What Is a EULA?

Software vendors protect their work through an end-user license agreement, or EULA. The EULA accompanies the software, either in printed or digital form. It’s a legally binding contract that requires the buyer’s agreement before the software can be installed and used.

Table of Contents

1. EULAs and Terms of Service
2. Why a EULA?
3. Creating the EULA
4. File Sharing, Revised, and Third-Party EULAs
5. Buyers' Red Flags
6. New, Improved EULAs
7. Easy-to-Read EULAs
8. Accessibility and Brand
9. EULA FAQs

The EULA created by your company grants a license to use your software. It protects your copyright and ownership of the product. It also sets out restrictions that protect you from liability for the buyer’s misuse of the product.

Accounting programs, tax preparation bundles, online games, and publishing and design applications — nearly any and all forms of software — require users to read through an EULA and click a box to “agree” to its terms. The software will not run if buyers opt to withhold their agreement. They can return the product to the vendor or, in the case of downloaded software, simply stop the installation.

You may see these contracts by several different names, including:

EULAs and Terms of Service

End-user license agreements and terms of service operate hand in hand to create a comprehensive contract between a service provider and service user.

A standard EULA can be easily mistaken for a terms of service (TOS) document, but there’s an important difference. The EULA gives software users permission to download, install, or otherwise access a program or app and establishes guidelines for how they may interact with the software. The TOS, on the other hand, are broad guidelines for using a website, app, software, or program.

EULAs are often incorporated into the TOS. However, you may also choose to use our EULA generator to create a separate EULA and link to it within your terms of service.

Why a EULA?

End-user agreements are valuable to any software developer or licensor. However, an EULA agreement may be particularly useful if:

• Your platform allows different levels of access, such as premium and standard access.
• You participate in an affiliate program.
• Your platform processes payments, allows transactions of any kind, or collects sensitive data.
• You allow users to interact with one another. 
• You want to prevent the commercial use of the software.

A‌fter the sale of a product, software vendors retain ownership. Payment for the software grants only the use of a copy, under certain conditions. The EULA’s function is to describe these conditions. It also sets out the rights and responsibilities of each party to the transaction.

EULAs reduce your chances of legal disputes with users. When federal or state laws govern a particular software function, like a financial transaction, for example, EULAs are critically important. In this case, an EULA should explain how users can collect sensitive data such as bank and credit card account numbers. 

One problem that arises with EULAs is the doctrine of “informed consent“. This is the idea that a party to a contract should fully understand its terms. Understanding a lengthy, dense legal document, such as an EULA, is difficult at best for most software users. This is particularly true when the document is presented online and in small type. Experts in the field of information technology have recently proposed some solutions to this problem. 

Creating the EULA

Software vendors can use our EULA template to create these agreements. Whether you’re using a EULA generator available online or an attorney versed in the details of software licensing agreements, note that an EULA typically consists of several sections, including:

‌In most EULA agreements, subheads clearly describe the function of each section.  At the end of each section, the EULA asks the user to check a box to agree with the terms and continue with the document.

Introduction and License

An EULA begins with an Introduction. This section identifies the vendor, relates the name and function of the software, and defines the parties to the agreement. 

A License section covers the scope of the license granted by the vendor. The license you grant, for example, may be non-transferable, meaning the individual buyer can’t allow it to be copied and used by someone else. It may be non-exclusive, meaning its sale is not limited to any one buyer or business. The license may also restrict the number and kind of devices where the software can be installed. 

Another significant term in this licensing section is “revocable.” An important function of the EULA will be to set the terms by which you can revoke permission to use the software. 

Copyright

W‌ithin a Copyright section, the EULA will explain that legal ownership of the software remains with the vendor. That means the vendor retains the exclusive right to the source code used to create the program or application. The EULA explains that your copyright is protected by law and that any registered trademarks used by the software also remain your legal property. 

Restrictions on Use

‌EULAs commonly include a Restrictions section, which describes the activity you prohibit. This may include copying the software, selling or distributing the software, or using the software for any illegal activity, such as using the software for surveillance, for spreading viruses, or for fraud. The Restrictions section helps protect you from any legal liability for this activity. Limitations of liability are spelled out more specifically in another section of the EULA.  

‌Termination

This section describes how you may terminate the license should the user breach the EULA agreement. There are various ways for such violations to come to the attention of vendors. Use of the software may be monitored, for example, and malicious use detected. In other cases, the vendor receives a complaint from a victim of malicious or illegal use.

The termination may be by written notice to the user. The vendor may grant a limited time for the user to correct the violation or remove the software from a system. Of course, you may not be aware of a user’s breach of EULA terms. But, in such cases, the vendor can limit its own liability for damages.

Limitation of Liability

‌In the Limitation of Liability section, you can specifically limit your liability for any damages caused by improper use of the software. This section will describe more precisely what the full extent of compensation will be. In some cases, it’s simply the price of the software, while in others, it’s a nominal dollar amount. Many vendors require users to submit any disputes to an arbitration process, which spares both parties the expense of litigation.   

Similarly, a “hold harmless” clause denies any liability for damage the software may cause the user’s own system. The hold harmless clause is how you stay clear of responsibility for viruses or spyware that may inadvertently appear on the user’s system, either via the installation or continuous use of the program. 

Warranty

‌A Warranty section will describe the extent of any guarantee you make that the software will work as promised. A software vendor may disclaim all warranties and simply state that the software is sold “as is” and buyer beware. Or there may be a short warranty period of 30 or 90 days in which the software is fully returnable in case of any defects. 

At their conclusion, EULAs contain contact information for the vendor. This includes a phone number, e-mail address, chatbot or fillable form to use should the buyer have any questions on the terms of the EULA agreement.  

