A software license is a permission granted by the holder of the rights in a piece of software that allows another party to use it in ways the law would otherwise reserve to the rights holder. Because computer programs are protected by copyright, acts such as copying a program onto a disk, loading it into memory or modifying it generally require authorization; a license supplies that authorization and sets its limits. In the European Union, for example, the rights holder’s exclusive rights include the permanent or temporary reproduction of a program by any means and in any form, and its translation, adaptation or other alteration.[1] Publishers’ own terms reflect this: Microsoft’s Product Terms define a License as “the right to download, install, access and use a Product”.[2]
A license states who may use the software, what they may do with it, how usage is counted, for how long, and on what conditions. In commercial practice it is also a product: organizations buy quantities of licenses measured in a license metric, together with maintenance and support, and their compliance is judged by comparing those purchases with actual use. The management of that comparison is the subject of software asset management; the units themselves are surveyed in software licensing models.
History
Publishers commonly distribute copies of programs subject to license terms rather than transferring ownership of those copies outright, and courts in different jurisdictions have taken different views of when that characterization holds.
In the United States, the Ninth Circuit held in Vernor v. Autodesk (2010) that a software user is a licensee rather than the owner of a copy where the copyright owner “(1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions”. Applying that test, it held that purchasers of Autodesk’s Release 14 software under its license agreement were licensees, so the first sale doctrine did not allow the resale of their copies.[4]
In the European Union, the Court of Justice took a different approach in UsedSoft v Oracle (2012), holding that for the purposes of the Software Directive the download of a program together with a license to use it for an unlimited period, in return for a fee, amounts to a sale of that copy (see Transfer and resale below).[3]
The later shift to subscriptions and hosted services changed the commercial form of licensing again. Many products are now offered only for a defined period, or as online services where the customer never receives a copy; Microsoft’s glossary, for example, defines a subscription license as one “that allows access to software or a hosted service for a defined period of time”.[2]
Scope and definitions
License and sale
The central legal distinction is between a license, which grants rights of use while the rights holder keeps ownership, and a sale, which transfers ownership of a copy. Publishers commonly state that software is licensed and not sold; IBM’s Passport Advantage Agreement, for example, describes the machine code supplied with its appliances as “copyrighted and licensed (not sold)”.[5] Whether that label is legally effective depends on the jurisdiction and on the substance of the transaction, as the Vernor and UsedSoft decisions show.[4][3]
Some uses are permitted by law regardless of the license. Under the EU Software Directive, a lawful acquirer does not need the rights holder’s authorization for acts that are necessary for its use of the program, and may observe, study or test the program’s functioning to determine the ideas and principles underlying it. Decompilation is permitted within strict limits where it is indispensable to achieve interoperability with an independently created program.[1]
End-user license agreements and other forms
A license may be presented in several forms:
- End-user license agreement (EULA). Terms accompanying a product and accepted by the user at installation or first use, typical of retail and consumer software.
- Negotiated or volume agreements. Enterprise customers typically sign a master agreement with the publisher or a reseller, under which individual orders are placed. IBM’s International Passport Advantage Agreement, for example, is accepted by submitting an enrollment form and governs later orders through attachments and transaction documents.[5]
- Product-specific terms and definitions. Metrics, use rights and restrictions are often published separately and incorporated by reference, such as Oracle’s License Definitions and Rules and Microsoft’s Product Terms.[11][9]
- Public licenses. Free and open-source licenses are offered to anyone who receives the software, without individual negotiation.
ISO/IEC 19770-3, which defines a machine-readable format for software entitlements, treats entitlements as the subset of a license concerned with usage rights, and states that the original documentation of licensing terms remains definitive for legal purposes.[10]
Proprietary and free and open-source licenses
Proprietary licenses reserve most rights to the publisher and grant limited, often counted, rights of use in return for a fee. Free and open-source licenses grant broad rights to use, study, modify and redistribute the software. The Open Source Initiative’s Open Source Definition sets ten criteria that a license must meet to be called open source, beginning with free redistribution: the license may not restrict any party from selling or giving away the software as part of an aggregate distribution. The definition stresses that open source “doesn’t just mean access to the source code”.[6]
Open-source software is frequently sold commercially under a subscription that provides support, updates and certification rather than the right to use the code itself. Red Hat, for example, describes its subscription as allowing customers to download its tested and certified enterprise software and giving continuous access to that software as it is developed.[7] See Red Hat Enterprise Linux and OpenShift.
Perpetual, term and subscription licenses
Licenses differ in duration:
| Type | Duration | Typical commercial pattern |
|---|---|---|
| Perpetual | Unlimited | One-time license fee, often with optional annual maintenance and support |
| Term | Fixed period | Fee for the period; rights end unless renewed |
| Subscription | Fixed recurring period | Periodic fee covering use, updates and support together; common for SaaS |
United States federal policy recognizes the distinction: OMB memorandum M-16-12 defines the software it covers as including commercial licenses, “perpetual and term licenses”, and maintenance such as maintenance contracts, software assurance, upgrades, patches and limited helpdesk support.[8] Consumption models, in which the customer pays for measured usage or pre-purchases credits drawn down by use, are a further variant; Salesforce, for instance, describes Flex Credits as a single unit of payment spent across its consumption services.[17]
Practice
The license grant
The operative clause of a license is the grant: a statement that the licensor permits the licensee to use the software, usually non-exclusively and non-transferably, subject to the terms. Grants are typically limited by:
- Scope of users. Who may use the software, such as the licensee’s employees and contractors, or third parties. IBM’s agreement, for example, restricts eligible products to use within the client’s enterprise.[5]
- Purpose and environment. Production, development, test, internal business operations, or hosting for others.
