Software Licensing Agreements: Proprietary vs Free

The type of software licensing agreement you use depends on whether you want to retain exclusive control over your software or prefer to give recipients the freedom to use, modify, and distribute the software.

This article explains what a software licensing agreement is, the differences between proprietary and free software, types of proprietary and free software licenses, and how to create proprietary and free licensing agreements.

What is a Software Licensing Agreement?

Software licensing agreements outline the conditions that users must agree to in order to use software. They define the terms of the agreement, explain how the software can be used and any usage restrictions, and grant licensees certain rights.

AnyLogic's Software Licensing Agreement grants licensees a limited license to install and use its software:

What is Proprietary Software?

Proprietary software is owned by the company or individual that develops it. The owners of proprietary software retain certain rights, such as intellectual property (IP) and source code rights. Owners of proprietary software restrict access to their software's source code, which enables them to control its distribution.

Proprietary software may be commercial in nature, meaning it is sold for a profit, but it doesn't have to be.

Types of Proprietary Software Licenses

Common types of proprietary software licenses include:

• Perpetual license: Allows the licensee to use the software indefinitely.
• Subscription license: Allows the licensee to access the software for a specific amount of time.
• Usage-based license: Customers pay for the software based on how much they use it.
• Floating (or concurrent) license: Allows a certain number of users to access the software simultaneously.

What is Free Software?

Free software gives users the freedom to use, modify, or distribute the software as they see fit. Free software is not necessarily free in terms of cost, rather the term "free" reflects the users' freedom to use the software however they wish.

According to the Free Software Foundation (FSF), software is considered free if it meets the following conditions:

1. Users can run the program for any purpose.
2. Users can access the source code and change the software as desired.
3. Users can redistribute copies of the software.
4. Users can distribute modified copies of the software.

The FSF lists the four conditions that must be met in order for software to be considered free, including the freedom of use, the freedom to study, use, and improve the software, and the freedom to share original and modified copies of the software:

Types of Free Software Licenses

The main types of free software licenses are copyleft and permissive (or non-copyleft) licenses.

A permissive license gives users the right to use, modify, or share the software's source code, and allows proprietary derivative works.

A copyleft license also allows users to use, alter, or share the source code and allows derivative works as long as all users follow the same copyleft terms that apply to the original software.

What's the Difference Between Free and Open Source Software?

The terms "free software" and "open source software" can both be used to refer to software licensed under copyleft and permissive licenses, but there are some philosophical differences between the two.

While most open source software is free, some open source software licenses may be too restrictive to qualify as free software under the FSF's definition.

For example, the NASA Open Source Agreement, version 1.3 is an open source license that does not qualify as a free software license as it includes a clause that requires any changes to be a user's "original creation." The development of free software depends on combining code from third parties, which the NASA Open Source Agreement doesn't allow:

To be considered free, software must provide users with the FSF's four freedoms (freedom to use the software, access and edit the source code, and share original and modified copies).

To be considered open source, the distribution terms for open source software must meet the Open Source Initiative's (OSI) criteria.

The OSI requires open source software licenses to fulfill the following conditions:

• Allow free redistribution
• Provide access to source code
• Give users the ability to modify the software, create derived works, and distribute modified and derived works under the terms of the license for the original software
• Maintain the integrity of the author's source code
• Refrain from discriminating against anyone or any fields of endeavor
• Ensure that rights apply to anyone the program is redistributed to without the need for an additional license
• Not be product-specific
• Not restrict other software
• Be technology-neutral

To be considered open source, software must meet the OSI's open source definition, including having no redistribution restrictions and allowing access to and distribution of its source code:

Both the FSF and the OSI advocate for the freedom of users to access the source code and control the software they use.

What Is the Main Difference Between Proprietary and Free Software Licenses?

The main difference between proprietary and free software licenses is that proprietary licenses typically restrict how licensees can use and distribute the software, while free software licenses grant and protect users' freedom to use, modify, and distribute the software as they please.

How to Create a Software Licensing Agreement for a Proprietary Software License

A proprietary software licensing agreement gives licensees the right to use the software while establishing the terms of use and restricting unauthorized use or distribution of the software.

Proprietary software licensing agreements typically contain the following clauses:

• License grant
• IP rights
• Payment terms
• Warranty disclaimer
• Limitation of liability
• Termination

Let's take a look at some examples of each clause.

License Grant

This part of a software licensing agreement grants the licensee the right to use the software, as opposed to ownership rights.

