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Drafting Software End User Licence Agreements

Software end user licence agreements are an essential tool for software providers who are investing in creating apps and software and need an end user licence agreement to protect their software and regulate its use. In this article our expert IT and technology solicitors consider the advantages to you as a licensor of using a specialist end user licence agreement, and how a well drafted agreement can protect your business.

What is an end user license agreement?

In essence, an end user licence agreement is an agreement under which a licensor gives a licensee permission to use a piece of intellectual property. Although some businesses have not invested in bespoke end user licence agreements (EULA) and consumers often do not realise that they have agreed to an EULA to use a business app or software, the EULA is increasingly becoming an essential type of commercial contract for businesses and the go to agreement for those investing in apps and wanting to protect their IP.

The EULA sets out the conditions that the licensor has decided to impose when giving the licensee permission to use their intellectual property by way of software. The licensor is the company or the individual who has developed the software for the licensee to use or purchase. The agreement not only includes usage terms but also detail the limits of the licensor’s liability for any damage. For example, to the licensee's hardware or data.

When is an end user licence agreement needed?

An end user licence agreement is needed in any scenario where the owner of software is permitting a third party the right to buy or rent software from them. A licensor’s software will have cost time and money to develop and has a commercial value. It should not be left unprotected and potentially at risk of being used for non-agreed purposes or copied.

Failure to protect your software or app with an EULA could leave your software valueless which in turn will affect the value of your company. No licensor in a company sets out to give their software or app away for free unless there is a clear rationale behind the decision, such as the selling of add-on products. However, even in those circumstances, you need an EULA to avoid competitors or customers changing or copying your software and either stealing your business model or infringing copyright by copying your software for their own purposes.

If you question whether a specialist EULA is necessary, any licensor should ask themselves would they leave their business premises without a burglar alarm activated and with the doors wide open. Whatever the scale of your software or app an EULA is necessary as without it you won't be able to effectively protect your business and any future software development that comes off your original app or software.

What is the purpose of an end user licence agreement?

Any end user licence agreement should have four primary purposes: 

Purpose Rationale
Control distribution and use An EULA enables users or licensees to use your software or app within the limitations set out in the terms of the agreement. Therefore, the EULA provides the licensor with retained ownership and control. The precise terms of the control of the distribution and use of the software will depend on the nature of the software and the end user (business to business with commercial licensee or consumer).
Prevent abuse of the software An EULA enables a licensor to police the use of its software to prevent abuse. Any licensor will not want their app or software copied and re-distributed, nor does a licensor want their goods adapted for anti-social or illegal use. Penalties in the EULA should be designed to prevent abuse of the software.
Allow the licensor to terminate the agreement on their terms Most commercial licensees are heavily reliant on their software, so the ability of the licensor to terminate the agreement can be a powerful tool to ensure compliance with the terms of the agreement. As even if there are alternate software providers available to the licensee most commercial licensees do not want to change their software or app usage without good reason because of the potential for business disruption.
Limit any liability for the software and any damage The limitation of a licensor’s liability is a crucial element of any EULA in this litigious culture. Commercial disputes and litigation are time consuming and risk creating reputational damage even where a licensor is not at fault. Limitation of liability clauses reduce the risk of disputes and litigation or can limit the amount of damages payable to the amount set in the EULA.

What is the difference between an end user licence agreement and a SaaS agreement?

Although both the end user licence agreement and the software as a service agreement (SaaS) both provide the end user or licensee with software there are subtle differences. The main difference between an end user licence agreement and a SaaS is that the EULA provides software to the licensee to install on their computer systems, whereas a SaaS agreement normally entails the licensed software still residing on the licensor’s servers as opposed to the licensee’s computer. Under a SaaS agreement the software is usually accessed by the licencee through a web browser.

For more information on SaaS agreements take a look at our webinar by Ed Kilner, an associate in the commercial technology team on ‘Key terms for your SaaS contracts’, and our article ‘SaaS contract negotiation essentials: what terms should you be negotiating?’

What is the scope of the licence in an end user licence agreement?

An end user licence agreement gives the licensee the right to use the software in accordance with the terms of the EULA. The scope of the licence in the individual EULA normally includes the right to use the software during the continuation of the licence, but not to misuse the software or attempt to sell it on or copy it other than as specified in the EULA.

It is important that both licensor and licensee carefully consider the scope of the licence in the EULA to ensure that it is fit for purpose. For example, if a licencee is a parent company does the scope of the licence enable employees of subsidiary companies to use the software? Does the subsidiary company require a separate EULA or does the scope of the original EULA for the parent company require clarification?

We often find that the scope of an EULA is glossed over, assuming that the EULA scope is standard in nature but, in some scenarios, it will require careful consideration and redrafting.

When considering whether the scope of the EULA meets the needs of the licensee and protects the commercial interests of the licensor IT and commercial technology solicitors need to consider how the scope of the EULA will limit the use of the software by the licensee so the licensor gains maximum commercial benefit from their software.

