What is an EULA?
An EULA, or End User License Agreement, is a license that sets forth the rights and restrictions the end user receives along with the software or program he or she purchases. The end user is just that—the caboose at the end of the distribution chain. They are the consumers who purchase the game at retail. An EULA typically prohibits a great deal of uses that are already prohibited under the DMCA of the Copyright Act. However, EULAs can also prohibit use of a work that would otherwise be permissible under the Copyright Act.
Keep in mind that when you purchase a piece of software, you are not also purchasing the copyrights and other intellectual property rights in and to the software. It’s the same with music—when you purchase a CD, you are not also purchasing the copyrights in and to the music. Those stay with the publisher and record label. Similarly, when you purchase software, you’re only purchasing the physical copy. The EULA determines how you may use that copy.
What about the First Sale Doctrine?
The First Sale doctrine applies to the last person in the chain of distribution—that is, the consumer. To understand this principle, you have to clearly separate the physical copy from the underlying copyright in your mind. The physical copy has particular rights and properties associated with it—for instance, you can resell that individual copy, you can destroy it, you can listen to it in your car, you can listen to it in your bedroom, you can give it to your mom for a birthday present—basically the physical product is yours to treat as your own physical property. However, the underlying copyright remains with the author. This means you cannot copy your copy, you cannot distribute your copy, you cannot publicly perform or display it or make derivative works from it because doing any of those things infringes on the right of the copyright owner. For developers, to state the principle simply, once you sell a particular copy of software to a consumer, your rights to that individual copy cease. This does not mean that your underlying copyright in that particular work expires. It simply means that once you sell a particular copy you can’t dictate how the user uses that physical copy unless that use affects your bundle of IP rights. That is the first sale doctrine as it applies to intellectual property.
This is complicated with software sales because a) software is easily copied, and b) a program can be installed to a hard drive and the end user may never need to use the physical copy again. As a result, software producers started including EULAs with their software in the form of shrink-wrap and click licenses that are accepted once you open the package or click "I Accept" during the installation of the program. These licenses have been deemed legal and enforceable in most jurisdictions.
When should you use an EULA?
You should use an EULA if you are interested in retaining your rights to a work. However, in order to retain your rights, you are also obligated to vigorously enforce your rights or risk losing them.* Contracts and licenses aren’t worth the paper they are written on if the injured party does not enforce his or her rights against the breaching party. Keep in mind that most end users don’t even read the EULA and will have no clue if and when they breach it. It is your duty as the copyright owner to retain your rights by enforcing those rights. Therefore you must monitor (or hire someone else to monitor) your copyrights and you must rapidly respond to any significant instance of infringement or breach of your EULA. How rigorously you enforce your EULA will depend on your resources and what you stand to lose.
What provisions should you include in your EULA?
If you’re comfortable with the idea of enforcing your EULA, you want to make sure yours preserves the particular interests you want to protect.
1) Be sure to state all rights retained by you, the copyright owner. Remind the end user that you retain all intellectual property rights in and to the work, including all copyrights, trademarks, patents, trade dress, trade secrets, name and likeness, and the kitchen sink.
2) Define the rights you want to grant the end user. Do you want people to be able to copy your product for personal use? Do you want to give them permission to distribute the product on a limited basis? Do you want to give them a license to use your trademark if the software is to be used for commercial purposes? You need to spell this out.
3) Define the restraints you want to place on the end user. Do you want people to promise to delete the software from all systems they’ve installed the software on before they sell, give, or lend their physical copy to another person? Do you want to prohibit the end user from using reverse engineering to circumvent DRM or encryption designed to protect your copyright? Because some of these practices are authorized under the Copyright Act, the only way to restrict these practices is through an EULA.
4) Spell out what you’re willing to warrant and what you want to disclaim. Almost all software is sold "AS IS" and disclaims any implied or express warranty of merchantability or use for a particular purpose. You should always aim to make a good product, but don’t warrant a product unless you feel comfortable that it will be fully compatible and usable on a broad array of systems that are in accordance with your stated system specifications. If you can disclaim it, you should to the extent that you can. Also bear in mind that some localities have specific consumer protection rules. You will want to refer to your choice of law (i.e., the state that governs your EULA) to determine whether consumer protection laws exist for your jurisdiction. If so, be careful not to waive or disclaim any rights that are not in your power to waive or disclaim. Some rights are held exclusively by the consumer and can only be waived pre-sale (I’m not actually aware of any laws like this as they pertain to software, but in the event that such laws are enacted at a later time and assuming that this blog will be available at a time when such laws are enacted, I’m basically just covering my/your ass).
