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Software Licensing: Reality Check

[Yes, Brady is a lawyer, and doesn’t just play one on the nets. Note that the discussion below applies in the U.S. and may vary in your part of the world. -Adam]

A couple of months ago, Adam asked me to write an article about software licensing, and asked Internet folks to let me know about strange, weird, or merely incomprehensible software licenses they had seen. Most of the responses noted the inconsistent and sometimes bizarre restrictions on transferring software or duplicating it even for personal use. It is interesting that although these are arguably the most important features of any licensing arrangement, they are the least intelligibly explained by the most commonly seen licenses. In this article, I focus on answering the one question that I have distilled from all the reader input: Can they really do that? ("That" being whatever the clause in question addresses).

The bottom line is that while federal copyright and other protections certainly apply to mass marketed commercial software, there is no legal authority upholding many of the additional restrictions on transfer and copying often found in software licensing agreements. Indeed, it is distinctly unclear at present whether any license arrangement that does not openly and specifically form part of the initial purchase would be upheld in court. Interestingly, both Louisiana and Illinois have enacted statutes attempting to extend traditional contract law to apply to these so-called "shrink wrap licenses." Both laws were struck down by the courts almost immediately and at present, there are no statutes dealing with this issue.

To understand this issue it is important to understand some basic law in the areas of "intellectual property" and contract. Let’s take a look at the basic rules in these two areas.

Software Protection 101 — Software can be protected in five basic ways. Three of these take advantage of specific, long-standing methods of protecting the creations of one’s mind, aka intellectual property. These are patent, copyright, and trade secret protection. The general law in these areas is well established, although there remain many questions as to how the laws apply to software. The fourth method is copy protection. This approach was popular for a short time, but it rapidly became obvious that any bright grade school student could beat any copy protection scheme before study period ended. The rise of the hard drive also made copy protection impractical. Today, few broadly marketed commercial products use this approach, at least in the U.S.

The fifth approach to software protection is the "contract" or "license" approach, which tries to apply traditional legal notions of contract to software purchases. Mass-marketed products, such as Microsoft Word and Lotus 1-2-3, come with a "Licensing Agreement" threatening dire consequences to any who violate whatever terms may be included in the small print. These licenses are invariably printed in an obscure dialect known to linguists as "lawbabble" or "legalese." Some of these "agreements" contain provisions that are annoying, but quite enforceable. Many of these licenses contain provisions that range from the impractical and impossible to the just plain stupid. There is substantial debate in the legal community as to whether all of these provisions are enforceable.

Another approach to software protection uses market forces rather than law. The so-called "extralegal" approach sees marketers offering additional incentives such as free upgrades, technical support, rebates and the like to registered users while presumably leaving the pirates out in the cold. The problem with using this approach alone is that it is as easy for an unscrupulous end user to pirate copies of updates and upgrades as it is to obtain the original application. Technical support is freely available on a variety of commercial bulletin boards and from user groups – the thief need not rely on the publisher’s own technical support. The extralegal approach is commonly used in conjunction with the contract method.

Contracts 101 — A contract is nothing more than an agreement between two or more parties, in exchange for something of value, called "consideration." The agreement must consist of an offer that is communicated to another, and a knowing and voluntary acceptance. Consideration can be something tangible, such as money, or something intangible such as a percentage interest in a money market fund. A promise can even be considered consideration. So a valid contract is formed where a promise is exchanged for another promise. In fact, this is probably the most common type of contract.

A license is a type of contract where one person "rents" a certain right or item to another. The most common types of licenses are bus tickets (well, most buses don’t actually give tickets, but you get the idea) and theater tickets. The only thing you buy is the right to ride the bus, or to see the show. Your rights end when the bus reaches its destination or when the show is over.

If A License Is A Contract, When Did I Sign? — What the software companies are trying to pass into law by papering all of us with these "licenses" is the idea that when you buy software, you aren’t actually buying software at all – all you’re buying is the disk and certain limited rights to use the software magnetically encoded on it. Considering the effort, time, and expense that goes into good software coding it is no surprise that vendors want to guard their product from piracy. This is particularly easy to see with a product so easily duplicated as a floppy (by contrast, try making multiple copies of a paperback for your friends!). The very fact that it is so easy to copy software makes traditional protections methods like copyright inadequate to stop the problem.

So the software industry has increasingly turned to the idea of licensing the use of their product to individual users, while retaining ownership of the actual product. This approach is not new. In the olden days – a few years back – most software was sold in small quantities. Contracting with each purchaser made sense since the numbers were smaller. In fact, this approach is still used today with products that are sold to small group of buyers, such as customized database products designed for mainframes.

