Protecting Your Business from Legal Risks
Navigating software licenses is critical for modern businesses as is no longer just an IT concern but a core business risk area. With evolving licensing models, open-source usage, and the rise of SaaS, understanding software license obligations is essential. Missteps can lead to six or seven-figure penalties, vendor audits, and potential intellectual property loss. Software licensing can be complex and you need to stay compliant, minimise risk, and optimise your software investment.
What is a Software License?
A software license is a legal contract between the software owner (licensor) and the user (licensee) that outlines the terms under which the software can be installed, accessed, modified, or distributed.
Common elements include:
- Installation rights such as how many devices and how users can install it.
- Permitted use such as whether it is for commercial, personal, educational purposes.
- Modification and distribution rules.
- Compliance and audit provisions.
Without a valid software license, software use is effectively a copyright infringement.
Proprietary versus Open-Source Software
Understanding the fundamental difference between proprietary and open-source licenses is vital for software licensing compliance:
Proprietary Software – Closed-Source
This is the traditional model, where the software is:
- Copyrighted with typically restrictive licenses.
- The source code is hidden, meaning you have no rights to modify it.
- Generally requires paid licenses for use e.g. Microsoft Office.
- Notably, some open-source software can also be offered under restrictive commercial dual-licenses, blurring the lines.
Open-Source Software (OSS) and Copyright
This model offers greater flexibility, but still operates under specific software licenses:
- The source code is accessible and often modifiable.
- Generally free to use, but governed by various open-source licenses like:
- GPL (General Public License) – This is a “copyleft” license, meaning any derivative works you create using GPL code must also be released as open-source.
- MIT/Apache – These are more permissive licenses, allowing you to create proprietary derivatives from the open-source software.
- It is still copyrighted, but the licenses grant radically different freedoms compared to proprietary models.
Versioning & Upgrade Rights
Understanding how versions impact your software license is crucial for ongoing compliance and cost management:
Not all software updates are equal, and neither are the license rules governing them:
| Term | What It Means | License Coverage |
| Major Version (e.g. v7.0) | Significant new features/architecture | Typically requires a new license or upgrade fee |
| Minor Version (e.g. v7.1) | Bug fixes, security patches (no new features) | Usually covered under your existing license |
| Upgrade License | Discounted access to a new major version (requires prior license) | Often 40–60% of the full price of purchasing a new license |
You should check if your software license includes Maintenance & Support . Without it, you may lose access to critical security updates and essential technical assistance, which can expose your business to unnecessary risks.
Common Software License Types
Software licensing models vary widely. Here are some of the most common types you might encounter:
- Perpetual License: Pay once, use forever.
- Subscription License: Monthly/annually recurring fee. This typically includes updates and support.
- Individual/Seat License: One license per user or device.
- Volume License: Offers bulk discounts for multiple users.
- Developer License: Grants rights to build and test software.
- Per-Processor License: Cost scales with the number of CPU cores (e.g. IBM WebSphere).
- Cluster License: Covers server clusters (a group of servers that work together as a single system).
- Floating/Concurrent License: A shared pool of licenses for concurrent users, rather than individual installations.
- Consumption-Based: You pay based on your actual usage.
- Module License: Grants access to only specific parts of a larger software suite.
- SaaS License: Cloud-based, typically per-user access to software as a service.
- GPL License: Allows free use and modification if any derivative works you create also remain open-source.
Hidden Compliance Risks to Watch
Poor software license management can expose your business to significant legal and financial risks such as the following:
- Audit Clauses: Vendors typically include audit rights to inspect your usage in their software license agreements, meaning they can demand an audit at any time.
- Penalties: Non-compliance fines can range from 150–300% of unpaid fees, a substantial financial hit. Severe violations can also lead to criminal penalties.
- Cloud Sprawl: Unmonitored cloud subscriptions (especially common in SaaS model) often lead to wasted spend, impacting your budget.
- Open-Source Risks: Using GPL-licensed code in proprietary software without understanding the terms can force you to open-source your own code, which is a major threat to your IP.
Need Legal Advice?
Software licensing disputes can cost businesses millions in legal fees, fines, and operational disruption. If your business relies on licensed software, you need legal protection, not just IT policy.
At Citilawyers, our IT lawyers can help your business:
- Negotiate better licensing terms with vendors that is favourable to your interests;
- Design compliance frameworks to reduce audit exposure and avoid future issues;
- Mitigate legal risks from open-source software use or dual licensing
- Respond effectively to audits or vendor disputes
Contact our IT licensing team today for a comprehensive risk assessment and strategic legal advice.
