Software Licensing Agreement Legal Issues Involving Dishonesty

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Software Licensing Agreement Legal IssuesWhen you license your application to others, there are software licensing agreement legal issues that often involve a dishonest licensee. Here are three of the most common types of licensee misconduct.

1. Ignoring EULA Limitations

Unfortunately, it’s common for someone to purchase an end user license agreement (EULA) for an application but then promptly violate the license by doing something prohibited. For example, a customer who buys a single user EULA may improperly duplicate the software for use for others, such as co-workers, family, and friends.

Related Article: What Is A Software Agreement?

If there aren’t security features built within the app to limit this type of abuse, it can whittle away at your profits when it becomes easier to obtain a pirated version than to buy a legitimate license.

For software as a service (SaaS), the threat also exists where a single username and password is given out to multiple people to use for access. Restricting IP addresses for logins and prohibiting simultaneous multiple logins to a single user account are a couple of tech means for reducing (but not eliminating) this SaaS risk.

2. Misusing The Application For A Prohibited Purpose

Although your software is designed for a legitimate purpose, too often applications can be misused by licensees for unethical or illegal conduct.

For example…

  • A CRM application might be misused to send spam emails.
  • A video editing app could be used to add a Hollywood celebrity’s face to a body in a porn movie.
  • Or a program for trading equities might be misconfigured for illegal online gambling.

3. Creating A Competing Software Application

What if a software customer suddenly became your competitor with an application that looks like it has ripped off features and design from your app? Was the new app created independently or was your intellectual property stolen?

How To Address Software Licensing Agreement Legal Issues

These software licensing agreement legal issues can often be prevented with an iron-clad license that clearly states what the licensee can and cannot do…and provides sufficient penalties for violating the license that even a dishonest customer will think twice before engaging in misconduct.

An experienced software lawyer can provide you with a customized software license that limits your risks from these and other types of customer bad behavior.

Religious Arbitration For Business Contract Disputes?

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religious arbitration sharia lawAlthough many don’t realize it, the American judicial system has a rich history of applying religious principles to adjudicate business disputes. For example, important equitable remedies trace their roots to Christian ecclesiastical courts based on the concept of providing (divine) justice where there is no adequate remedy at law.

But what about settling business conflicts today through religious arbitration before a private tribunal?

For example, should two Muslim businessmen be able to resolve their differences before a private Sharia law court? Or two Jewish entrepreneurs have a beth din (rabbinical court) adjudicate their claims?

Express Agreement To Arbitrate

One of the first prerequisites to religious arbitration is to have the contract between the parties expressly provide for such alternative dispute resolution. For example, in a Pennsylvania case, the state superior court refused a request to have a conflict involving the sale of a kosher wine store submitted to a rabbinical court.

Why? Because the agreement between the parties did not provide for such arbitration. That the parties involved were of the Jewish faith was not relevant where the contract was silent on the issue of arbitration.

State Law Prohibitions

A few states have passed laws that prohibit their courts from taking into account Sharia law. If these laws are constitutional, it’s unclear whether or not a decision by an Islamic arbitration panel would be enforceable in that state from a legal standpoint (although the parties might still honor the panel’s ruling because of their faith).

Deference To Religious Arbitration

To the extent religious arbitration is a viable means of settling disputes, courts are more likely to defer to it in the context of business-to-business (B2B) matters instead of resolution of personal disputes between individuals (e.g. family law issues).

Similarly, the legal system is more likely to look favorably at a provision that provides for arbitration before a private religious tribunal if the parties are of the same faith.

If they are members of different religions, there’s a heightened risk that equal protection and due process will be unavailable to one of the parties. There also may be fundamentally conflicting beliefs on key business issues between the faiths. For example, one religion may consider any interest charged on a loan as usury while another might view only a (subjective) excessive interest rate as usury.

Have A Backup Plan

If you decide to include a religious arbitration clause in your business agreements, your business contracts lawyer should also include a fallback position for non-religious alternative dispute resolution in case religious arbitration is disallowed.

Single Member LLC: Is It Dangerous To Own One?

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single member llcSome entrepreneurs are mistakenly reluctant to form a single member LLC because they’ve heard the entity is treated like a sole proprietorship.

Yet that’s only partially true. Here’s why.

Tax Treatment Election

When you form a single member LLC, you have the ability to have it treated as a sole proprietorship or as a corporation for taxation purposes. You should consult with your business lawyer and accountant before making the election so that you’re both protecting yourself from a legal standpoint and minimizing the federal and state taxes you will pay.

Related Article: Who Can Sign Legal Documents For A Texas LLC?

However, if you choose tax treatment as a sole proprietorship, that’s not the same thing as having all of the personal liability of an actual sole proprietorship. For example, the single member limited liability company may shield you from personal liability in a civil lawsuit against the business where there would be no shield if the venture was a sole proprietorship.

Can There Be Personal Liability With A Single Member LLC?

Yes. Whether you have a limited liability company (single or multi-member) or a corporation (C corp or S corp), there are certain exceptions to the liability shield that exist. Here are three common areas where there can be personal liability.

1. Environmental Liability

If your business violates federal or state environmental laws (e.g. dumping toxic waste into a local river), you may be personally liable for the cleanup expenses in addition to your business entity also being liable.

2. Taxes

One can’t evade taxes by claiming an entity as a shield. The IRS and your state’s department of revenue will get their pound of flesh no matter what type of entity you use.

3. Alter Ego – Piercing The Corporate Veil

The shield provided by your single member liability company may be pierced to make you personally liable on some civil claims if you’ve engaged in misconduct. For example, if you’re not observing the legal formalities required to maintain the shield.

