The Quick Guide to API Licensing

Application Programming Interfaces (APIs) in recent years have become essential tools for many businesses to broaden their customer base, increase exposure to their services and grow their revenues. This has been accomplished by the businesses allowing their services and data to be integrated with the offerings of other companies. In response to this, the importance of properly licensing an API has become an increasingly relevant consideration to ensure it is used properly and as intended.

What is an API?

An API is a software intermediary used by businesses to promote and increase the adoption of their products or services with other businesses. An API enables businesses to create software, websites or applications that more easily integrate with the services and data from the business providing the API. When an individual makes a reservation on a local restaurant’s website through OpenTable, listens to Spotify music on Instagram, or finds the location of a store on Google Maps inside the store’s branded application, they are empowered to do so in each case through the use of an API that was licensed to the business.

An API can be thought of as a locked door to a room. It will only provide access to individuals with the keys (API credentials) to the room and the contents within it (the data and services shared through the API). APIs in serving this gateway function allows the companies that license them to others a certain level of quality control by limiting access to the information and services shared; allowing the companies to share only what they believe necessary.

Why License an API?

APIs that are licensed properly can provide for smooth and controlled interactions between a company’s software and the end-users of other businesses utilizing the API. By allowing other businesses to access its offerings and data through an API in new and innovative ways, a company can effectively expand its reach, increase its use-cases and value, without having to build out internal capabilities and infrastructure.

When distributing an API, the incentives between the company providing the API and businesses using it may not be perfectly aligned. For this reason, it is critical to have a licensing agreement that (i) outlines the expectations of how the API should be used by external developers, (ii) communicates what the developers are restricted from doing with the API, and (iii) allocates the risk of loss when issues arise from using the API. Addressing these matters in the licensing agreement is necessary to both reduce potential liability and prevent unintended outcomes. Some of the ways to accomplish this include communicating in the licensing agreement:

  1. How the API and associated company’s brand name or trademarks may be displayed on the licensee’s website, application or software
  2. Whether the API may be used for a commercial purpose
  3. Any usage limits for the number of ‘calls’ that may be made through the API
  4. Whether the company providing the API may track the use of the API by the licensee
  5. Whether there is an indemnification of the licensor if the licensee causes the API to malfunction

Restrictions in the licensing agreement on how other businesses may use the API will also be beneficial. Some commonly used restrictions include restricting licensees from breaching the API’s technical safeguards, restricting the licensee from infringing on third-party rights when using the API and restricting use cases of the API. These restrictions become more important in situations where a company cannot monitor how its API is being utilized by other businesses. By setting clear legal boundaries of how external parties may interact with the API, a company can be better comforted that its software and data are being incorporated into other business’ offerings in a responsible manner that can create value for the company in uncontemplated ways.

If you are interested in learning more about the use of APIs in business, MuleSoft’s strategy page and Upwork’s API Economy primer are good places to start.