File Sharing, Revised, and Third-Party EULAs

File-sharing or peer-to-peer programs present their own challenges to vendors writing EULA agreements. These programs typically need direct access to the user’s internal systems and directories. They may also allow the upload of extraneous files, such as monitoring software or advertising, to the user’s system. 

The EULA for any file-sharing program should explain in detail how the program operates. It should also explain the risks of receiving uninvited guests such as monitoring software, viruses, or “trojan horses” that ride in on innocuous links or apps and seize control of a user’s system.  

Vendors may also create “revised” EULAs. These will pop up with an updated version of the software and set new terms and conditions. Revised EULAs are now common in the age of subscription software, which is rented by the month rather than paid for in a single transaction. Revised EULAs may ask for more direct access to a computer, the monitoring of internet activity, or even the use of a user’s system resources by the software or service vendor. 

Your EULA may also expressly permit the installation of third-party software. As a condition of using the “primary” software, users are barred from disabling or removing the third-party software. Third-party software may mean an additional EULA requiring further study and agreement. It may mean “cascading” EULAs if additional tools, pointers, adware or other software arrive courtesy of the third-party vendor. 

Buyers’ Red Flags

EULAs are meant to protect you as the creator of the software. They allow you to avoid explicit guarantees for the work your software performs.

An extreme example was proposed in PCMag’s definition: 

“EULAs are so inclusive that if the software computed 2+2=5, the disclaimer would likely apply. Whether that would hold up in court is another matter.”

But increasingly conscious of data privacy issues, buyers who read these agreements may be watching for red flags. They may find grounds to reject or return the software in case of a worrisome clause. When this happens, the EULA has failed in its purpose of protecting the vendor. Instead, the EULA has cost the vendor a customer. 

Some EULAs, for example, may permit the collection of data by the software vendor for the purpose of reselling the data, carrying out market research, or for soliciting further business. An EULA may also expressly permit recording of online activity by the buyer — for example, websites visited, products purchased, and queries made through search engines. In some cases, EULAs have allowed the use of the buyer’s own computer resources for purposes of marketing and data collection. 

This would, in turn, allow the software vendor to record names, addresses, Social Security numbers, credit card numbers, bank account numbers and a host of other personal data. If the software is to be installed on a network, the EULA could be allowing the collection of network IDs and passwords. Once the data is transferred, the buyer loses control over its use. 

New, Improved EULAs

‌‌The controversies surrounding informed consent, data privacy and the readability of EULAs have led to proposed changes in the way software vendors write and present EULAs. 

One of these involves the use of a standardized, modular agreement. The agreement would act as a template for software vendors, who would benefit in the same way the food and pharmaceutical industries benefit from standardized labeling, 

The standard agreement would not specifically allow controversial functions such as monitoring, altering of the user’s system, or the installation of adware or third-party software. If there’s an exception, that would be clearly explained. With a series of drop-down boxes, the user would be prompted to allow that particular function(s). The user may also opt out of the function if the software can be used without it. In this way, the user clearly understands which exceptions to the standard agreement he is allowing. 

The idea of a standardized EULA arises from the Creative Commons licensing system. A non-profit organization, Creative Commons allows artists, musicians, photographers and other creatives to license their work through an easy-to-use, easy-to-understand standard online agreement. 

This agreement can be modified to permit certain acts by the end user, such as copying, selling or distributing the work. Typically such use requires giving credit to the originator, while the work itself remains in the public domain. 

For software, the GNU General Public License similarly allows free public use under certain conditions.  The third and latest version of this license was released in 2007. The license appears at the program start-up and explains any restrictions on use, limits of liability, and warranty.  

Easy-to-Read EULAs

T‌he main problem with EULAs has always been their readability. Users eager to get started on a new application or game are seldom interested in plowing through long text blocks of legalese. For this reason, experts in the field have proposed more graphic, visually friendly approaches to simplifying EULAs. 

In 2004, computer scientist Simson Garfinkel proposed the use of icons to represent certain software functions. The icons would easily guide the user through a greatly simplified version of the agreement. ‌For example, a wrench may represent the software’s need to make changes to the user’s operating system. An ear may indicate that the software monitors the user’s internet activity, while a billboard shows that adware may be attached. 

By hovering a tooltip over the icon, the user gets a small popup with a short, simplified explanation of the particular function that reads, for example, “This software may monitor your internet activity.” Clicking on the icon brings the user to the full EULA text and legal language. 

Accessibility and Brand

EULAs began with software sold by IBM in the 1980s. Over the years of ever-expanding tech capabilities, they’ve been subject to many complaints. The main problem has been the grant of too much control over consumer use of software. Observers have pointed out that EULAs create a parallel legal system in which the vendor holds an unfair advantage over the buyer. 

But in several court cases, the legality of EULAs has been upheld. Judges have not been sympathetic to complaints about reading lengthy documents, since that’s what they’ve spent much of their own careers doing. In this view, software buyers should understand that by clicking “I Agree,” they are signing legally binding contracts.

It’s a good business practice to stay aware of this conflict and of the consumer’s take on software vendors and their licensing agreements. Allowing contact by the buyer in case questions over an EULA arise is simply good public relations. The EULA should clearly explain contact that is available before the software is installed. 

In the case of a “shrink-wrap” agreement, which can’t be read until the software is opened, the EULA should be available online. Many software vendors publish these agreements and allow access before their customers open the package and find themselves legally bound by the terms of a document they haven’t yet read.

Vendors should also consider working up a more visually appealing and easily understood EULA agreement. By doing so, they can take a big step toward creating “user-friendly” software and improving their brand.

EULA FAQs