Legal Journal

Software as a Service Transition from Traditional Software License Agreements to Cloud Service Agreements

In the beginning of 90’s we had a confusion period when software license agreements first appeared before the end users. They were different from traditional product purchase and sale agreements and did not have an exact equivalent in law. This confusion ended when computer programs were added to scope of Turkish Law on Artistic and Intellectual Works in 1995. Computer programs were then protected by Law on Artistic and Intellectual Works under the agreement types such as “usage license” or “transfer of copyright”. Standard license agreements granted end users limited usage rights solely on one copy of the Software. Software companies provided no performance or similar warranties to end users except for “available functionalities” of the software. On the contrary, Software usage right was granted on “as-is basis” and end user had no further claim rights. Therefore the subject of the purchase transaction was this “usage license” itself. License types did vary based on different concepts: perpetual license, term license, license for limited number of users or unlimited number of users, concurrent user licenses, open licenses etc.

This licensing model which has been used for 25 years is showing signs of change for the last 3-4 years. Software which controls and manages the commercial activities has shown enormous development through integration with other modules. In parallel with this development, the need for fast and powerful processors has emerged. Consequently, companies’ hardware and software investment costs for automation have increased significantly. Especially because of maintenance, update and remote support requirements of software, companies had to pay an extra amount equal to license fees within 4-5 year terms after the purchase of licenses. In addition to that, security software costs gained a remarkable share in IT budgets because of “software security” becoming a critical problem. As a result, economy created new models for these problems. Cloud solutions like SaaS, PaaS, IaaS have formed during this process.

Cloud agreements are formed based on a service model rather than an end user licensing model. However, cloud agreements certainly include license rights. Just as term license agreements, there is also a license right hidden in the service during the term of the agreement. On the other hand, license concept is drawn to background because companies do not get a direct usage license on the software but they are focused more on the quality and continuous performance of the service. They are granted the right to access the server where the software is hosted and to use the software as a service. Continuous access to service, constant reach of users to software, security services and similar necessities are deemed as major needs in cloud agreements. Therefore cloud agreements are now software licenses as a service. As cloud agreements are formed on a different logic than license agreements, they represent the “second phase” in relation to usage of computer programs.

Companies should compare positive and negative sides of the service before preferring cloud agreements. Notable negative sides of cloud agreements may be stated as follows: (i) storing of companies’ personal data and trade secrets on a place where the company does not have the ability to control or audit and the risk of third parties reaching such data; (ii) cloud companies having no or limited liability for service interruption or breach of agreement including data clauses.

On the other hand there are also positive sides of cloud agreements: (i) offering modest IT budgets instead of big investments; (ii) enabling companies to effectively benefit from technologic innovations via updated software versions instead of big IT platforms which may turn into functionless structures when not updated; (iii) eliminating the need for automation investments with big budgets.

Cloud services are provided in different types. Major software companies establish their own hosting companies and provide users with software service packages. For example, Microsoft Office-365 and Apple cloud services have become the first leaders in cloud service of software for individual use.  

It is also possible that when software is stored on servers of a hosting company, users unknowingly connect to the servers of the hosting company while reaching the service. Cloud company has a separate back to back agreement with the hosting company but acts as the sole party before the end user.

The attitude of both software companies and the hosting companies, where they do not wish to have any kind of legal liability, raises major problems in practice. These service providers use standard agreements and do not agree to any amendments. It should be noted here that according to Turkish Law, agreements with general standard terms and clauses where liability is limited in case of gross negligence shall be deemed as void. However in case the cloud companies or hosting companies are foreign companies, the risk will still be borne by Turkish companies as foreign companies will probably include arbitration clauses in their agreements where foreign law will apply. The other legal issue with the cloud agreements is that these high risk service agreements are signed by electronic means via Internet and their validity is questionable.

Cloud services will surely have an irresistible rise in future once convincing data security methods are regulated by statutory provisions and zero-risk approach of cloud and hosting companies are abandoned.

Av. Haluk İnanıcı