Scope of licence considerations include:

  • The identity of the licencee and whether the EULA enables the licencee ;to allow others to use the software. For example, freelance workers or agency workers or an outsourcing service.
  • Whether the licencee can sub-licence or assign the EULA. If the scope of the EULA permits this then does the licensor have to approve the sub-licence or assignment documents?
  • Whether the licencee can adapt or modify the software.
  • The number of machines onto which the software can be loaded.
  • The location of the machines on which the software can be loaded. For example, if the licensee has multiple offices is a separate EULA needed if the software is to be used in multi-locations? This is something that licensees need to look out for with the rise of employees either working from home or employers adopting a hybrid working model.
  • The number of concurrent users able to use the software at any one time and the volume of processing that can be conducted by the software.
  • How is compliance with the scope of the licence to be policed? Should the EULA provide for remote or non-remote auditing of the use of the licence by the licencee?
  • The prohibition of the copying, modification or decompiling of the software save in specified circumstances.

The scope of an EULA may meet the needs of a licensee’s current business requirements, but it is important that the EULA enables the scope and license remuneration to be reviewed if the business needs of the licensee change. For example, a licensee may want to add to the number of machines that can be loaded with the software or the number of users.

If the scope of an EULA is breached then, depending on the terms of the EULA, the licensor may be entitled to apply for an injunction to stop ongoing breach and/or damages. The licensor may also be entitled to terminate the EULA.

However, licensors do need to be aware that the scope of the licence cannot prohibit all software decompilation where it is necessary, for example, maintenance by the licensee. Licensees have the following statutory rights:

  • The right to reverse-engineer or decompile the software if it is necessary to use a program with another program. This right cannot be excluded by contract by virtue of section 50B of the Copyright, Designs and Patents Act 1988 as amended by the Copyright (Computer Programs) Regulations 1992 (SI 1992/3233) and the Copyright and Related Rights Regulations 2003 (SI 2003/2498). However, the right to decompile can be excluded by the licensor in the EULA if the licensor provides the licensee with the information needed at the time of taking out the licence or on request so the licencee can obtain inter-operability.
  • The right to make a back-up copy of a program if necessary for its lawful use. This right cannot be excluded by contract.
  • The right to copy or adapt the program if necessary for its lawful use. For example, to correct errors. The right can be excluded by an express provision in the EULA. It is important that the licensor excludes the right in the EULA if the sales of software maintenance is a crucial part of the licensor’s business model.
  • The right to observe, test or study the functioning of a program to determine the ideas and principles which underlie any element of it. This right cannot be excluded by contract or by a clause in the EULA.

To limit the risk of disputes over the scope of the end user licence agreement it is important that the licence is drawn up by specialist EULA solicitors.

What clauses should be included in an end user licence agreement?

The contents of an end user licence agreement are dependant on the nature of the industry, the product and its planned usage. However, every EULA should include:

Clause in the end user licence agreement Purpose
Licensor and licensee Particular care needs to be taken in identifying the licensee to avoid commercial disputes over the scope of the licence and who is entitled to use it.
The software The software and any relevant updates should be carefully identified.
The scope of the licence Any limits on the licence and permitted exclusions to statutory rights should be made clear.
The start date of the licence and duration and provisions for the termination of the licence The licence can be for a specified period or indefinite in length. Termination triggers need to be carefully drafted taking into account the nature of the software.
Disclaimers and warranties and limitation on liabilities If the licensor is limiting or disclaiming liability this must be specified to reduce risk of damages or other claims. It is usual for a licensor to give warranties over IP and data protection issues. The scope for a licensor to limit liabilities in the EULA will depend on whether the licensee is a business user or a consumer protected by consumer legislation (such as the Unfair Contract Terms Act 1977).
Consequences of breach of the agreement This could include damages or injunctive relief.
Maintenance and support To ensure that the software is kept up to date.
Remuneration Some EULA’s provide for a one-off fee whereas other agreements provide for a more complex remuneration structure, such as an annual fees and add-on fees for adding current users, sites or for testing or maintenance work or upgrade fees.
Review provisions For example, to enable the licensee to add sites to the license or current users.
Governing law To reduce the risk of jurisdictional conflicts.

What is the difference in an end user licence agreement for electronically accessed or physical pre-installed software?

The timing of the licensee’s acceptance of the terms of an end user licence agreement contents are dependant on whether an EULA is for electronically accessed or pre-installed software. An EULA for electronically accessed software can be referred to as a ‘click-wrap agreement’, whereas an EULA for physical pre-installed software can be referred to as a ‘shrink wrap agreement’.

The electronically accessed EULA is referred to as a click wrap agreement because the licensee clicks to accept the terms of the EULA when they open the software. With the shrink wrap EULA, the licensee does not see the EULA until they have opened the packaging of the software that has been supplied by a retailor. As a result of the timing of the licensee seeing the terms of the EULA there can be enforceability issues with a shrink wrap agreement in comparison to a click wrap EULA.

If your sales of software rely on physical pre-installed software a commercial technology solicitor can advise on how best to ensure the enforceability of the shrink wrap EULA. This will depend on whether the licensee will be a business consumer or a customer. A EULA solicitor will also advise on the specific issues applicable to the shrink wrap scenario. For example, advising that the potential licensee should be able to read through the packaging of the software, and that they can view the full terms of the end user licence agreement on the licensor’s website prior to opening the software packaging and committing to their purchase

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