller is typically the difference in price between the amount paid by the user/customer and the price paid by the reseller to the publisher. However, some software reseller arrangements provide for the reseller to receive a sales commission based on license fees paid to directly to the publisher by the user, which is more similar to how a sales representative of agent is compensated). This is especially true of “software as a service” agreements (or “SaaS agreement”).

Also, if the user license is based on an annual or other renewable subscription, or if the user can purchase additional products or services from the publisher, the software reseller agreement should clarify whether the reseller is entitled to compensation in connection with any such renewals or additional purchases.
Where the software reseller is truly a reseller, the reseller purchases licenses from the publisher and then sells the licenses to its customers. In these instances, the reseller wants the publisher to commit to certain pricing of its products so that the reseller will be able to up-charge enough to make a reasonable profit.

Payment is typically made at the time of purchase but could be aggregated on a monthly or quarterly basis. The reseller should also be able to reduce its payment to the publisher in the event the reseller has to refund or write off a sale, though the publisher will not want to bear the burden of collection from the reseller’s customers.

Software Updates and Maintenance

The software reseller agreement should address whether the publisher is obligated to provide end users maintenance or upgrades to the software and, whether an additional fee is required for any such maintenance or upgrades. Of course, the reseller will likely want to pass any additional fees on to its customers.

Installation, Training, and Software-Related Services

The software reseller agreement should address whether the reseller is obligated or allowed to provide installation, training or other services. In fact, many software resellers are primarily IT services companies who offer the publisher’s software as an add-on or tool to their clients or a middleware using the software to bridge their own software applications with the customer’s software or date, or that of third parties. In these arrangements, it is important that the software reseller agreement address the potential issues associated with the interplay of these various systems.

Software Reseller Agreement Term and Termination

The term of a software reseller agreement describes the period of time in which the reseller is granted the right to resell the software. Often this, is for an initial term, and may be extended for additional terms (typically this is subject to the reseller having met certain performance obligations during the initial term).

Regardless of the length of the term, the software reseller agreement should address what happens when the term expires or is otherwise terminated. Some post-termination items that may need to be addressed include the impact on end user license renewals, ownership of data or other IP associated with modifications to the by the reseller, software whether future commissions are owed to reseller, and responsibility for ongoing service agreements related to the software.

International Software Reseller Agreements

If the reseller is granted a territory outside the United States, the publisher must consider what impact the laws of the foreign jurisdiction might have on the software reseller agreement. Some countries require resellers to register. Otherwise grant the reseller a form of property rights to the market the reseller creates in the territory. In other countries, their laws render exclusivity provisions unenforceable.
Also, the publisher should include language in the international software reseller agreement to prohibit the reseller from registering the publisher’s trademarks in the foreign jurisdiction and requiring the reseller to cooperate with helping the publisher police and enforce its intellectual property rights in the foreign jurisdiction.

Finally, an international software reseller agreement should include language requiring the reseller to comply with US laws regulating international trade such as export controls, sanctions, not dealing with restricted parties, and avoiding bribery of foreign officials. Even though the reseller is independent of the publisher, violation of these laws by the reseller can cause significant trouble for the publisher.

Legal Issues for Software and App Developers

An increasing number of Texas companies are creating electronic medium products: software, mobile applications and video games. Software app and video game entrepreneurs (“SAVaGEs”) include digital arts and entertainment product developers, investors, resellers, publishers, and distributors, as well as the consultants and technicians who help create, deploy, market, and/or maintain these products.

SAVaGE companies face many of the same challenges as traditional businesses, but also must address additional legal challenges because of the mercurial, non-physical nature of digital assets and operations.

Entity Structure

SAVaGEs should consider forming a legal entity, such as a corporation or limited liability company (“LLC”), as soon as possible. These legal entities provide personal asset protection for the owners and managers from business debts, and can also provide a more palatable structure for potential investors. There is no single entity type or jurisdiction that is ideal for all SAVaGEs and the proper entity choice should be made only after discussion with legal and tax counselors.

Funding

Like all businesses, cash is critical for SAVaGE enterprises. Many are initially self-funded, but often need outside financing moving forward. Financing options include selling equity, loans and royalty-based financing.