But problems arise in trying to apply the contract approach to the mass market. Let’s say you buy a software package. It comes in a flashy box with a lot of writing on the back about the neat stuff that the software will do. You fork over some cash for it and rush home to try it out. You open the box, and see the floppy disks in a paper sack with the words "Important Licensing Information" written on it. Totally ignoring this "important" information, you tear into the sack and install the software (how many of you do this? show of hands please?). Let’s also say that the "Important Licensing Information" started out something like: "This is a legal Agreement between the buyer and the VaporWare Company. If you do not agree with the provisions of this Agreement then you must immediately return your VaporWare product for a full refund."

Well? Are you stuck with a contract even though you didn’t read it? Is the entire legal staff of VaporWare trying to pull a fast one on you by sneaking this into the box so you don’t know about it when you purchase the product? Hmm. Let’s take another look at the contract rules we started out with. When you paid for the product, you knew nothing about this "agreement" inside. In fact, you couldn’t have learned about it without opening the box, which would mean paying for it. (Catch 22?) When you got home and opened the box, you found this new "agreement" in which the good people at VaporWare tell you that you are now party to a contract you knew nothing about when you bought the software.

Under traditional contract analysis, this type of agreement would not be enforceable since it was unknown at the time of purchase and thus, could not have been negotiated or agreed to. In other words (lawyers always have other words), the offer to buy the product did not include the terms of this license, and you did not accept the offer and pay your hard-earned money with the understanding that this license would apply. Simply opening the package does not mean that you have entered into a second contract because not only have you not negotiated anything, but no new "value" has been exchanged. That is, VaporWare has given you nothing extra in exchange for your supposed agreement to the second contract. Ironically, this analysis is even stronger if you didn’t read the agreement, since you certainly can’t be forced to agree to something you know nothing about. There is no legal duty to read everything in a package.

Even if you read every word of the license agreement, and mentally assent to it before opening the package, the question is not resolved. With respect to consumer sales most courts follow a line of cases holding that one-sided contracts created in conditions of clearly unequal bargaining power are not recognized to the extent that they impose unreasonable or "unconscionable" conditions on the consumer. There are numerous additional difficulties presented by the current approach to these license agreements under traditional contract law, as well. Fortunately for you, dear reader, Adam won’t let me go into all the gory details (it would only be a few dozen pages!)

Well now, wait a minute. Does this mean that you can ignore all that licensing stuff and make all the copies you want, hand them out to your friends, or even open up shop and start marketing copies of VaporWorks – the leading VaporWare product? Nope. Federal copyright law still applies, and prevents you from legally "publishing" (e.g., copying and distributing) any copies of the software without authorization from the copyright owner. In fact, copyright law makes it a criminal offense to do this, punishable by fines and prison time.

At least one software publisher has decided against using the licensing approach in one of its products. Purchasers of Prince of Persia, a Broderbund product, may notice that the package contains no license. Instead, the manual contains a brief statement that the software is protected by federal copyright law and that "copying the software for any reason other than to make a backup is a violation of law. Individuals who make unauthorized copies of software may be subject to civil and criminal penalties." Despite all of the fancy wording and restrictive language of other publishers’ licenses, under the current state of the law, I believe that Broderbund’s simple, two-line statement most likely accurately reflects all of the legal protections actually available.

The Bottom Line — Although a couple of cases have addressed shrink wrap license issues, none has decided the issues of greatest concern to us: whether the restrictions on archiving, personal backups, use on more than one hard drive, etc. are valid or just so much smoke. Although several states are actively considering shrink wrap license legislation, only two have passed laws on the subject and in both cases, they were promptly struck down by the courts. Neither of those cases addressed these issues either – the statutes were stricken on constitutional and other grounds not related to their substantive provisions.

Though existing contract law does not support the restrictions contained in many licenses, it may be tempting fate to wantonly disregard them. After all, who wants to become the defendant in the first test case? It is one thing to say, "they can’t win – they’re full of hogwash" and quite another to be confronted with the prospect of paying legal fees and costs to assert your defenses.

One thing is clear – duplicating commercial software for distribution is a violation of existing law. Ultimately, distribution of any unauthorized software that deprives the rightful owner income, profits, or any other benefits is probably a violation of the federal copyright laws (and hence, a crime) and may also constitute certain civil torts, such as interference with business or contractual relations. In some states, punitive damages are available for this conduct. It is not necessary to sell the product to run afoul of these laws. ANY distribution will do – including gift, sale, rental, etc.

The best course is, as always, common sense. We may quibble about whether we can be prevented from making two backups instead of only one, or whether it is all right to have VaporWorks on both the office and home Macs at the same time, but everyone knows that it is wrong to distribute someone else’s software without paying for it. That is known as piracy and in addition to being a criminal act, it is also as immoral as any shoplift or theft.

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