Most types of authored and copyright-protected works, such as books, magazines, records, photographs, and artwork, are sold outright. In other words, they are sold directly to end users (readers, viewers, consumers, and the like) or to commercial middlemen (bookstores, networks, websites, and so forth) who in turn sell the works to end users. These users can typically do whatever they like with the products.
Some copyright owners, however, particularly software and website publishers, prefer to limit how purchasers use their products and services. For example, a software maker may insist that customers use its program solely for personal, not commercial, purposes. To impose these restrictions, most publishers employ a contract known as an end-user license agreement (EULA).
Why is software "sold" through a license? Software owners believe that license agreements help them preserve market share, obtain the maximum return on each transaction, and safeguard intellectual property rights. All of this creates, at least in theory, greater profits.
Because the end user does not acquire ownership of a copy of the software, he or she has only those rights provided in the license agreement. The license agreement normally includes provisions that effectively take away most rights that a purchaser of a copy would have under the copyright law. Such licenses typically include one or more of these restrictions:
It's not difficult to understand how such license restrictions can help software developers protect their product and increase their profits. For example, licenses typically provide that, without permission from the copyright owner, the purchaser of a copy of a computer program may not use the program on a network. Persons or companies that want to use software on a network usually must obtain a network or multi-user license from the copyright owner or, in the case of mass-marketed software intended to be used in networks, can rely on licenses already included in the package.
In short, creators and owners of software would be wise to "sell" their product through a licensing agreement with consumers, which method of sale has become the industry standard.
What form do these license agreements actually take? Sometimes they will be printed on term sheets physically included with the software. But in today's world of downloads and apps, it is more common for companies to use end-user license agreements or EULAs.
EULAs were originally known as “shrinkwrap licenses” because, at least in the early days of software production, the user would consent to the EULA by breaking the box’s shrinkwrap. Sometimes the terms of the EULA were visible on the back of the package, and sometimes they were contained in a terms sheet contained inside. A user who proceeds to use the program is deemed to accept the terms. A user who does not want to accept the terms can return the program to the manufacturer for a refund.
Nowadays, most EULAs are known as a “clickwrap agreements,” because the user enters into the agreement online and must click to accept the conditions before accessing a website or using software. (Most software is now downloaded from the Internet, rather than purchased on CDs in stores).
Initially, there was doubt as to whether EULAs could be enforced in court, especially if the provisions were inconsistent with the Copyright Act. The reason for doubt is because the typical EULA is not negotiated between seller and purchaser at the time of sale, so the purchaser might argue that he or she shouldn't be held to its terms, especially if the user must waive rights under the Copyright Act. For example, some licenses may prohibit the user from copying the software, even though the Copyright Act permits the purchaser to make an archival copy.
In 1996, the U.S. Court of Appeals for the Seventh Circuit held that shrinkwrap licenses are valid as long as a user who disagrees with the terms can return the product for a refund. The court also ruled that a license restricting rights that a purchaser would have otherwise had under the Copyright Act is legal. (See ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)).
The same standards apply to clickwrap agreements, which are said to be “an appropriate way to form contracts.” (See i.Lan Systems Inc. v. Netscout Service Level Corp., 183 F.Supp.2d 328 (D. Mass. 2002).) In a case involving America Online, a court upheld a clickwrap agreement between AOL and a Massachusetts man requiring that legal disputes with AOL be settled in Virginia. (See Hughes v. AOL, 2002 U.S. Dist. LEXIS 9569 (D. Mass 2002)).
A EULA was found ineffective in a case involving the Adobe Software company. In 2001, a federal court ruled that, despite the language of an Adobe license agreement, the purchaser of a bundle of Adobe software programs could resell the individual components (separate programs on CDs). (See Softman Products Co. LLC v. Adobe Systems Inc., 171 F.Supp.2d 1075 (C.D. Cal. 2001)). The district court in that case determined that Adobe had sold, rather than licensed, its products to distributors, permitting the resale of the components under the first sale doctrine.
As the cases above show, there was some initial uncertainty about the enforceability of these sorts of electronic contracts and user license agreements. In 2000, federal legislation—the Electronic Signatures in Global and International Commerce Act—was enacted, which helped remove some of this uncertainty that previously plagued e-contracts and prevented a contract from being challenged simply because it was created electronically.
The ability of companies to use license agreements to limit the use of software by users has only grown in recent years. Another company, as a condition of its EULA, prohibited reverse engineering of its software. To the dismay of software programmers, a federal court upheld this provision. (See Bowers v. Baystate Technologies, Inc., 320 F. 3d 1317 (Fed. Cir. 2003)).
Even more disconcerting for many Internet law scholars and consumers was the introduction of nonsoftware EULAs. For example, a book publisher used a shrinkwrap agreement to prohibit the resale of books. A museum required viewers to waive the right to claim fair use when copying material from its website. Both of these rights—resale and fair use—are otherwise permitted under the Copyright Act.
How does this work in practice? Imagine that you want to buy a book. You walk into a bookstore, pay your money, and you are sold a copy of the book. You now own the copy of the book. You do not have to sign a license agreement and the book does not contain any type of "shrink-wrap" license.
Software copyright owners are also free to simply sell copies of their software. Such a sale would usually be through a download, CD, DVD, or other media containing copies of the software to end users.
Today, however, virtually all software is licensed to end users rather than sold outright like books. Instead of owning the copy of the software they "buy," end users merely acquire permission to use it. A written license agreement carefully defines and restricts the nature and extent of that permission.
In short, consumers should be aware of the terms of any EULAs to which they "agree," while software creators should be sure to use such agreements to safeguard their rights.