Software Vendor Trumps First Sale Doctrine via License–Vernor v. Autodesk

[Post by Venkat, with some comments from Eric below]

Vernor v. Autodesk, Inc., Case No. 09-35969 (9th Cir. Sept. 10, 2010) [pdf].

The Ninth Circuit last week issued an opinion in one of the two cases addressing whether a transaction involving copyrighted material is treated as a sale or license. Here’s a previous blog post on the district court’s opinion: “Vernor v. Autodesk–Does the Right to Possession Distinguish Between Sales and Licenses?“. The other case, UMG v. Augusto, involves resales of “promo CDs,” and the court has yet to issue an opinion in that case. A third topically related case, MDY v. Blizzard, is also pending at the Ninth Circuit.

Vernor tried to resell (on eBay) copies of Autodesk software that he purchased at a garage sale from Cardwell/Thomas & Associates, an architectural firm. Autodesk issued numerous takedown notices for Vernor’s auctions to eBay, which ultimately terminated Vernor’s account. Vernor brought a lawsuit seeking declaratory relief that he was entitled to sell the copies of the software on eBay since the initial transaction between Autodesk and Caldwell/Thomas was a sale and not a license. A ruling in Vernor’s favor would have two consequences. First, he could freely sell the copies of the software he obtained. Since he hadn’t agreed to the contractual restrictions on at least some of the copies, Autodesk’s sole avenue to relief would be a breach of contract action against Caldwell/Thomas. Second, his customers could assert the “essential step” defense against Autodesk’s claim of unauthorized copying when they ran the software they bought from Vernor on eBay.

The district court found determinative the fact that the Autodesk agreement allowed Cardwell/Thomas to retain the copies in perpetuity. Cardwell/Thomas could choose to upgrade, in which event it would have to certify that it destroyed the old versions, but if it chose not to upgrade, it could retain the copies indefinitely. In the district court’s view of Ninth Circuit case law, Cardwell/Thomas’s perpetual right of possession if it chose not to upgrade was determinative. (As Professor Goldman notes in comments below, the fact that Cardwell/Thomas chose to upgrade and sell its copies of the older version of the software tilts the equities in Autodesk’s favor, away from Vernor.)

The Ninth Circuit reversed, focusing on the restrictions imposed by Autodesk. The court held that (1) the label attached by Autodesk, along with (2) the “significant” transfer and “notable” use restrictions, meant that the transaction was a license and not a sale. Vernor argued successfully at the trial court level that regardless of whatever restrictions the Autodesk license agreement imposed in theory, in practice, Autodesk did not enforce these restrictions. Vernor argued that the mere formality of having in place restrictions which Autodesk never enforced should not determine the classification of the transaction. The Ninth Circuit rejected these arguments. The Ninth Circuit also discussed the “essential step” defense, which would have been available to those who purchased the software from Vernor, had Caldwell/Thomas been a purchaser. Interestingly, as the court notes, the essential step defense is not available to licensees.

This was a closely watched case, and the Ninth Circuit acknowledged participation of amici (including the American Library Association, eBay, and the Software & Information Industry Association) and addressed their arguments.

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I don’t have much to add on the policy debate surrounding this – somewhat predictably, the reactions of people tended to fall towards extremes. My view is that anything less than a very limited ruling in Vernor’s favor would have constituted a significant incursion into the contractual relationship.

One point which people picked up on is that the increase of software or content being made available in intangible form (without physical media, such as a CD) changes things. As more copyrighted material is made available in non-tangible (digital) form, I wonder if resale will become much less prevalent. Most times you have to jump through a few technical hoops (and maybe fight a few DRM battles) to be able to sell or lease your non-tangible (digital) copy of the copyrighted material, and I would guess the average person is much less likely to do this. You have a physical copy of the book and in order to sell or lend it you don’t have to do much. With digital media, on the other hand, this does not seem to be the case. Practically speaking, I wonder how much being able to take advantage of the first sale doctrine even matters when it comes to books, music, and software in digital form.

Vernor involved software, and the first sale doctrine is a limitation on the copyright owner’s exclusive right of distribution. The line between display and distribution is blurred on the internet, and if the purchaser who acquires a copy of a digital book cannot be prevented from freely displaying it, the purchaser can essentially distribute the book. For example, if I buy a copy of a digital book and make it available on a website where people can freely browse and read the book, most would agree that copyright rules should allow the copyright owner to prevent this. Also, a transfer of a digital copy that is in intangible form involves reproduction of the copyrighted material, unless the device itself is transferred. A 2001 report issued by the Copyright Office which looked at, among other things, first sale in the digital context (“Digital Millennium Copyright Act, Executive Summary“) makes this point:

While disposition of a work downloaded to a floppy disk would only implicate the distribution right, the transmission of a work from one person to another over the Internet results in a reproduction on the recipient’s computer, even if the sender subsequently deletes the original copy of the work. This activity therefore entails an exercise of an exclusive right that is not covered by section 109.

