A practical guide to drafting software end user licence agreements

Software end user licence agreements are an essential tool for providers and developers to protect the software they create. An end user licence agreement (EULA) allows software owners to limit their liability and place obligations on end users.

Commonly, in today’s digital world where there is an app for everything, users click to agree to end user licence agreements before downloading an app on their mobile – even if they haven’t realised that they have done so.

In this article, we consider the key issues around using an end user licence agreement, and how a well drafted agreement can help to protect your software in different scenarios. For help creating an EULA which is clear for the user to understand, yet robust to sufficiently protect your business interests, speak to our friendly and experienced IT and technology solicitors.

Jump to:

1. What is an end user license agreement?
2. What are the different types of end user licence agreements?
   1. Click-wrap EULAs
   2. Shrink-wrap EULAs

   What is an end user license agreement?

   There are various types of software licence agreements, which are structured depending on the type of software and how it is licenced to third parties to use.

   Software is protected by copyright law and therefore it needs to be licenced by the software owner, in order to give third parties the right to use it. Software can either be distributed directly by the developer or owner of software, or indirectly via third party channels.

   An end user licence agreement (EULA) is a type of software licence, allowing an end user the right to use software and setting out rules about how it can be used.

   An EULA is commonly entered into between the software owner or developer (the licensor) and the user of the software (the licensee).

   EULAs can be used in both a business to business (B2B) and business to consumer (B2C) context. This is important, as the drafting of an EULA may vary depending on whether end users act in the course of business, or are individual consumers. Consumer laws are strict and vast, so it is vital to ensure that any EULA with an individual consumer complies with applicable laws. When EULAs are directed at consumers, it is also important to ensure that their terms are clear and transparent.

   An EULA creates a direct contractual relationship between the software owner and the end user, offering the software owner significant protection. This is particularly important – especially where end users are not direct customers of the software owner, as this can cause risks of software misuse.

   Usually, EULAs are drafted in favour of the software licensor and are non-negotiable. For example:

   • Using a well-drafted EULA will protect your software from risk, for example by preventing users of the software from reverse engineering or misusing it.
   • You can limit your liability to the end user under the EULA – for example, by including a limitation of liability clause which sets out limits on your liability if there are problems with the software, or if you breach your obligations under the agreement.
   • You can control use of your software, for example – by including extensive termination rights if users breach the terms.
   • You can provide disclaimers around use of the software such as what it does and does not do, to manage expectations.
   • You can set out parameters on your obligations under the licence, for example by specifying exactly what levels of support and maintenance you will provide.

   What are the different types of end user licence agreements?

   There are various agreements under which software can be licenced and the word ‘EULA’ and what it means can cause misunderstanding.

   Although the term ‘EULA’ can be used in a wide sense, in practice EULAs are often used in specific circumstances – for example, where end users who are using software are not the direct customers of a software owner. Often, EULAs are also used for mobile applications licenced to consumers.

   The following are some practical examples of when an EULA may be used:

   • EULAs are used where the end-users (such as individuals who are using the software) are not direct customers of the software owner. For example, a software owner may provide a company with a licence to use its software (under a software licence agreement). Additionally, the software owner may require that company’s employees, who are end users of its software, to sign a separate EULA to ensure that the owner’s software is protected when end users use it. In this case, having employees sign a EULA would grant the software owner additional protection, as the EULA could impose usage restrictions on the end users.
   • If a software owner distributes its software via a third party (such as a reseller), it could also require the reseller’s customer to sign an EULA, to impose licence restrictions on their use of the software.
   • EULAs are often used for mobile applications, whereby software is downloaded via an app store. In this case, end users will often need to sign a EULA before downloading an app.

   Generally, an EULA may be more limited than a traditional, extensive software licence agreement (which will often cover more terms, including detailed payment terms).

   There are various types of EULAs, the most common being:

   • A ‘click-wrap’ EULA whereby the end-user will click to accept the terms of the EULA, before they can access the software.
   • A ‘browse-wrap’ EULA whereby end-users are simply notified of the licence terms and told that by continuing to browse, they are deemed to have accepted the licence terms.
   • A ‘shrink-wrap’ EULA – in this context, the licence terms will be presented either on the packaging or a file during installation of the software.

