When engaging in negotiations for software licensing or development, it is important for intellectual property rights (IPR) owners to consider the following guidelines:
Software Licensing Agreement:
The validity of an escrow arrangement is contingent upon full and timely payment under the license agreement and subsequent maintenance agreement.
If affiliates or subsidiaries are to enjoy the benefits of licensing rights, the interpretation should be limited to existing entities that fall within the respective definitions and were present at the time of executing the licensing agreement.
In the event that escrow materials need to be handed over due to support stoppage, the transfer value or shareable value should be determined based on the written down depreciation value of the source code. These materials are strictly for internal use, and any commercial use, such as selling or sharing the source code for profit, is prohibited. Therefore, the cost of the escrow material is not the cost of the source code itself but rather the cost of access rights to the source code for internal development and maintenance purposes only.
Customization of Software or Interface Development (Inputs Exclusively from the Customer):
In the case of exclusive inputs from the customer, granting ownership of the intellectual property rights (IPR) to the customer is essential. However, the IPR owner should retain restricting rights, allowing the customer to use the software only once payment has been made in full.
If the source code is provided when the software is live, the handover should not restrict the development of similar or identical software, modules, or interfaces for other customers. This is permissible as long as the new software is developed independently, without using the same code, and tailored to suit the specific requirements of each customer. The IPR owner must also uphold the confidentiality obligations agreed upon in the agreement.
In order to ensure a clear scope of deliverables in customization agreements, it is mandatory for both parties to execute a Business Process Study and Gap Analysis. In the event of timeline disputes and the absence of such documentation, a panel of three experts ("BenchMarkers") from commercial, technical, and HR backgrounds should be appointed. This panel evaluates the project based on time invested, resources utilized, and the cost of the project. Each party nominates one member, and these two nominated members subsequently nominate a presiding member. The presiding member prepares a "Draft Report" which is then sent to both parties for their comments. The final version of the report is referred to as the "Final Report." If either party is dissatisfied with the "Final Report," the Dispute Resolution Mechanisms available under the agreement should be invoked for a settlement. (Note: The nominated members can be neutral or external parties, and the costs associated with each nominated member will be borne by the respective party nominating them. The cost of the presiding member will be shared equally by both parties. It is important to ensure that the nominated members have no association with the competitors of either party to maintain fairness and impartiality in the resolution process.)
Every licensing or customization agreement should clearly specify the designated place or jurisdiction of software usage. Any change in legal status due to acquisition or merger should be commercially and operationally reviewed to determine if onsite support is required. Expenses related to personnel or expert travel, lodging, and other activities required for commuting should be reimbursed based on actual costs, along with pocket expenses.
Taxes applicable to the services under this agreement should be borne by the customer and levied at the latest applicable rate during billing. The customer has the right to deduct tax on income, and it is obligatory for them to issue a certificate of such tax deduction in the same financial year. Failure to issue the certificate within 30 days of deduction or before the 30th of April of the subsequent financial year, for deductions made in the preceding financial year, entitles the IPR owner to claim the money as a legal due. The IPR owner can recover the amount, along with applicable interest rates as per the law.
By adhering to these negotiation tips, IPR owners can optimize their software licensing and development agreements, promoting effective collaborations and reducing the likelihood of disputes.
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