Navigating Open-Source Licenses in Your Licensing Agreements

In many standard client contract templates, a critical aspect often gets overlooked: User’s obligations arising from use of third-party components in the software licensed under these contracts. These obligations can carry significant risks to the user if not addressed properly.

At Legally Wired, we offer insights that look beyond the basics of the law. Each article concludes with actionable insights to help you assess potential risks and practical ways to reduce them, empowering you to make confident, informed, proactive choices for your business.

What Do We Mean by Third-Party Obligations?

Imagine a company called Code Crest, which has developed an invoice management tool for freelancers. While the tool includes proprietary elements created by Code Crest, it also incorporates third-party components such as open-source (OS) elements and licenses from other businesses. These third-party components come with their own set of rights and obligations that Code Crest must adhere to. Obligations and risks arising from use of OS must be reflected in Code Crest’s contracts with its clients.

This chain of rights and obligations, flowing from vendors to end users , is often referred to by lawyers as "back-to-back agreements."

While various third-party obligations may need attention in such contracts executed between ‘you’ the vendor and the end user , this article focuses specifically on managing your obligations relating to the use of Open Source (OS) components in licensing agreements with end users.

Common Obligations in Open-Source Licenses

Open-source licenses often come with built-in obligations. Here are two key examples:

1. Obligation to License Modified Works Under the Same TermsIf Code Crest incorporates software that was licensed to Code Crest  under a restrictive OS license (such as the GNU General Public License), any modifications they make to that OS code must also be licensed under the same terms to end users. This means the modifications must remain open source.

2. Obligation to Include NoticesMost OS licenses require attribution notices for the original authors and the inclusion of copyright notices. Failing to meet these requirements can expose a company to significant liability for breaching the OS license terms.

Breach of these obligations in client contracts can lead to serious legal consequences for companies like Code Crest. That’s why proactive measures are essential.

How to Address Open Source Components in Licensing Agreements with End Users

To effectively manage OS components in licensing agreements, your approach should focus on two goals:

1. Complying with the obligations imposed by the OS license.

2. Shielding yourself from liabilities that should not fall on your shoulders.

Here are four key strategies to incorporate into your client contracts:

1. Warranty Disclaimers

Most license agreements include warranties regarding the ownership, performance, and functionality of the software. However, when your product includes OS components, you must avoid unintentionally taking on someone else’s liability.

Solution:Explicitly state in your contract with the end user that you do not provide warranties or representations for OS components. Specify that such components are provided “as-is” and “as-available” without additional guarantees or representations. This ensures you’re not held responsible for third-party code included in your product.

2. Liability and Indemnity Carve-Outs

Indemnity provisions are often broadly worded to cover any losses arising from the use of the product. When OS components are part of the product, you need to include a carve-out to limit your exposure.

Solution:Clearly disclaim any indemnity obligations related to OS components. This carve-out ensures that you are not liable for any issues arising specifically from open-source code.

3. Notification of Open-Source Licenses

Transparency is crucial when dealing with OS components. Clients should know that the product they’re licensing includes open-source elements.

Solution:Include a section in your agreement notifying clients that the licensed product contains OS components. Provide either a copy of the applicable OS license or a link where the license terms can be accessed. This keeps clients informed and ensures compliance with OS licensing terms.

4. License Restrictions

Software agreements often include usage rules, such as prohibiting reverse-engineering or sublicensing. For OS components, you must include additional restrictions to avoid misuse or violations of OS license terms.

Solution:State explicitly in your contract that clients cannot use OS components in ways that breach the terms of the OS license. This precaution helps you avoid unintended legal conflicts while ensuring all parties remain aligned.

Open-source components bring immense value to software products but come with unique challenges in licensing agreements. By understanding the obligations tied to OS licenses and addressing them proactively in your client contracts, you can reduce risk, protect your business, and ensure smooth collaboration with your clients.

The strategies outlined here—warranty disclaimers, liability carve-outs, OS license notifications, and usage restrictions—serve as practical tools to navigate the complexities of open-source licensing. With these measures in place, you’re better equipped to build robust and legally sound agreements.