Selling equity is a common source of capital for early stage ventures, but SAVaGEs must follow all securities laws and be careful to retain control. This caveat applies to both cash investors and “equity for service” arrangements with developers and partners. Debt and royalty-based financing can be difficult to obtain for early stage companies, except at outrageous interest rates. Regardless of the source of funding, SAVaGEs will want to ensure that all transactions are well documented using comprehensive agreements prepared by experienced legal counsel.

Taxes

SAVaGE products can be sold, licensed and accessed from virtually anywhere, which means a variety of governments may have an interest in taxing these transactions. It is important that SAVaGEs discuss the tax implications of where and how they make money.

Intellectual Property

Since Intellectual Property (“IP”) will represent virtually all the value of the SAVaGE company, SAVaGEs must appreciate the importance of comprehensive IP protection. IP includes: copyrights, patents, trademarks and trade secrets, and SAVaGEs will typically need to protect all four types of IP to adequately protect their assets. A well-focused IP strategy adequately identifies, secures, and enforces all IP assets – both in the U.S., and abroad.

SAVaGE companies must clearly address all issues regarding IP ownership during the development process and limit trade secret exposure from the competition. In some instances, company entity documents can directly address IP rights, confidentiality, or non-competition (e.g., in the LLC company agreement). Additionally, all owners, investors, directors, advisors, officers, employees and contractors should sign agreements to protect against the loss of trade secrets, and to transfer the ownership of any IP developments to the company.

eCommerce

Prior to accessing or using a SAVaGE product or website, users of SAVaGE products should first agree to a license, often called the “Terms of Use” or “End User License Agreement” (“EULA”). The EULA outlines the rights and responsibilities of the company and the user, and should comprehensively address all areas of concern and vulnerability for SAVaGEs. Users must also agree to a privacy policy that outlines what data will be collected and how it will be used. User data can be a valuable asset to SAVaGEs, but they must ensure not to violate the myriad of state, federal (and even foreign) data privacy laws.

Conclusion

SAVaGEs represent a growing industry segment, and it is important that SAVaGEs consult with legal counsel and business and tax professionals who are experienced in handling special issues and challenges SAVaGEs face.

Website Development Agreement Essentials

A Website Development Agreement is an agreement between a company desiring to have a website developed or modified (the “client”) and a person or company that will be handling the development (the “Developer”). The website development agreement contains important terms and conditions relating to the scope of the project, payment terms, and overall responsibilities of the Developer and the client. Although each development agreement will vary depending on a variety of criteria, here are some key terms that will need to be addressed:

Website Development Agreement Benchmarks

One of the most important elements of a website development agreement is the “statement of work” (or “SOW”) which details important deliverables, deadlines, partial payments, and performance requirements to measure progress throughout the development process. SOW’s are sometimes woven into the development agreements, themselves, but are typically attached as schedules or exhibits to the development agreement, which are incorporated into the agreement by reference. Changes to the SOW may result in changes to the payment owed to the Developer.

A significant amount of conflicts that arise between developers and clients relate to an unclear understanding of the deliverables, ownership of intellectual property, benchmarks and timings, performance requirements, and other specific elements of the project.

Ownership and Copyrights

Another critical aspect of a website development agreement is ownership of intellectual property. In many cases the Developer will use third party website elements, or elements of its own previously-developed website, as part of the new website being developed for the client. The development agreement must determine the ownership of each element of the website and must clarify each party’s rights with regard to all of these various elements.

Moreover, the development agreement should provide for the transfer of copyrights and other intellectual property related to website from the Developer to the client (unless the parties prefer that the Developer retain these rights).

Employee vs. Contractor

Many companies incorrectly assume that, because they are paying for website development, they automatically own the website that is created. This is not true, unless the Developer is an employee of the client and development is part of their employment. This is covered in the US “work for Hire” statute. For all other developments, such as where the Developer is a freelancer or third-party company, the Developer will be the owner of all website created for the project. Thus, it is important that the development agreement provide for the automatic transfer to the client of all copyrights and related intellectual property rights in the website.

Confidentiality and Control of Information

In many instances, the Developer will need access to a client’s confidential information and trade secrets in order to create the website. The website development agreement must require the Developer to keep such information confidential and must provide guidelines for the use of this information by the Developer.

