Are EULAs inefficient?

Tim Lee says so:

It should be remembered that every contract signed is a prelude to possible state coercion if the contract is broken. Like all other kinds of coercion, the possibility of contract-related litigation creates uncertainty and other deadweight costs. In addition, the act of offering contracts imposes a deadweight cost. Every time I’m presented with a contract, I have to at least skim through it to make sure that the terms are acceptable. A society in which contract formation is extremely cheap for one party will be a society in which other people have to spend a lot of time scrutinizing the contracts they offer. Finally, contracts impose costs on the court system. A legal system that makes contracts to cheap to create will lead to too much taxpayer money being wasted on contract litigation.

In contrast, if things are structured so that each party bears roughly half the costs of contract negotiation, then each party is only going to propose a formal, written contract if he believes that the benefits of doing so will outweigh the costs to both parties. This is one of the good things about paper contract negotiations between flesh-and-blood people: If you give me a long contract to sign, you’re going to have to stand there and wait while I read the contract and decide if I want to sign it. Since standing around is a waste of your time, you’re only going to do that if you believe the transaction can’t happen without it. And you’re going to try to make the contract as short as possible so you don’t have to stand around too long.

I’m not so sure about this. EULA’s impose a cost on customers, but they’re willing to pay those costs so I’m not sure why these would be dead weight losses. I agree that if I read every contract offered me, that would entail high costs, but I don’t read every contract offered me. There’s a risk that if I don’t read the contract I’ll be signing away my life, but clearly if I buy the software I’m willing to bare this risk.

I agree legal costs are dead weight losses but its an empirical question as to how much cost EULA’s impose on our court system. I’m guessing not very many of these contracts are contested in courts so the cost is really low.

Standards of fairness may argue against EULA’s (e.g. both contracting parties should bare equal contracting related costs), but the efficiency based argument against them doesn’t work for me.

As a complete aside: what’s so bad about leasing software vs buying it? This is the same question I have for folks that go nuts over copy-protection in games. So what if those schemes result in psuedo-ownership of games? If the game isn’t fun enough to lease, then don’t lease it.

10 thoughts on “Are EULAs inefficient?”

  1. I don’t have a problem with leasing software as long as the rights are clearly spelled out, I have a chance to review them before purchase, the terms of the lease can’t be arbitrarily altered by the leaser at any time, and my usage license can’t be arbitrarily revoked at any time. The last point is becoming increasingly relevant.

    Despite what the contracts say (and EULAs have been around for a while), there is a reasonable expectation among buyers that buying a copy of software is just like buying a hammer or a pair of shoes. One doesn’t expect their new hammer to disintegrate if Craftsman goes out of business, or if they store it in a Sears toolbox, or if they use it on illegally imported nails, or if Craftsman decides to deprecate that model of hammer. None of these examples are implausible with software, but none are expected either.

    It’s not limited to software anymore, come to think of it.

    Historically, I think most EULA terms have been used defensively rather that offensively. It’s a little alarming to see producers write in more favorable rights for themselves without being called on it by consumers. How is this not – what’s the term economists use – “rent seeking?” Classically, I think customers have tolerated EULAs because the terms were very rarely activated. Given the costs of taking something like that to court, most customers find it much cheaper to go extra-legal and deal with the very tiny risk of getting caught.

    At some level of abuse, I think market mechanisms will kick in and adjust to a new equilibrium – marketers will pick up on complaints and things like openness, moddability, and portability will become selling points. It’s not going to take too many cases of “hahaha fuck you, we have all of your data locked into our format, now pay up” before this happens.

    One other thing about your last point: so what if these schemes result in pseudo-ownership of your company’s inventory control software? If the new terms of your lease aren’t agreeable to you, then simply convert your company’s IT infrastructure to use a competitor’s product. Why, when I was a young’un, we had to do double entry bookkeeping in the snow. Uphill. In both columns.

  2. “How is this not … rent seeking?”

    Well, because if the costs are too onerous, customers won’t buy. If you don’t like EULAs then don’t buy the product. If enough customers do this companies will notice it in their sales figures.

  3. Generally, yes. I think the more likely scenario is that customers will grow wary of brands associated with abusive EULAs, but it’s the same end effect. Hopefully.

    I still think there’s legitimate worry about the legal protection potentially given to license holders, and the legal precedent it would set if an auto-agree contract were upheld and enforced. The system in place is kind of an ad-hoc “just sign here and you can use our product, don’t worry about the fine print” setup. It’s functioned so far, but it’s only a matter of time before companies start to really flex the powers that these contracts give them.

    Imagine a clause in a EULA where the licensor owns the copyright on any information created in a piece of software. We’re not too far from that right now. What happens when Canon decides to revoke your family photos and bill you to view them? It’s a little late to switch to Kodak at that point.

  4. Well, the good news is there’s competitors that don’t force EULAs on people. The scary scenario you paint won’t occur as long as this is true.

  5. “Well, the good news is there’s competitors that don’t force EULAs on people.”

    With software or hardware, who? I think you’re confusing End User License Agreements (EULAs) with Digital Rights Management (DRM). I don’t think I’ve seen an application in the wild, beyond small homegrown executables, that didn’t have some kind of EULA.

  6. Short answer: you agreed to many EULAs.

    You’re bound by the GPL and probably a few other licenses if you’re running a Linux distro.
    You’re bound by the GPL and probably a few other licenses with the WordPress instance hosting The Ambrosini Critique. Same for the PHP, MySQL, and Apache instances hosting it.
    I assure you, you’re bound by some kind of EULA with your Gmail account.

    You opened a web page in a browser. Probably Firefox. Y hallo thar. Chrome, Opera, and Safari have you agree to something when you install them, and I don’t feel like digging through Microsoft’s site for the IE license terms. Pretty much any data your browser has received is covered under some kind of copyright law, but that’s a different animal.

    Some installation/registration processes have you click through a “Yes I agree to…” dialog, as in a Gmail registration. In some processes, like opening a box, explicit consent is implied. For the most part, the cost to you is negligible, so you don’t notice it. A lot of the terms in EULAs say things like “This software is provided as-is, you can’t sue us if it crashes. You agree not to use this software in mission-critical applications like autopilots, reactor control systems, or life support equipment. You agree not to reverse engineer our software and resell it.”

  7. I wasn’t careful enough. I meant how many of those license agreements are onerous and don’t allow me to refuse them before using the product? When people refer to EULAs, I thought they were referring to the practice of having customers agree to the license by opening the box.

    In any case, I’ve kinda lost the thread of thought here. Its not obvious how agreeing to terms on free software is onerous or inefficient.

  8. Ah – that’s the “shrink wrap” part, not the EULA part. The “By opening the box and reading this contract, contained within in the box, you agree to all of the terms of this contract” contract. It’s onerous because often, if you don’t agree to the terms of the agreement, it’s difficult or impossible to return the product for a refund.

    Realistically, I’m not even a fan of the 30-page jumbled legalese that gets flashed in a user’s face before they’re allowed to use something that they’ve bought. The “You should have read and attained perfect understanding of the contract you clicked ‘I agree’ on” argument doesn’t hold water when you need to be a contract lawyer to understand what you’re getting into. The courts seem to feel the same way, and generally hold that clicking “I agree to the terms stated above” isn’t the same as putting your signature to a document.

    It hasn’t been onerous or inefficient up to this point because the system is working on a “wink and nod” model. The sellers have agreed not to put anything nasty in the big black box as long as buyers agree not to look inside the box.

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