- Quantity. Measured in a license metric.
- Territory and duration.
License metrics
The metric is the unit in which the licensed quantity is expressed: processors or cores, named or concurrent users, devices, installations, employees, or units of consumption. Its definition decides how many licenses a given deployment requires. Oracle’s Processor metric, for example, counts all processors where the programs are installed or running, multiplied by a core factor, while its Named User Plus metric counts every individual authorized to use the programs whether or not they are actively using them.[11] IBM’s Authorized User metric requires a dedicated entitlement for each unique person given access, which may not be reassigned except on permanent transfer.[12] Some licenses also limit how assignments may change; Microsoft allows a license to be reassigned to another device or user, but not within 90 days of its last reassignment.[9] The main metric families are compared in software licensing models.
Maintenance and support
Perpetual licenses are commonly accompanied by a separately priced maintenance and support offering that provides new versions, fixes and technical assistance. IBM’s Software Subscription and Support, for example, runs for about a year from the date of acquisition and, while in effect, makes available defect corrections and any new versions, releases or updates IBM makes generally available, together with how-to and code-related support; once it lapses, those benefits are no longer available, and the agreement provides a separate reinstatement offering for returning to coverage.[5] Microsoft’s equivalent program, Software Assurance, is described as a set of technologies, services and rights whose benefits depend on the customer’s licensing agreement and purchases.[13] In the EU, the Court of Justice has held that maintenance agreements are service contracts separable from the sale of a copy, but that updates obtained under them become part of the copy sold.[3]
Transfer and resale
Most commercial licenses restrict transfer. IBM’s agreement states that eligible products “may not be assigned, resold, rented, leased, or transferred to third parties”.[5] Licenses supplied with hardware by original equipment manufacturers (OEMs) are typically tied to that device; a Microsoft guide on OEM licensing states that OEM software may not be transferred to another machine, even if the original is no longer used.[14]
In UsedSoft GmbH v Oracle International Corp. (Case C-128/11), decided by the Grand Chamber of the Court of Justice of the European Union on 3 July 2012, the German Federal Court of Justice asked whether a trader could resell “used” licenses for Oracle software that customers had downloaded. The Court held that the download of a copy and the conclusion of a license agreement for it form an indivisible whole, and that where the rights holder grants a right to use the copy for an unlimited period in return for a fee corresponding to its economic value, the transaction is a “first sale” that exhausts the distribution right under Article 4(2) of the Software Directive.[3] It made no difference whether the copy was supplied by download or on a physical medium. Later acquirers of such a license may rely on exhaustion and are lawful acquirers entitled to use the program.[3]
The Court set limits on that principle. The original acquirer must make its own copy unusable at the time of resale, and an acquirer whose license covers more users than it needs may not divide the license and resell only part of the user rights.[3] The ruling is framed in terms of licenses granted for an unlimited period in return for a fee; it does not address subscriptions or hosted services.
Audit and verification clauses
Enterprise license agreements usually give the licensor a right to verify the licensee’s compliance. IBM’s Passport Advantage Agreement, for example, requires the client to keep records and system tool outputs sufficient to verify its use, allows IBM to verify compliance on reasonable notice at all sites and environments, with the help of an independent auditor under a confidentiality agreement, and requires the client to pay for any excess use together with subscription and support for that use for the lesser of its duration or two years.[5] Publishers may also offer non-contractual reviews; Microsoft states that its SAM engagements are not audits.[16] Preparing for verification is one of the main motives for software asset management.
Standards and frameworks
There is no single international standard for license terms. The ISO/IEC 19770 family addresses the management of licenses rather than their content: Part 3 defines a transport format for encapsulating software entitlements and their metrics, intended to make proof of ownership, cost optimization and compliance easier and to encourage consistent naming of entitlement types across the industry.[10] The legal framework is supplied by national and regional copyright and contract law, such as Directive 2009/24/EC in the European Union.[1]
Relationship to other disciplines
- Software asset management applies license terms to an organization’s actual deployments to produce an effective license position; see software asset management.
- IT asset management treats licenses as one class of asset among hardware, cloud and SaaS; see IT asset management.
- Procurement and contract law govern how licenses are negotiated, priced and enforced.
- Cloud computing raises questions about whether licenses bought for on-premises use may be used on a provider’s platform. GAO has described restrictive practices such as requiring customers to repurchase licenses already owned for cloud use, or charging more for use on a competitor’s cloud.[15] See Cloud BYOL.
Criticism and challenges
The treatment of licenses as distinct from sales has been contested, and the answer differs between jurisdictions: the Ninth Circuit’s Vernor test gives effect to license restrictions on transfer, while the CJEU in UsedSoft looked past the label to the economic substance of a perpetual license.[4][3]
For licensees, the practical difficulty is complexity. Metric definitions, minimums and use rights are set by each publisher, are spread across several incorporated documents, and change between versions, so determining how many licenses a deployment requires can itself require expert interpretation. Public-sector purchasers have also objected to terms that restrict where software may run; GAO found in 2024 that five of six agencies it examined had been affected by restrictive licensing practices in the cloud.[15]
Out of scope
This article does not give the terms of any individual product; see the vendor articles such as Oracle Database licensing, Windows Server licensing and IBM Passport Advantage. It does not survey individual open-source licenses, and it is not legal advice. The effect of a license depends on the executed agreement and applicable law.