   Focussing specifically on click-wrap and shrink-wrap EULAs:

   Click-wrap EULAs

   If a company buys a software licence, EULAs often show up as click-wrap agreements (i.e. a pop-up window where the user clicks ‘okay’ or ‘agree’) that each employee must agree to before using the software.

   This forms a direct agreement between the licensor and each user, which allows the licensor to take legal action against an individual user who breaches the agreement, rather than the company customer.

   However, EULAs extend beyond desktop software. Anyone who downloads a mobile app will likely interact with a EULA too.

   An electronically accessed EULA is referred to as a click wrap agreement because the licensee clicks to accept the terms of the EULA.

   Shrink-wrap EULAs

   With a shrink-wrap EULA, the licensee does not see the EULA until they have opened the packaging of the software. As a result of the timing of the licensee seeing the terms of the EULA, there can be enforceability issues with using 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 will advise on how best to ensure the enforceability of a shrink-wrap EULA. This will depend on whether the licensee you are entering into the agreement with is a business consumer or a customer.

   A commercial technology solicitor will also advise on the specific issues applicable to the shrink-wrap licence scenario. For example, advising on the fact that the potential licensee should be able to read through the packaging of the software, and view the full terms of the EULA on the licensor’s website prior to opening the software packaging and committing to their purchase.

   Given the use of EULAs has presented issues around enforceability, it is highly advisable to take legal advice on using a EULA and which type of EULA is most appropriate to protect your software.

   What issues should be considered in an end user licence agreement?

   The following key issues should be considered for the purposes of drafting an EULA:

   • Controlling distribution and use of the software.
     An EULA enables users 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 of their software. The precise terms of the control of the use of the software will depend on the nature of the software and the end user (for example, if the licence is on a B2B or B2C basis).
   • Preventing abuse of the software.
     An EULA enables a licensor to police the use of its software to prevent abuse. Any licensor will want to ensure that their software is not copied nor re-distributed. Penalties in the EULA should be designed, to prevent and deter abuse of the software.
   • Allowing the licensor to terminate the licence 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.
   • Limiting any liability for the software and any damage it causes.
     Limitation of a licensor’s liability is a crucial element of any EULA. Software disputes and litigation are time consuming and risk creating reputational damage, even where a licensor is not at fault. Limitation of liability clauses can help reduce the risk of disputes and limit the amount of damages a software owner must pay in the event of a breach of contract claim. Without a carefully drafted limitation of liability clause, a software licensor could face unlimited liability and there would be no financial limit on the level of damages a user could claim if things go wrong.
   • Limiting the scope of use.
     An EULA gives the licensee the right to use the software in accordance with its terms. The scope of the licence in an individual EULA generally includes the right to use the software during the term of the licence, but not to misuse the software or attempt to sell it on or copy it (other than as may be specified in the EULA).

   It is important that the scope of the licence in the EULA is fit for purpose.

   When considering the scope of rights under an EULA, you should consider:

   • The identity of the licencee and whether the EULA enables the licencee to allow others to use the software. For example, freelance workers or a third party suppliers who need to use the software.
   • Whether the licencee can sub-licence or assign the EULA.
   • 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 compliance with the scope of the licence to be policed. You may consider whether the EULA provides for audit rights to check the use of the licence by the licencee.
   • The prohibition of the copying, modification or decompiling of the software.

   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.

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

   The contents of an end user licence agreement are dependent on the nature of the relevant software product, its planned usage and who the end users are (for example, if they are businesses or consumers).