5) Limit your liability to a reasonable extent. You do not want to be liable for damages that result when you program is not compatible with another program and blows up the end user’s hard drive unless you warranted that your program would work with that other program. Limit your liability to a specific dollar amount and only to those damages arising from breach of warranty.
6) READ your EULA before you send it out. Do not copy and paste someone else’s EULA and expect it to work with your product. One, you are doing your customers a disservice. Two, you are being lazy, and you may wind up including something that will render your contract void/voidable (there’s a difference) by a Court.
7) If you are selling your software, consider implementing a refund and/or rescission period to give the end user the opportunity to test the product and get a refund if the product is not functional or is not what the end user wants. This removes the harsh edge of a "take it or leave it" contract and shifts the EULA into an optional agreement. In other words, it gives the consumer CHOICE, which definitely works in your favor when you want to include limitations that would otherwise raise a question of unconscionability. This is not a hard and fast rule. Unconscionable/unfair clauses ALWAYS pose the risk of being voidable, or rendering the entire agreement void, so tread carefully. To the extent that you do include a refund policy, make sure you have some kind of protective measures in place to prohibit use of the product beyond the designated period unless an actual purchase or acceptance of the agreement takes place—otherwise you may expose yourself to unnecessary copyright infringement exposure.
8) Remember that you can amend your EULA with later versions of your software. Pay attention to consumer protection laws as they relate to software and EULA, because there is a good chance that the slow cogs of the legal system will eventually touch down on consumer protection for software purchases as they relate to EULAs.
9) ALWAYS have a severability clause. If one provision of your EULA is deemed unenforceable you do NOT want that provision to render your entire contract void or voidable. Have a solid severability clause in place.
What provisions can you do without?
First, it’s important to note that EULAs are typically treated as contracts of adhesion. This means that consumers either accept the contract or do not use/purchase/install the product. No negotiation is involved. Because this kind of contract tends to go against the public policy supporting arm’s length negotiation, courts will only uphold contracts of adhesion if they are not deemed unconscionable (also, se #7 above). Different courts may have different standards for determining whether a contract is unconscionable (i.e., very imbalanced, oppressive, etc). Therefore it’s important to keep consumer rights in check when you’re drafting an agreement. Ideally, and especially as an indie developer, you want your contract to be fair. One mental exercise is to evaluate your agreement as if the terms are negotiable, and put yourself in the position of the consumer. What would you not agree to or want changed in the agreement? Keeping this in mind will not only protect you from potentially having your contract voided, but will also help to protect the rights of your customers as well. If you are not sure as to whether a provision is unfair, or if you do not understand a provision, you should either a) talk to a lawyer, or b) delete the provision.
†One quick note. Prohibition on participation in class actions—this may be a difficult clause for courts to stomach, because it may go against public policy. Gatton v. T-Mobile, 52 Cal.App.4th 571 (Cal.App. 1 Dist. Jun 22, 2007). This isn’t the case for all courts, especially as not many have ruled on the issue of EULAs. However, the fact that any court has ruled against permitting this clause in a take it or leave contract should make you seriously reconsider whether this kind of clause is necessary for your agreement.
The argument for a standardized EULA system
There’s a healthy debate going on right now concerning EULAs. That’s actually why I picked this topic (that, and the continuing "license" theme). I could regurgitate already available information, but it’s best you read it for yourself.
My two cents: People who don’t pay attention to what they put into their EULAs are exposing themselves to as much (and sometimes more) risk as the people who click without reading said agreements. If your license is determined unconscionable, it will have a negative impact on you and every person you’ve sold product to. For your protection and the protection of your users, understand the terms of your own EULA and don’t put anything in there that causes your moral compass needle to go haywire.
* Copyright infringement suits have a 3 year statute of limitations period. This means that you must bring an action within 3 years from the "last act" of infringement. For the preservation of justice, some courts may start to toll (trigger the running of) the statute of limitations once the copyright owner has constructive notice. In the alternative, a defendant could raise the doctrine of laches (based on a reliance on the copyright owner’s failure to timely bring a claim to court) as an affirmative defense. As a copyright owner, if these defenses are successful your copyright infringement claim will be dismissed with prejudice (i.e., you will lose regardless of the merits of your case).