When we search against the words ‘licence’ and ‘hunting’ on a search engine, we learn a number of interesting things. We learn that, in Finland, it is possible to hunt 34 species of mammal and 26 species of birds, and for some of these a licence is required. In Quebec, we discover, hunting licences can be obtained from authorised distributors, the licence obtained is personal and the licence lasts for one year only. We also find that you have to be over 18 years old to hunt moose in Canada.
To state the obvious, a licence is an authorisation to do something which, without such authorisation, cannot be done lawfully. In hunting for software licences that fit both the licensor’s requirements and licensee’s demands, there are a number of recent trends and issues which can be identified.
Tradition
The traditional perspective shared among the software industry is that each of its customers is an end user. The majority of software licence agreements actually define the customer as the ‘End User’. Often, software licence agreements are known as ‘End User Licence Agreements’ or ‘EULAs’. For the software industry, there is some merit behind this piece of semantics.
Traditionally, of course, the industry has seen software procurement as a licence, rather than a sale. Software is not sold, its use is simply licensed. While the disk or medium on which the code is recorded (if any) is sold outright, the software itself (meaning the code or instructions which comprise the software) is licensed to the customer. The principal focus is on the copyright in the software, rather than the sale of the medium.
Generally, this is a view which is not shared by software users. While the industry holds to the view that the underlying copyright in software is owned by the software vendor or licensor and usage is only licensed by them, the users’ perspective is different. Software users often believe that they have bought software and therefore own it and are not restricted in what they can and cannot do with that software in the future. This belief was typified in a recent newsgroup posting.1 In this posting, a user complained of a software package which had recently expired, despite the fact that it had been bought outright and there was no mention of a time-limited function.
An analogy is often drawn between two types of copyright works: printed books and software. For a customer purchasing a book, the situation is clear. The book appears to be sold to the customer outright. For software, the user often believes the same to be true. However, it is clear that when a book is purchased, the book and the customer remain subject to the restrictions placed on them under the Copyright, Designs and Patents Act 1988. The user is not free to photocopy the book and sell the copies to his or her work colleagues and the user is not under any illusion that they are entitled to do so. The position is no different for software, except that the customer needs to copy the software in order to be able to use it and the customer’s understanding of what they are and are not entitled to do is more vague. These thoughts are verified by Lord Penrose in the Scottish case of Beta v Adobe.2
This misunderstanding can lead to customer dissatisfaction, future loss of sales and unauthorised usage. The challenge for the software industry is to prevent customer misapprehension on this aspect of licensing before it causes any or all of these effects.
The Software Licence
As we have already canvassed, a licence is a permission to do something which, without that permission, cannot be done lawfully. A software licence is a permission to copy the software or to issue copies of the software to the public by putting them into circulation in the United Kingdom or by importing them – acts which without such permission would be unlawful in terms of the Copyright, Designs and Patents Act 1988.
Trends in Software Licensing
There are three particular trends which can be identified in software licensing practice over the past decade: namely the tempering of use restrictions, clearer positive assent to licence terms and movement away from perpetual licensing.
Tempering Use Restrictions
Ten years ago, it was common to license software to end users for use on specific hardware. This was characterised by software licensing practices which actually named the make and serial number of the computer upon which the software could lawfully be used. This particular practice was tempered in time and user demands required a more flexible approach. The site licence, where usage was restricted to a number of computers at a specific physical location, became more common in practice. Following this development, still greater flexibility was demanded with the increase in network computing. This heralded the introduction of user licences. User licences allowed an end user to make any number of copies of a piece of software, usually divided into client and server modules, provided that only a specific number of individuals used the client software or accessed the server software at any one time.
Format changes
The format of licences has also changed. First, it was common practice in the software industry for shrink-wrap licences to be used when contracting with end users. This was followed in turn by the use of so-called click-wrap licences, and at this time it is clear that, for software downloads carried out via the Internet, web-wrap contracts have become common. This is particularly the case with the increasing popularity of ASP (Application Service Provider) models. However, the basic premise remains the same: that there must be positive assent to the terms of the licence. Much doubt surrounded the enforceability of shrink-wrap licences,3 however the software industry has reacted to this ambiguity by striving for greater degrees of positive assent, to the extent that the user must accept end user licence terms before downloading or installing software.
