Restrictions in Software License Agreements

Short answer: the software license restrictions in your agreement, no reverse engineering, no third-party use, and the custom limits you add, are usually enforceable. Two software companies learned that the hard way in court, against Blizzard Entertainment and IBM. So if you need a unique restriction to protect your product, put it in the agreement and draft it clearly.

Here is a software licensing attorney‘s view on license restrictions, which are simply the things a customer is not allowed to do with your software.

The Common Software License Restrictions.

Almost every software license carries two standard restrictions: (1) do not reverse engineer or decompile the software, and (2) do not let a third party use the software. Those two do a lot of work, and the reverse engineering one in particular has to be in the contract because copyright does not provide it by default. In fact, Section 117 of the Copyright Act affirmatively permits certain copies and adaptations by the owner of a copy, which is exactly why vendors license software rather than sell copies, and why the contract has to carry the restrictions copyright law does not. But you are not limited to the standard set. You can add unique restrictions tailored to your product, and two cases show courts will usually enforce them. Even unusual, product-specific license restrictions are generally enforceable.

Case #1: Blizzard v. MDY.

Blizzard Entertainment (maker of World of Warcraft) had a unique restriction in its license. MDY Industries built a “bot” called Glider that let users advance in the game without actually playing. The Ninth Circuit’s decision in MDY Industries, LLC v. Blizzard Entertainment, Inc. upheld liability against MDY, including under the Digital Millennium Copyright Act for trafficking in circumvention technology. MDY had pulled in around $3.5 million selling the bot. Courts do not look kindly on a business built on breaking someone else’s license.

Case #2: NEON v. IBM.

NEON Enterprise Software made a product that let IBM mainframe customers move workloads around more freely than IBM’s license allowed. IBM pointed to a restriction in its license. The court agreed with IBM, and NEON ended up under a permanent injunction, withdrawing its software and handing IBM the source code. Two companies, two custom restrictions, two wins for the licensor.

Are License Restrictions Always Enforceable?

No, not always. Some sit on shakier ground. A classic example is a clause barring the customer from publishing benchmark test results, which may or may not hold up depending on the jurisdiction and the facts. The lesson is not “restrictions never fail,” it is that well-drafted restrictions tied to a legitimate business reason usually hold, while a few categories are genuinely contested, so draft those with eyes open. Getting that line right is part of the broader question of which contract form you are even using (see SaaS Agreement vs. Software EULA: Which Template Do You Need?).

Software License Restriction FAQs.

Do SaaS agreements need license restrictions too? Yes, in the form of use restrictions. A SaaS customer does not get a copy of the software, but you still restrict reverse engineering of the service, scraping, sublicensing access, and competitive benchmarking. Same concept, different delivery model.

What happens if a restriction is violated? Usually breach of contract, and sometimes copyright infringement on top, if the use exceeds the license scope. That dual track (contract claim plus copyright claim) is a big part of the vendor’s leverage.

Should you copy restrictions from a big vendor’s license? No. Restrictions should map to your product and your business model. A restriction with no business purpose behind it is the one a court will squint at.

The Takeaway.

If you license software and you need a unique restriction to protect it, add it. Do not assume you are stuck with the boilerplate two. Just make sure each restriction has a real business purpose behind it and is drafted clearly, because that is what makes it stick. I hope this helps.

Resources:

• Reverse Engineering Software
• What Is a Software License, and How Is It Measured?
• SaaS Agreement vs. Software EULA

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.