Software OEM Agreement

Short answer: in a software OEM agreement you cannot grant your customers more rights than your own upstream license gives you. So spell out exactly what rights survive termination. A case where SAP was sued under an OEM agreement makes the point. Here are three things every software company can learn from SAP losing a software OEM agreement case. Here is the summary:

• SAP distributed and sublicensed certain AMC Technology software embedded with a SAP product.
• When the OEM agreement expired, SAP tried to give customers “specific instructions” on using the AMC software with a new version of the SAP product. The agreement said that post-termination SAP could only sublicense the AMC software with the “then current version of the SAP software.”
• SAP argued its customers could use the AMC software with the new SAP version. The court said no.

1. You Cannot Grant More Rights Than You Have.

This is a fundamental property-law principle, centuries old, from the days when sellers tried to grant real-estate buyers more than the seller held. It applies squarely to software. A sublicense is just an authorization, and you can only authorize what your own license permits under the copyright owner’s exclusive rights (17 U.S.C. section 106). So if your upstream rights end, the rights you passed downstream end with them.

2. Plain English Matters.

This agreement was as clear as can be, and SAP still missed it. The court rejected SAP’s argument that the customer had a perpetual license, because the agreement plainly said “the then current version of the SAP Software.” Be crystal clear about post-termination rights in your OEM agreements, because judges read the words closely. The same precision belongs in the restrictions you write into any license.

3. Take Ownership of Your Agreements.

When you negotiate an OEM agreement, on either side, dig in. Do not simply outsource it to your attorneys. The details matter, and what rights are granted during the term, and what rights remain after termination, should be described clearly. For the broader picture on choosing between OEM, reseller, and referral models, see SaaS Reseller and OEM Agreement Models, and on picking the right structure, Which Form of Distribution Agreement Do You Need?

The Post-Termination Questions to Settle Before You Sign.

The SAP case turned entirely on what happened after the term ended, and that is the part OEM drafts skim past. Settle these before signing, not after the dispute. Can existing end customers keep running the embedded component, and for how long? A flat cutoff and a wind-down tail are different deals, so pick one and say so. If they can keep running it, with which version, the one shipped during the term, or whatever you release later? SAP lost precisely because the agreement tied the right to the “then current” version and SAP read it more generously than the words allowed. Can you still deliver maintenance, bug fixes, or support for the embedded piece once the upstream license is gone, since you may have no right to touch that code anymore? Who tells the end customers, and what exactly are they told, because informal “instructions” to customers are how SAP walked into the lawsuit. And does any escrow, source access, or transition right survive so customers are not stranded? Write the answers into a survival or post-termination section in plain words, and align them against your upstream license so you never promise downstream what you do not hold upstream. The drafting cost is an hour. The litigation cost, as SAP found out, is considerably more.

Frequently Asked Questions.

Can my OEM customers keep using the embedded software after my upstream license ends? Only if your agreement says so, and only to the extent your own license allowed. You cannot grant downstream rights you no longer hold.

What is the most important OEM clause? The post-termination rights. State exactly what the customer may and may not do once the OEM term ends, in plain words a judge will read literally.

Should I rely on a “perpetual license” argument? Not against clear contract language. SAP tried and lost. If the agreement ties rights to the “then current version,” that is what controls.

I hope this helps.

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.