Ansys' Software License Agreement , and details the terms of the license, explaining that it is granting the licensee a license that is not assignable, exclusive, or transferable, and that does not include the right for the licensee to grant sublicenses:

Authorized Uses and Restrictions

This clause lets users know what they are allowed to do with the software and explains any restricted uses.

Apple's Software License Agreement lists the permitted uses and restrictions for its macOS Sonoma, including the number of copies specific types of users are allowed to download, install, use, and run, and certain restrictions on using virtualized copies of the operating system:

IP Rights

This clause lets users know what intellectual property rights the license provides and can include information about IP-related usage restrictions as well as trademark information.

Ableton's End User License Agreement (EULA) explains that users have no ownership rights over its products and that its products are protected by copyright and other IP laws:

Payment Terms

This clause details payment terms, and can include information about when subscription payments are due, when late fees or interest may apply, and what happens if a customer fails to make required payments.

Ansys's Software Licensing Agreement lets its licensees know that they are responsible for paying applicable fees within 30 days of receipt of invoice and that late fees may apply:

Warranty Disclaimer

A warranty disclaimer serves to inform users that the software does not come with a warranty or any guarantees.

Splunk's Software License Agreement explains that its software is available on an "as is" condition, and includes no warranties:

Limitation of Liability

A limitation of liability clause defines the limits of what the licensor will be held responsible for.

Splunk's Software License Agreement lets users know that it is not liable for certain damages related to the use of its software and explains that its cumulative liability is not to exceed a specific amount:

Termination

The termination clause lists the circumstances in which either party can terminate the software licensing agreement and explains what will happen once the agreement has been terminated.

Splunk's Software License Agreement lets users know that if the agreement has been breached and not cured within 30 days of receiving notice of the breach, either party can terminate the agreement via written notice to the other party. It informs users that Splunk retains the right to immediately terminate the agreement in certain situations, and outlines the customer's obligations in the event of early termination:

How to Create a Software Licensing Agreement for a Free Software License

A free software licensing agreement explains that the software must be used in accordance with free software principles and safeguards users' rights to use, modify, and distribute the software.

Depending on the type of license, free software licensing agreements can include the following clauses:

• Scope of license
• Copyright notice
• Warranty disclaimer
• Limitation of liability
• Attribution requirements

Here are some examples of common free software licensing agreement provisions.

Scope of License

This clause outlines the extent of users' rights to modify or distribute the software and the terms of the license.

The text of the GNU General Public License, Version 3 (GPLv3) describes the basic permissions it grants users, including making, running, and propagating covered works that they do not convey. It details the circumstances under which covered works can be distributed and explains that sublicensing is not allowed:

Copyright Notice

This clause requires copies of the licensed software to include a copyright notice.

The Apache License, Version 2.0 explains that users must include a copy of the license with any redistributed copies of the software, and that derivative works must include copyright notices from the original form of the work:

Warranty Disclaimer

As with a proprietary software licensing agreement, free software licensing agreements often contain a warranty disclaimer to let users know that the software does not come with a warranty.

The GPLv3 explains that software licensed under the agreement does not include any warranties unless otherwise provided in writing by the copyright holders or other parties.

Limitation of Liability

As the name implies, a limitation of liability clause functions to limit the licensor's liability, the same way as it does in a proprietary software licensing agreement.

The GPLv3 explains that neither the copyright holder nor anyone who modifies or distributes the licensed software is responsible for any damages that may arise from interacting with the software:

Attribution Requirements

Some free software licenses may require users to credit the authors when distributing copies or redistributing modified copies of the software.

The FreeType Project License states that all redistributed copies of the software must include the original license file as well as a disclaimer that informs recipients that the software is based in part on the work of the FreeType Team:

Summary

A software licensing agreement explains the rules that licensees must follow to use licensed software. It describes the terms of the agreement and permitted and restricted usage of the software.

The company or individual that develops proprietary software retains ownership and IP rights and restricts access to the software's source code.

Free software grants users the freedom to use, modify, or distribute software.

The primary difference between free and open source software is that some open source licenses are too restrictive to qualify under the FSF's definition of free software.

The main difference between proprietary and free software licenses is that proprietary software licenses restrict how software can be used while free software licenses enable users to use, modify, and distribute the software.

Free software licenses include permissive and copyleft licenses. Proprietary software licenses can include perpetual, subscription, usage-based, and floating licenses, among others.

Proprietary software licensing agreements typically include the following clauses:

• License grant
• IP rights
• Payment terms
• Warranty disclaimer
• Limitation of liability
• Termination

Free software licensing agreements often include the following clauses:

• Scope of license
• Copyright notice
• Warranty disclaimer
• Limitation of liability
• Attribution requirements