   However, EULAs will typically include key clauses such as:

   • Details of the relevant licensor and licensee.
     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. If a group company licence is granted, this should be specified.
   • The software being licenced.
     The software, and any relevant updates, should be carefully identified and detailed in the agreement.
   • The scope of the licence.
     Any limits on the licence should be made clear, so users understand exactly how they are able to use the software.
   • Intellectual property rights.
     The agreement must include robust intellectual property rights provisions, protecting the rights in the software being licenced. The licence must make clear that all intellectual property in the software is the property of the software licensor and that the customer does not acquire any rights in the software, apart from a limited licence to use the software for specific purposes.
   • Restrictions on use.
     It is vital that restrictions on use of the licence are clearly documented. For example, the software licensor will want to set out that its software cannot be sub-licenced, modified, dissembled or reverse engineered or made available to third parties.
   • The term of the licence and how it can be ended.
     The duration of time for which the licence may be used must be clearly documented. The software owner should have strict rights to end the licence, for example if users fail to comply with its terms.
   • Disclaimers, warranties and limitation on liability.
     As mentioned above, limitation of liability clauses are vital. The scope for a licensor to limit liabilities in the EULA will depend on whether the licensee is a business user or a consumer. This is because additional rules apply when limiting liability in consumer agreements. The licence may also to give warranties (contractual promises) about the software – for example, that the software will confirm with its specification for a period of time.
   • Consequences of breach of the agreement.
     Any implications of breaching the agreement should be fully clear, such as the right for the licensor to end the licence.
   • Maintenance and support.
     This is important, to ensure that the end user understands what types of software support is offered.
   • Remuneration.
     This will very much depend on the circumstances and structure of the EULA. For example, a EULA with employees will be unlikely to include payment terms (for example, if the employer has paid for the licence under a separate software licence agreement).
   • Data protection:
     Where personal data will be shared between the parties, additional considerations apply under the UK GDPR. For example, if the software supplier acts as a ‘data processor’ when processing the user’s data, the EULA would need to contain mandatory terms due to the stringent rules around data processing under the UK GDPR. If you’re unsure whether your software or app requires a separate privacy policy, please read our introductory guide to privacy policies.
   • Governing law.
     It is vital to set out which country’s laws will apply in the event of a dispute, to reduce the risk of jurisdictional conflicts.

   Key tips for effective end user licence agreements.

   Every EULA will be different and will need to be considered on a case-by-case basis.

   Various legal considerations will apply, depending on the type of software and how it is licenced. For example, special attention will apply where apps are licenced via an app store and you will need to carefully consider the interplay with the relevant platform and their own rules (for example, the rules of Apple and Google Play when licencing apps on their platform). As part of this, you will need to determine if the app store sets out seperate rules around how apps can be used in its own terms, which end users will need to also comply with. For example, often the terms of sale and software licence fee are covered in the relevant app store’s own terms. If children are accessing an app, further complex issues and rules will apply.

   Your EULA should also be updated to reflect changes and developments in your software product. You will also need to deliberate how to notify end-users of changes in your EULA terms and seek their approval to the new terms.

   It is vital that software owners ensure that their EULAs are legally binding. This can be difficult in practice and give rise to enforceability issues, for example – if a user claims that the EULA terms were not properly brought to their attention or were not incorporated into their agreement. This issue can be particularly difficult in the context of mobile apps. Commonly, EULAs are presented to users before an app is downloaded, together with various other information. It can be questionable as to whether the EULA has been sufficiently brought to a user’s attention and binding upon them. App providers should therefore implement further steps to take to ensure EULAs terms are clearly displayed to the end user – for example, by requiring users to re-confirm their acceptance of the EULA as part of the sign-up process. Overall, it is crucial that EULA terms are easy to find and evidently brought to the user’s attention.

   EULAs can be quite complicated to draft, and you should seek specialist legal advice if you are unsure about how to prepare your EULA, how it should be presented to end-users and additional considerations which apply to mobile apps.

   Conclusion

   This guide has explained some of the key issues to consider around EULAs. However, EULAs are unique agreements and do not follow a one-size-fits all approach. EULAs are flexible, can take different forms and must be tailored depending on how the software is being licenced and who the end users are.

   Software owners should carefully plan and structure how they wish to licence their software, which will allow them to understand which type of software licence agreement is most appropriate. Where end users of software are not direct customers of the suppliers, EULAs can be particularly helpful and give software owners comfort that their valuable software assets are protected.

   If you would like advice and support with licencing your software or drafting an EULA, contact our experienced IT lawyers who are happy to help.