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Evaluation Licenses: Limited Protections for Limited Use

An evaluation or pilot license usually involves use of the software in a production environment with real data for a short period of time to evaluate the software. Most licensors are unwilling to negotiate the terms of the license agreement. Given the limited use rights granted by the licensor and the short use time (e.g., 90 days), the licensee cannot expect to receive the same level of protection (e.g., representations, warranties, indemnities, and liability caps) it would receive with a production license. Usually the software is provided “AS-IS” without express or implied warranties or an indemnity, and the licensor’s liability is usually limited to the amount of the license fee. Licensors usually charge a moderate license fee as well as the cost of any tangential services, such as the cost of any training.


(a) Indemnification


Most licensors are unwilling to provide an indemnity in an evaluation/pilot license, arguing that the licensee’s use of the software on a short-term basis for a limited use creates a very low risk for the licensee. Use of software under an evaluation license may carry a low risk to the licensee, but it does not protect the licensee or justify shifting the risk of infringement to the licensee. If the software is a commercial product that is being evaluated in contemplation of the licensee purchasing a production license, the licensor should be willing to assume the risk of infringement, as the licensor is better able to quantify and manage the risk.


Some licensees believe it is important to negotiate an indemnity at the time of entering into an evaluation license to utilize its leverage of a possible sale over the licensor. They believe that by waiting to negotiate an indemnity until the licensee commits to purchasing a production license, the license has lost the leverage to negotiate a favorable indemnity.

Some practitioners believe that providing an indemnity for an established product already in production use does not increase the licensor’s risk. Because the software is already in production use with other clients, a claim made against one client will likely affect all other clients using the software. Thus, indemnifying additional clients does not increase the licensor’s risk and most likely will not materially increase its defense costs. In most cases, however, the licensor possesses significant negotiating leverage over the licensee and will not consider including an indemnity in the evaluation license.


(b) Limitation of Liability


Due to the nature of evaluation licenses, most licensors are usually unwilling to assume more than a token amount of liability, usually equal to the license fee paid by the licensee. Some licensors are willing to assume a higher level of risk if the licensee is using the software solely in a controlled test lab environment where the software is segregated from the licensee’s enterprise IT infrastructure, as doing so limits the licensor’s risk of a third-party infringement claim.




PRACTICE POINT:


From the licensor’s perspective, evaluation licenses should:

· Limit the licensee’s usage to a short period of time with the automatic expiration of the agreement at the end of the stated term.

· Provide that if the client uses the software following the end of the evaluation period, the licensor's standard license fees should automatically apply, There should be clear delineation between the free, or reduced-fees, term and any use thereafter.

· Limit the scope of the license rights, i.e. use only by the licensee's employees for purposes of internal evaluation.

· Clearly indicate the software is provided "AS IS" without warranties of any kind.

· Disclaim all liability for all damages including direct damages.

· Not provide indemnities of any kind.

· Expressly state that the licensee disclaims any ownership interest arising from any comments, input, or other feedback provided by the licensee in connection with the software’s evaluation.

· Include language providing that if intellectual property ownership of the feedback does not transfer to the licensor for any reason, the licensor will receive an exclusive, perpetual, royalty-free license rights to any such intellectual property generated by the feedback.

· The expectations and requirements relating to the test environment.

· The parties' rights, roles, and responsibilities.

· Require the licensee to execute a nondisclosure agreement.

· Set forth the parties’ termination rights and remedies.

· Allow the licensor to use any endorsements, recommendations, positive comments, etc., in its advertising and marketing. If any feedback comments are negative, consider granting the licensor the discretion to withhold those comments or statements.

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