This note is from an electronic magazine called Tidbits the May, 1994. Very little has changed since then so this is still useful information.

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Software Licensing: Reality Check
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by Brady Johnson -- wizard36@aol.com

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.