Moving from the Perpetual Licence
While these types of licences introduced less restrictive licensing practices over time, all shared one thing in common: they were usually perpetual licences. In other words, the end user paid a single lump sum for the use of the software and the licence did not end, unless actively terminated for breach. Fixed term licences were in the minority. There has been a recent shift in the licensing strategies within the software industry. Colin Barker, writing for Vnunet.com, has commented that ‘Oracle has angered users by shifting to “a power unit pricing model” that implies a move to renting its software in the future’.4 Mike Simons corroborates this development, explaining that while Oracle has found it difficult to ‘strike a balance between the demands of its own bottom line and those of its customers’ when changing its database licensing to a model based on processor power, Borland has implemented new licences with increased audit rights.5 Microsoft has been at the forefront of this brave new world.6 Rather than single payment perpetual licences, the proposition is for single payment fixed term licences. Daniel Thomas has contrasted Microsoft’s current practice, whereby large companies purchase software on a per-user basis under three-year enterprise licences and after they have paid the licence fees the software is theirs to keep, with the proposed model where, at the end of the three-year period, these companies would need to either pay again or stop using the software.7 For end users familiar with the former, it promises to be a difficult transition. Colin Barker comments: ‘Where once you would have been happy to buy software, now some of the biggest vendors want to make you rent it’.8 The majority of end users do not view themselves as end users but rather as customers or owners of software. The software industry faces an uphill struggle to make end users accept the fact that they have never been the owners of the software they use. The software industry has never pretended differently. The challenge for the software industry is to manage this transition diplomatically. Microsoft has delayed pushing the new strategy until after it has concluded special deals with the National Health Service, Ministry of Defence, The Royal Bank of Scotland and some local government bodies.9 Microsoft has also highlighted the benefits of adopting the new licences,10 and Colin Barker has supported this view commenting on the advantages of end users being supported rather than pressed into adopting new versions of software every couple of years.11
It is possible that these software licensing trends in practice reflect recent legal developments in this area, first in the 1995 Scottish case of Beta v Adobe12 and more recently in the US case of Softman v Adobe.13
Beta v Adobe
By telephone, Adobe ordered standard packaged Informix software from Beta. The software was delivered to Adobe, and Adobe sought to return the software before it had accepted the shrink-wrap terms accompanying the software and before it had installed or used the software.
Lord Penrose acknowledged ‘the genuine confusion and lack of certainty’14 about the classification of contracts for the provision of software at the time. He determined that the supply of proprietary software for a price was a contract sui generis, rather than two contracts (one sale contract and one licence contract), which would be inadequately understood if expressed wholly in terms of either of these types of contracts alone. Lord Penrose ruled that in this case no contract had been concluded unless and until the licence terms had been accepted by the end user and, accordingly, the software could legitimately be returned by Adobe and payment of the price withheld. The owner of the copyright in the software, the licensor, would be entitled to enforce the licence terms under and in terms of a ius quasitum tertio. At the time, the court’s decision signified a tilt in the balance of power in favour of the end user against the software vendor. The software owner, and the licence terms as between end user and licensor, played a small part in the decision.
It is worthy of note that Lord Penrose also indicated clearly that it would be open for subsequent courts to distinguish the case for different software and different transactions. He stated that: ‘It would be misleading to generalise, and to deal with the arguments as if they extended to all forms of software and all forms of transaction which might be brought to the notice of the court’.
The trend of employing click-wrap and web-wrap licences rather than shrink-wrap terms may not have been solely down to Beta v Adobe or its US counterparts, but the doubts cast on that form of licensing may have been significant in dictating the level of assent that the software industry felt comfortable using after those cases.
Softman v Adobe
In this recent US District Court decision, Softman distributed software online via the Web site buycheapsoftware.com. Adobe distributed collections or sets of Adobe products for retail, but Softman unbundled these collections and sold them individually. Adobe raised an action against Softman for infringement of Adobe’s copyright and violation of its licence terms, in particular for the distribution of unauthorised Adobe software. The decision was directed at whether the preliminary injunction granted against Softman should continue.
Softman argued that it was entitled to distribute the software in this way. There was no reseller contract between Adobe and Softman and the ‘first sale doctrine’ provided that, once the first sale had taken place, the exclusive right to distribute software was exhausted. Adobe argued that, as the owner of the copyright in the software, it was exclusively entitled to distribute and authorise distribution of its software. This is not dissimilar to the exclusive right, under UK law, to issue copies of the software to the public by putting them into circulation in the United Kingdom. Softman had no reseller agreement with Adobe, but Adobe sold its software accompanied by click-wrap licence terms which prohibited individual distribution of the collections by end users.
The court found that, looking at the economic realities of the situation, there was a strong suggestion that the transaction was in fact a sale rather than a licence. Simon Minahan translated this as a declaration that ‘regardless of what a licence agreement may say, a punter buys a copy of software and is thereafter free to sell that copy as they see fit’.15 Some of the factors which pointed towards this conclusion were that an end user received a single copy of the software for a single payment and that the licence runs for an indefinite term. The same was true of the relationship with resellers on the basis that the risk that the software may be damaged or lost was borne by the reseller, not Adobe. It also found that the click-wrap licence terms did not apply to Softman because there was no positive assent to its terms – there was only a notice on the software packaging which stated that ‘this product is offered subject to the license agreement included with the media’ which the court held could not bind Softman in these circumstances. On this basis, the court held that Adobe had not demonstrated a likelihood of success on the merits of its copyright infringement claim and that the injunction should not continue.