In addition, where the Developer uses employees or contractors on the project, the agreement must require notice if any data or work will be moved outside the United States and must ensure that the Developer’s employees and contractors are also subject to confidentiality requirements.

Payment Terms

Compensation to the Developer is typically paid in multiple phases, such as when important benchmarks in the project are achieved. This enhances the importance of the SOW being clear and detailed, so that each party knows when a progress payment is due. The final payment should not be required until all work on the project is complete and the website is performing according as required by the SOW.

After final delivery, any ongoing training or maintenance obligations of the Developer can be addressed in the SOW, the development agreement, or via a subsequent agreement between the parties.

Term and Termination

While the “term” of the development agreements is typically the amount of time required to complete the project, the parties should address in the agreement what happens in the event either party wants to terminate the contract prior to completion. They should address issues such as: who owns what IP, what payment will be owed to the Developer, and the return of all client confidential data and other proprietary materials.

Hosting

Sometimes, the Developer will host the website once development is complete. Although the hosting may be related to the development project, hosting services will require additional agreements and understandings between the Developer and client. These are best addressed in a separate “Web Hosting Agreement.”

Devil is in the Details

Majority of my civil defense practice is centered in Cook County, Illinois, one of the most litigious and populous counties in the United States of America. Since it encompasses the entire city of Chicago, the jury pool tends to be liberal, plaintiff-friendly, and from a variety of backgrounds. Because of how liberal and plaintiff-friendly the jury pool (and subsequently the judges are), winning dispositive motions in Cook County is extremely difficult, if not borderline impossible. While these are motions that defense counsel must file to provide the best defense for our clients, the general belief across the aisle is that these motions are not won and they just remain appealable issues for the parties to deal with at the appellate level. Of course, the larger the case with more complex issues and severe the injuries, the harder it becomes.

That was the exact thought process that all the attorneys adhered to for a catastrophic limousine accident lawsuit I became involved with in 2016. From what should have been a simple auto accident lawsuit due to the limousine driver not seeing the lane shift ahead of him ballooned into a massive theory built by crafty plaintiffs’ attorneys against numerous engineers, design consultants, and contractors involved with three separate construction projects spanning a couple of miles on the highway where the accident took place. Five years later after over 175 depositions, hundreds of thousands of pages of construction documents reviewed, and innumerable hours spent on this case, it was the time to file dispositive motions, or rather a motion for summary judgment. This is a type of motion where a judge makes a determination as a matter of law that the plaintiff cannot proceed against the defendant(s), and the case is dismissed without the plaintiff receiving any type of monies or the case going to a jury. Since the latter is a constitutional right, that is huge.

All the defendants filed their motions for summary judgment, with everyone asserting arguments specific to them. One argument applied to all defendants across the board (barring the driver), which is that the driver was the sole “proximate cause” of the accident, meaning that he is the one who caused the accident. Not the defendants, but just the driver. Notwithstanding the complex theory developed by the plaintiffs focusing on design and signage, none of that mattered as it all came down to the unforeseeability of the driver’s actions that day, which broke the legal causal connection between the alleged wrongdoing and the subsequent accident.

Since the plaintiffs with the more significant injuries in this case included a grieving husband who filed an estate’s claim on behalf of his wife who passed away in the accident, a quadriplegic, a woman with a shattered lower extremity, and a young 20 year old limousine driver with multiple back fractures, this case was thought to be exactly like one of those typical “Cook County” cases where the defendants file the motion for summary judgment to make their record and it is denied. That is certainly what the general impression was.

Yet, the presiding judge decided to hear this issue before hearing all the individual arguments raised by the respective defendants. After a 7.5 hour hearing that included multiple rounds of arguments from each side, the Judge considered all the facts and actually pulled the trigger, granting the motion for summary judgment and dismissing every defendant (except the driver) from the case. Her underlying rationale was that it was so unforeseeable that an underage, unlicensed, tired limousine driver would not pay attention to various markings on the same roadway that he had traveled through within the same configuration multiple times in the week leading up to the accident, that any causation the defendants had for the signage and the design was cut off. There were insufficient facts to establish Plaintiff’s claims of negligence and summary judgment was appropriate. She focused on the details rather than getting caught up in the inflated emphasis of the severity of the injuries.

The case is now pending on appeal.