Now this frequently occurs where an entrepreneur uses a single personal bank account for both personal living expenses and as the business account for the entity. In short, if you act as if the entity doesn’t exist separate from your personal life, chances are the courts will reject the liability shield it would otherwise provide you.

Where To Get A Texas Single Member LLC Set Up

You can try to set up your own Texas single member limited liability company or use an online company. However, both of those options are risky.

Related Article: LLC Operating Agreement – Why It’s Important To Have One

The best method is to use an experienced Texas business contracts lawyer who knows how to form a single member LLC correctly, provide you the legal advice you need, and get you the right legal paperwork run the LLC (customized operating agreement, business contracts, etc.).

Product Licensing Essentials: What You Need To Know

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Product Licensing EssentialsWhen you’re considering product licensing, there are some fundamental issues you need to address.

As a preliminary matter, you need to determine if you’re really wanting to license a product, a trademark, or both?

Product Licensing Versus Trademark Licensing

Product licensing means one party (the “licensor) is licensing its product to another party (the “licensee”) to use or sell to others.

As a hypothetical example, The Coca-Cola Company* could license its cola soda to a licensee in another country to manufacture, distribute as a wholesaler, and/or sell at retail.

The cola would be the product being licensed. This type of product could be private labeled under licensee’s own brand name for the soft drink.

Related Article: Licensing Agreements – How To License Products In 3 Easy Steps

However, the company could also license its brand Coca-Cola® for the licensee to brand the soda. This would be trademark licensing.

In many cases, a prospective licensee only wants to license the trademark, not the product. For example, a manufacturer of stuffed polar bear toys might license the right to add a red hat with white script letters that read “Coca-Cola” to each toy bear. In this case, it’s the trademark being licensed (Coca-Cola® brand), not the product (toy polar bears with hats).

Scope of License

Whether you’re licensing product, trademark, or both, the scope of the license is important.

For example, if you want to only license a mark and don’t want a competitor to place the same mark on its similar product, you’ll want to negotiate an exclusive license to use the brand for that kind of product. Of course, you’ll likely to pay a higher licensing fee for such exclusivity.

On the flip side, if you’re the licensor, you’ll want to limit the scope of the license as much as possible so that you retain the ability to license the mark to others for additional revenues when it makes sense to do so. The terms and conditions that trigger license revocability are also important.

Where To Get A Product License Agreement

If you’re dealing with a large corporation as licensor, chances are they have boilerplate take-it-or-leave-it product licensing agreements that heavily favor the licensor. You will have little or no room to negotiate any of the terms and conditions except perhaps price and how long the license will last.

On the other hand, if you’re dealing with a small or medium-size company as licensor, it makes sense to have an experienced business contracts attorney prepare the license agreement with terms and conditions that are favorable to you.

Similarly, if you’re just starting out licensing your products or marks to others, a reputable business transactions attorney can prepare licensing agreements that are customized to favor you as the licensor.

* References to the marks of The Coca-Cola Company are made solely for educational purposes using hypothetical examples. No relationship exists between this law firm and the company. No claims are made with respect to the marks owned by the company, including but not limited to, the terms and conditions (if any) the company may license its products or brands to third parties.

Is A Business Verbal Agreement Enforceable?

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Is A Business Verbal Agreement EnforceableWhen you reach an agreement but don’t reduce it to writing, it’s commonly known as a “gentleman’s agreement.” This type of handshake deal occurs all of the time. But is a verbal agreement enforceable as if it were a written contract?

Like many areas of law, the answer is “it depends.” And often it’s a fact-specific inquiry.

Statute of Frauds

Certain types of contracts are required to be in writing by the statute of frauds and other law. For example, a real estate sales contract.

Related Resource: Free Business Contracts Management Spreadsheet

The writing requirement is designed to prevent fraud and reduce the likelihood that you’ll end up in court in an expensive protracted lawsuit based on fading memories of who agreed to what in an alleged verbal agreement.

Promissory Estoppel And Detrimental Reliance

There are ways to enforce a verbal contract if you can prove certain things. For example, under the concept of promissory estoppel, if you can show you relied to your detriment on the other party’s promise, you may be able to enforce an oral contract.

How does that work?

Let’s say you verbally agreed to buy a company car. Your business paid for the vehicle but the seller refuses to give you the car keys or transfer the title to your company. Detrimental reliance could be shown by evidence your business paid the seller.

Related Article: Is Your Business Using Legally Binding Contracts?

Or you accepted a verbal offer of employment from Apple, shut down your startup, sold your home, and moved across the country at your own expense to start the new job. However, upon arrival, the business that made you the oral employment offer changes its mind and you’re now unemployed. You can show detrimental reliance with evidence you shut down your business, relocated, etc. based on the promise of new employment.

Course Of Dealing Can Make A Verbal Agreement Enforceable

Repetitive behavior in business deals with the other party, known as “course of dealing,” can be used in some instances to make a verbal contract enforceable.

Let’s say you’ve been supplying the other party with 10,000 widgets per month based on a handshake deal you made two years ago. Agreed upon Net 30 payment terms have always been met. Yet the other party suddenly decides Net 180 are the new payment terms and will only buy 5,000 widgets per month at a price that wipes out your profit. Your course of dealing can be evidence used to enforce the gentleman’s agreement.

How To Prevent This Problem In The First Place

If you’re trying to make a verbal agreement enforceable, chances are you’re either heading to court or alternative dispute resolution (mediation, arbitration, etc.). That costs you a lot in time and money even if you have the evidence you need to prove your case.

The solution is to use professionally prepared written business contracts. As Dallas Business Lawyer Mike Young likes to point out, Benjamin Franklin was right when he said that an ounce of prevention is worth a pound of cure.

If you need a written business agreement, check out our firm’s Business Contracts Legal Protection Package.