Want to learn more about drafting, negotiating, and understanding intellectual property and technology contracts and have 10 minutes to spare? Grab your morning coffee or afternoon tea and dig into our Tech Contract Quick Bytes—small servings of technical contract insights expertly prepared by our seasoned attorneys. This month we are talking about open-source software licensing.
Open-source software (OSS) is now embedded in many commercial technology products. From foundational libraries to AI frameworks, companies rely on OSS to accelerate development and reduce costs. Yet many organizations continue to misunderstand how OSS licensing operates—and, more importantly, how those misunderstandings translate into contractual risk. The issue is rarely whether OSS can be used. It is whether OSS use has been properly managed, disclosed, and contractually addressed. Below are the most common legal misconceptions—and practical contract fixes.
"Open Source" Doesn't Mean "Free to Use Without Conditions": Understanding Open Source Software License Compliance Obligations
Teams often assume that "free" means unrestricted. In reality, OSS is licensed—often subject to attribution, disclosure, and in some cases, source code distribution obligations. The legal issue is not cost; it is compliance with license terms. Failure to comply can potentially result in:
- Breach of license (and potential copyright infringement)
- Injunctive relief forcing distribution of proprietary source code
- M&A diligence red flags
- Reputational damage
To address these risks, third-party vendor and development agreements should include explicit OSS disclosure obligations (e.g., a complete and accurate list of all OSS components and licenses). In addition, include a representation that OSS has been used in compliance with its license terms. Furthermore, they should include a covenant requiring maintenance of an up-to-date open-source inventory (often via a document called a Software Bill of Materials (SBOM). Without contractual visibility, legal risk becomes reactive rather than controlled.
Overlooking "Copyleft" and Reciprocal License Effects
Not all OSS licenses are equal. Permissive licenses (e.g., MIT, BSD, Apache 2.0) generally allow incorporation into proprietary products with minimal conditions. However, copyleft licenses (e.g., GPL, AGPL, LGPL) may impose obligations to disclose source code of derivative works, license derivative works under the same terms, or provide installation information (in certain hardware contexts).
Many companies do not analyze whether their use creates a "derivative work" or triggers distribution obligations. To address this, they should include a representation that no OSS incorporated into deliverables is subject to a license that would require disclosure of proprietary source code, require licensing of proprietary components under an open-source license, or restrict the company's ability to commercially exploit the product. Furthermore, they should require advance written consent before using of "copyleft" or "reciprocal" licenses and add an indemnity covering OSS-related IP claims arising from non-compliance. This is particularly critical in SaaS agreements, where confusion persists around whether "distribution" occurs.
Failing to Align OSS Risk with IP Representations and Indemnities
Standard IP infringement reps and indemnities are often drafted without considering associated OSS carve-outs. Vendors sometimes attempt to exclude OSS from indemnification entirely. The risk is that a vendor uses non-compliant OSS, the company faces a claim, and indemnity protection is weakened by broad OSS exclusions. Therefore, aim to avoid blanket OSS exclusions from IP indemnity. Instead, narrowly carve out OSS that the company independently modifies or combines beyond vendor specifications. Tie indemnity coverage to the vendor's compliance with OSS licenses. Require remediation obligations (e.g., replace, modify, or procure rights) if OSS creates risk. The key principle is that OSS should not become a loophole that undermines the core IP risk allocation.
Treating Open Source Software License Management as a Technical, Not a Legal, Function
Many organizations delegate OSS management entirely to engineering. While engineering is essential, license interpretation and risk tolerance are legal questions. OSS compliance should be structured as a part of risk management. So, require vendors to maintain a formal OSS compliance program. Mandate use of automated scanning tools to review OSS. Include audit rights or certification requirements. In acquisition agreements, include robust OSS representations tied to diligence disclosures.
Open Source Software Licensing in AI: Emerging Legal and Compliance Risks
Increasingly, AI models and development frameworks are released under OSS or "source-available" licenses. These may include use restrictions, field-of-use limitations, attribution requirements, and data-related obligations. Companies often conflate "open" with "permissive." That assumption is no longer safe; distinguish clearly between Open Source Initiative (OSI)-approved open-source licenses and source-available licenses. Require disclosure of any non-standard licensing terms. Ensure downstream customer agreements are consistent with upstream OSS restrictions.
Open-source software is not the problem; misunderstanding its legal framework is. With thoughtful contractual controls and internal governance, companies can leverage OSS strategically while preserving IP integrity and commercial flexibility. The objective is not to eliminate OSS—it is to ensure that its use is deliberate, documented, and defensible.
If you or your company would like to discuss open-source software licenses, please contact A.J. Zottola.
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