Software Protection Strategies: Alternatives to Patents

Over the past few decades, intellectual property (IP) has become an increasingly larger portion of the capital investment and assets of U.S. companies. For software companies, in particular, IP legal protection is crucial to secure their assets from theft or copycats.

Pros and Cons of Software Patents. For many software companies, patents serve as a key tool in protecting their rights in and to their software products. U.S. patent owners can prevent others from making, using or selling any products or services that incorporate their patented inventions or methods throughout the U.S. As such, patents can be powerful deterrents to copycats, and can provide patent owners with significant market advantages.

However, software patents are expensive and difficult to maintain, and can be even more expensive and difficult to enforce. The lifetime cost of obtaining and maintaining a patent in the U.S. can easily top $30,000. Of course, patents expire after a maximum of 20 years, so at some point the patented inventions become open to the pubic.

Also, U.S. patent protection does not protect the invention from users in other countries. Of course, since the U.S. patent process involves a publication of the claims that, thanks to the Internet, are globally available, failure to secure international patents leaves a U.S. patent owner unable to prevent use of their technology by foreigners. As such, U.S. patent owners often seek patent protection in foreign countries, as well, at costs of $30,000 or more for each additional country where patent protection is desired.

In addition, once a patent is obtained, the burden of enforcing patent rights falls upon the patent owners, themselves. Thus, patent owners must bear the cost of investigating potential infringement and, if necessary, filing infringement lawsuits. A recent study by the American Intellectual Property Law Association to find median litigation costs for patent infringement suits can be significant: For claims of less than a $1 million, median legal costs are $650,000. When $1 million to $25 million is considered at risk, total litigation costs can hit $2.5 million. For claims over $25 million, median legal costs are $5 million.

Alternatives to Software Patents. In light of the costs and limitations of software patents, some of which are outlined above, software owners often employ alternative legal tools to protect their IP rights. Some of these alternative software IP protection strategies include the following tools:

Effective use of licenses can grant software owners significant legal powers to use control the use of the software by partners, affiliates, developers, distributors, and users of their software. The main benefit of this tool is that the license language can grant broad powers to the software owner and moves legal considerations from the more nuanced and complex realm of “IP law” (confusing to many courts), and renders them more simple “breach of contract” issues that courts handle on a regular basis. However, a significant limitation to this mechanism is that the licenses can only be enforced against those who agree to it, and not against others.

Trade Secrets. Trade secret laws protect a company’s secret items that have commercial value. Items protected by trade secret laws are typically the same subject matter as patents. However, trade secrets do not require any filings or public disclosure, as is required with patents. Moreover, trade secrets do not expire, so a secret can remain protected indefinitely (e.g., the Coca-Cola formula). The mechanics of qualifying for trade secret protection are fairly nominal, but software owners should implement comprehensive protocols to ensure their software is fully protected.

Copyright Registration. While not required to create rights in a copyrighted work, registering software with the U.S. Copyright Office grants software owners significant legal protections and enforcement tools, such as: the ability to sue in federal court for infringement, the ability to receive an award of attorneys fees from infringers, and the ability to receive statutory damages (meaning that the injured copyright owner doesn’t have to prove lost revenue or profit to receive a money award). S. Copyright Office registrations are relatively inexpensive to acquire, do not require renewal, and protections can last 100 years or more.

Trademark Registration. While trademark registration with the U.S. Patent and Trademark Office (USPTO) won’t protect the underlying code associated with a software program, a USPTO trademark registration can help ensure that no one in the U.S. can market similar products under a name or logo that is “confusingly similar” to the registered mark. The USPTO trademark registration process is much simpler and less expensive than patents, typically costing less than 10% of the cost of patent protection. In addition, USPTO registrations can be renewed indefinitely, as long as the mark remains in use.

Finally, for copyrighted works registered with the U.S. Copyright Office and for trademarks registered with the USPTO, the registration owners can also record their registrations with U.S. Custom and Border Protection (CBP). Once these are recorded, CBP will ensure that no infringing items are imported into the U.S., effectively locking out the entire U.S. market from foreign imports of infringing goods.

The above discussion represents a brief overview of some of the legal tools that software owners can employ instead of, or in addition to, software patents. The best options and strategies for protecting software will depend on a number of factors, and software owners should consult competent IP legal counsel for advice.

Category: Legal