In the course of arriving at this decision, the court made a number of observations which reflect recent trends in software licensing and the difficulties faced by the software industry in gaining user acceptance of new licensing strategies.
First, each of these cases highlights the difficulties which a software owner can encounter if it does not regulate its licensing and distribution channels solely through binding contractual undertakings. In Softman, the court reiterated the requirement for assent to licence terms for them to be binding. Softman was not subject to Adobe’s licence terms because it had not assented to be bound by that contract and was not subject to Adobe’s standard reseller agreement.
Second, looking at whether software was sold or licensed, Judge Pregerson looked at the historical background to the licensing of computer programs, emphasising that traditionally the licence was employed to augment trade secret protection and protect against unauthorised copying before it was beyond doubt that copyright protection applied to software. Citing the US case of Step-Saver Data Systems,16 he noted that the need to characterise the transaction as a licence had been rendered largely anachronistic. For the first sale doctrine to apply in Softman, the court had to find that there had been a first sale, as opposed to a licence.
He cited a number of US cases in which the court had ruled that there had been a sale, not a licence, of software. This reflects the perception of end users that they have been sold software outright, rather than simply granted a limited licence to use the same. However, it also acknowledged that no claim was made that the transfer of the copy of the software involved a transfer of ownership of the intellectual property rights in copies of the work. In characterising the transaction as a sale rather than a licence, the US court favoured the end user rather than the licensor and moved some distance from the Scottish proposition that there was a contract sui generis featuring elements of sale and licence.
Conclusion
The software industry must continue to develop new and profitable licensing structures which keep pace with user demand, but in doing so it must not lose sight of the legal niceties which underpin the process. It is critical that licensing models are based on binding and enforceable licensing or distribution contracts. It is also critical that end users recognise their legal status in the supply chain, and recent trends in licensing practice can only serve to reinforce that position. The difficulty for the software industry will be keeping users satisfied with their lot.
The recent trend of software transactions being categorised as sales rather than licences may be another, though not necessarily the only, justification for the software industry’s recent attempts to emphasise that these transactions are licences, either by increased transparency in licensing or by limited duration licensing strategies. This recent trend has culminated in the District Court decision in Softman v Adobe. The case is only a District Court judgment and may be appealed to the Circuit Court (9th Circuit). However, if the reasoning in the Softman case was followed in the United Kingdom, this could present a further difficulty for the software industry. The type of reasoning seen in this case may give users further justification to continue to see themselves as customers, purchasers, or worst of all, software owners.
Jeremy Warner is an Associate at the law firm of Biggart Baillie, Edinburgh & Glasgow. He is to join the University of Strathclyde as a Lecturer in IT Law in May.
Endnotes
1. Posting to First Tuesday Edinmburgh Yahoo Newsgroup dated 28 February 2002.
2. Beta Computers(Europe) Limited v Adobe Systems (Europe) Limited [1996] FSR 367 at 374-375.
3. See Software Licences: A Necessary Evil?, Gabriela Kennedy, Copyright World, June/July 1999, 18.
4. Whose software is it anyway? Colin Barker, Computing, December 7 2001, http://www.vnunet.com/News/1115156.
5. Software Licensing – what’s the problem?, Mike Simons, February 12 2002, http://www.computerweekly.co.uk.
6. Licence Hunting, Simon Minahan, February 12 2002, http://it.mycareer.com.au.
7. Microsoft considers three year licences, Daniel Thomas, May 10 2001, http://www.computerweekly.co.uk.
8. Whose software is it anyway?, Colin Barker, Computing, December 7 2001, http://www.vnunet.com/News/1115156.
9. Software Licensing – what’s the problem?, Mike Simons, February 12 2002, http://www.computerweekly.co.uk.
10. Microsoft has highlighted that there are greater discounts available, the ability to minimise cash flow with lower annual payments, eligibility for upgrades to the latest versions, greater pricing flexibility, lower total cost of ownership, improved workplace productivity and the opportunity to renew the subscription – http://microsoft.com/licensing.
11. Whose software is it anyway?, Colin Barker, Computing, December 7 2001, http://www.vnunet.com/News/1115156.
12. Beta Computers (Europe) Limited v Adobe Systems (Europe) Limited [1996] FSR 367.
13. Softman Products Company, LLC v Adobe Systems Inc. et al, United States District Court, Central District of California, November 1 2001.
14. Beta Computers (Europe) Limited v Adobe Systems (Europe) Limited [1996] FSR 367 at 373.
15. Licence Hunting, Simon Minahan, February 12 2002, http://it.mycareer.com.au.
16. Step-Saver Data Systems Inc v Wyse Technology and the Software Link Inc 939 F2 d 91 (1991).
