There are several scope of license issues to work through when handling license agreement negotiations. In my SaaS law (SaaS legal consulting) practice I often see licensees wanting to open the scope of the license to its “affiliates”.
For many larger SaaS customers this makes sense as these businesses often operate as families of companies rather than single operating entities. The customer may need to open the license to its other companies in order to properly use the software. Just last week I was negotiating a Software License and Services Agreement with a Fortune 100 company that has over 50 companies in its U.S. operations alone. They needed SaaS user seats for most of these companies.
The problem with the term “affiliates” is that it is not precise and may mean different things to different parties. Some contract terms have clear legal meanings. For example, “subsidiaries” commonly means companies which are owned and controlled by another company. “Parent” commonly means the company that owns the subsidiary. “Joint venture” commonly means a contractual relationship between two companies to engage jointly in a particular operation.
“Affiliates” does not have a common meaning for most contractual purposes. At the highest level the term points to a working or organizational relationship between two companies, but it is unclear how related the two companies have to be in order for them to be considered affiliates. For example, are joint ventures affiliates? Are management companies or consulting companies affiliates?
The term is defined differently in Federal and State laws and by legal dictionaries.
The Banking Act of 1933, for instance, contains a very broad definition as any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank. This definition is probably much broader than most licensees intend and most licensors are willing to accept.
The IRS defines the term much more narrowly (for purposes of consolidated tax returns) as a group of companies whose parent or other inclusive corporation owns at least 80% of voting stock. This definition may be more narrow than the licensee intends.
The Investment Company Act defines “affiliates” as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities. I am not sure if any licensee or licensor is intending that precise scope when using the term.
Black’s Law Dictionary defines the term broadly as a corporation that is related to another corporation by shareholdings or other means of control. By that definition a management or consulting company could arguably be considered an affiliate.
The Ninth Circuit court recently adopted the Black’s Law Dictionary definition as it applies to the TCPA (an opt-in privacy law related to telephone marketing), but interestingly, the court also determined that because there was no direct contractual relationship between the two companies, they were not affiliates. Thus, the court apparently also needs to see a contractual relationship between the businesses for them to be affiliates.
Finally, a note for Indiana technology companies – Indiana Code 23 (the Indiana business statute) does not define “affiliate” and Indiana courts have not yet addressed the definition in a business structure context.
You see the point. The term is messy – which is why it should be avoided. The point of contracts is to be clear and avoid ambiguity. This term can create ambiguity and lead to unnecessary disputes down the line.
For many larger SaaS customers this makes sense as these businesses often operate as families of companies rather than single operating entities. The customer may need to open the license to its other companies in order to properly use the software. Just last week I was negotiating a Software License and Services Agreement with a Fortune 100 company that has over 50 companies in its U.S. operations alone. They needed SaaS user seats for most of these companies.
The problem with the term “affiliates” is that it is not precise and may mean different things to different parties. Some contract terms have clear legal meanings. For example, “subsidiaries” commonly means companies which are owned and controlled by another company. “Parent” commonly means the company that owns the subsidiary. “Joint venture” commonly means a contractual relationship between two companies to engage jointly in a particular operation.
“Affiliates” does not have a common meaning for most contractual purposes. At the highest level the term points to a working or organizational relationship between two companies, but it is unclear how related the two companies have to be in order for them to be considered affiliates. For example, are joint ventures affiliates? Are management companies or consulting companies affiliates?
The term is defined differently in Federal and State laws and by legal dictionaries.
The Banking Act of 1933, for instance, contains a very broad definition as any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank. This definition is probably much broader than most licensees intend and most licensors are willing to accept.
The IRS defines the term much more narrowly (for purposes of consolidated tax returns) as a group of companies whose parent or other inclusive corporation owns at least 80% of voting stock. This definition may be more narrow than the licensee intends.
The Investment Company Act defines “affiliates” as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities. I am not sure if any licensee or licensor is intending that precise scope when using the term.
Black’s Law Dictionary defines the term broadly as a corporation that is related to another corporation by shareholdings or other means of control. By that definition a management or consulting company could arguably be considered an affiliate.
The Ninth Circuit court recently adopted the Black’s Law Dictionary definition as it applies to the TCPA (an opt-in privacy law related to telephone marketing), but interestingly, the court also determined that because there was no direct contractual relationship between the two companies, they were not affiliates. Thus, the court apparently also needs to see a contractual relationship between the businesses for them to be affiliates.
Finally, a note for Indiana technology companies – Indiana Code 23 (the Indiana business statute) does not define “affiliate” and Indiana courts have not yet addressed the definition in a business structure context.
You see the point. The term is messy – which is why it should be avoided. The point of contracts is to be clear and avoid ambiguity. This term can create ambiguity and lead to unnecessary disputes down the line.
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