SaaS, short for “Software as a Service”, is a software delivery model that grants users access to a program while the software itself and its accompanying data are stored off-site, on a vendor’s (or another third party’s) servers. A user accesses the program via the internet, and the access is provided as a service. Hence … “Software as a Service”.
In terms of user interface functionality, a SaaS service – typically accessed via a subscription model – is identical to a traditional software model in which a user purchases (or more typically, licenses) a physical copy of the software for installation on and access via the user’s own computer. And in enterprise structures, the software is installed on an organization’s servers and accessed via dedicated “client” end machines, under one of many client-server setups. In that sense, SaaS is much like the traditional client-server enterprise model where servers in both cases will likely be offsite, the difference being that SaaS servers are owned and managed by the software owner. The “cloud” really just refers to the invisibility of the legal and operational relationship of the servers to the end user, since even in traditional client-server structures servers might very likely be offsite and accessed only via internet.
Traditional software licenses are made under software license agreements that allow and restrict proper usage, including redistribution, copying and other uses of the program. SaaS users are still subject to terms of proper use analogous to terms under software license agreements, with some important variations due to the physically different relationship with the software. A second major difference arises from the nature of a subscription model, since almost by definition revenues received from users of the software are spread out (rather than largely upfront as in traditional licensing) with important tax and accounting implications. It should also be said that in the United States the distinction between “service” (in a SaaS structure) and “license” (in a traditional license model) can have important sales tax implications, although this will vary greatly from state to state. (These tax and accounting issues will be discussed in a follow-up posting in the near future. For the moment, please see these good resources on these issues: here, here, here and here.)
Software License Agreements. As noted above, while license agreements used for traditional software licensing may not be wholly applicable to SaaS, the concept is the similar but the business model differs. Most importantly, no grant of use is required to permit the user to use the copy of the software, since a physical copy of the software is never given to the user. This would normally be the subject of a license “grant” clause, for example:
Company hereby grants User a limited, non-exclusive, nontransferable right and license (without the right to sublicense) to use, execute, and display the object code version of the Software and use the Documentation in the Territory set forth in the applicable Statement of Work.
Instead, in a SaaS subscription agreement, the software owner grants rights of to a user to an online service. Here, for example, from Intuit’s Terms of Service for QuickBooks Online:
The Services are protected by copyright, trade secret, and other intellectual property laws. You are only granted the right to use the Services and only for the purposes described by Intuit. Intuit reserves all other rights in the Services. Until termination of this Agreement and as long as you meet any applicable payment obligations and comply with this Agreement, Intuit grants to you a personal, limited, nonexclusive, nontransferable right and license to use the Services.
The online service happens to be software, of course, so functionally the user experiences no difference. The difference is in copyright law: In theory, copyright is only implicated if there is a “copying” of copyrighted software, and therefore without an actual placing of a copy of the software on the user’s computers there is no copying. And thus no need for a license to copy anything.
Rather, the thing that’s being authorized by a SaaS subscription contract is access to software via a software owner’s servers without actual copying of the software. So, the thinking goes, since a user needs no license to do anything that would be protected by copyright, the user obviously still needs something to permit use of the software. And if not a license to make use of rights protected by copyright, that something must be a grant of right to use the function of the software, or in other words, use the service. Put another way, the idea behind SaaS is that a user is not actually using the software since the user is never physically given the software, but instead is given only the service that the software performs.
Commentator Chip Cooper discusses this same point in his blog here, “Digital Contracts”, noting also that a SaaS contract for higher end services will frequently have more robust privacy, data security, performance and uptime guarantees, the latter commonly addressed in a Service Level Agreement (SLA). This too is simply derivative of the physical relationship of the user with the software and servers, where not just systems but user data will be processed, managed and stored on the SaaS vendor’s servers.
Intellectual property illustrates a commonality between the 2 software models. Contracts under both models universally specify full retention of intellectual property rights (particularly copyright and patent) for the software owner. This will be true regardless of where the software is hosted, if for no other reason than the sensitive concern of a technology company to protect its IP assets. Nonetheless, one might wonder why this protection would be necessary in a SaaS contract, which would seem to undercut an owner’s argument that no license was given in the first place. As David Tollen writes in his “Tech Contracts Blog”, “SaaS customers generally don’t risk suits about copyright infringement, including open source suits, because they’re not copying any software. So they usually don’t need indemnities against copyright suits. Of course, the flip-side is that vendors don’t face much risk if they grant copyright indemnities.” As discussed above, if no license to copyright (or any other IP right) was given, presumably no grant of IP ownership right could be inferred.
On the other hand, as Tollen recognizes and as many common Terms of Service for subscription model SaaS service make plain, traditional license language is used for both software and service structures. See for example Intuit’s Terms for QuickBooks Online (“The Software is licensed on a monthly or yearly subscription basis, as selected by User or its agent”). Nevertheless, in both SaaS and traditional licensing, a software product is offered for end use, and users choose whether to accept terms of use in either utilizing a service or using a program that is physically installed. Indeed, Richard Bergovoy points out in his “Licensing Law Blog” that “some SaaS offerings require installation of software on the local client in combination with access through a web browser, in which case the agreement would be a hybrid even closer to a traditional software end user license agreement.”
SaaS Agreements: Unique Terms (or lack thereof). Bergovoy and other commentators note a great benefit of SaaS to permit seamless and automatic service upgrades, maintenance and support, since the service provider has full constant access and control of the software. General maintenance will frequently be included with the subscription. Commonly, a Service Level Agreement (SLA), especially in projects for more customizable applications, identify minimum standards of service including performance speeds, system response times for concurrent users, support responsiveness for fixing of bugs and other defects, and hosting uptimes.
As also discussed above, user data is stored on the vendor’s systems, and a data clause addresses management of sensitive data as well as data security and privacy. A related but important consideration is data portability, since certainly not all relationships end amicably and even those that do face cost burdens when contemplating data transfer to a new vendor (or bringing data storage in-house). These are issues that do not normally need to be addressed in a traditional software license involving installed applications, and merit further more considered discussion in a separate post.
Britnie Morris, a Research and Social Media Intern with Mirsky & Company, researched and contributed to this post.
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