The report also highlights an important difference between first sale in the context of tangible and non-tangible media:

Physical copies degrade with time and use; digital information does not. Works in digital format can be reproduced flawlessly, and disseminated to nearly any point on the globe instantly and at negligible cost.

It’s interesting that one criticism of the Ninth Circuit’s decision is that it paves the way for other industries to start imposing restrictions on the resales of copyrighted material. See, for example, this interview with Greg Beck, counsel for Vernor: “How Booksellers Could Be Affected by Vernor Copyright Ruling.” According to this argument, if software publishers are allowed to control the terms of redistribution via a license agreement, is the scary scenario of booksellers licensing copies of books next? But isn’t this already the case? Companies such as Amazon certainly act as if they license the content to you. (Amazon generated some bad press when it zapped Kindle content, as mentioned in this article in The Consumerist: “Amazon Clarifies When It Will Remove Kindle Books“.) This is also the position Amazon takes in its Kindle content terms, although interestingly, the Kindle terms allow for the perpetual right of possession (which in Judge Jones’s view could have meant that Kindle content is owned, rather than licensed):

Use of Digital Content. Upon your payment of the applicable fees set by Amazon, Amazon grants you the non-exclusive right to keep a permanent copy of the applicable Digital Content and to view, use, and display such Digital Content an unlimited number of times, solely on the Device or as authorized by Amazon as part of the Service and solely for your personal, non-commercial use. Digital Content will be deemed licensed to you by Amazon under this Agreement unless otherwise expressly provided by Amazon. Restrictions. Unless specifically indicated otherwise, you may not sell, rent, lease, distribute, broadcast, sublicense or otherwise assign any rights to the Digital Content or any portion of it to any third party, and you may not remove any proprietary notices or labels on the Digital Content. In addition, you may not, and you will not encourage, assist or authorize any other person to, bypass, modify, defeat or circumvent security features that protect the Digital Content.

Greg Beck indicated that Vernor will seek to have the case re-heard. We’ll see what happens there. In the meantime, we’ll see if the court’s decision in Augusto adds anything to the mix.

Additional coverage:

Evan Brown: “Vernor v. Autodesk: does it matter in an age of cloud computing?”

Public Citizen (who litigated the case on behalf of Vernor): “Ninth Circuit says consumers may not own their software”

ars technica: “No, you don’t own it: Court upholds EULAs, threatens digital resale”

Law prof. Randy Picker: “Vernor v. Autodesk: Copyright, Software Upgrades and Secondary Markets”

Wired: “Guess What, You Don’t Own That Software You Bought”

EFF: “Magic Words” Trump User Rights: Ninth Circuit Ruling in Vernor v. Autodesk

Timely and relevant event at Santa Clara Law on this topic (Nov. 5, 2010): “Exhaustion and First Sale in IP”

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Eric’s comments: This case makes my head hurt. It involves a complicated set of legal and business issues that don’t lend themselves to quick sound bites or easy answers.

We don’t get a definitive answer here. Given the pending Augusto and MDY opinions, we don’t really know the full state of 9th Circuit law yet. In this regard, I’m reminded of the troika of Perfect 10 cases from 2007; there was no way to understand the state of Ninth Circuit secondary copyright infringement law until we got all three opinions. (Unfortunately, I would add, I don’t understand the Ninth Circuit jurisprudence even after we got over 100 pages of “explanations” in the three opinions). With two other related cases in process, it’s too early to conclude where the Ninth Circuit will end up.

As it turns out, there was also a fourth relevant case, the F.B.T. Productions v. Aftermath Records case from Sept. 3. In that case, the court said:

where a copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee’s exploitation of the material, the transaction is a license

Compare this to the standard in the Vernor case:

First, we consider whether the copyright owner specifies that a user is granted a license. Second, we consider whether the copyright owner significantly restricts the user’s ability to transfer the software. Finally, we consider whether the copyright owner imposes notable use restrictions.

Interesting parallels–basically the tests are the same except in the Vernor case, the licensor restricted software transfer, while in the FBT case, the licensor required periodic payments. Even more interestingly, Vernor doesn’t cite to FBT, and the cases did not have any panel members in common. So apparently independently, two panels of Ninth Circuit judges (a total of 6 judges) both used broad definitions of licenses and narrow definitions of sales. This seems to bode poorly for other First Sale cases.

In considering the equities of the Vernor case, one fact stood out to me above the others: the architecture firm sold the supplanted software version after buying an upgrade at a discounted price. If Autodesk loses this case, then presumably it won’t offer discounted upgrades in the future because each upgrade buyer can unleash the prior version into the secondary market. I would feel totally differently if the architecture firm had simply decided to stop using the software and wanted to liquidate the asset. Instead, the architecture firm got a windfall that Autodesk had clearly tried to prevent, which makes it harder to be sympathetic to Vernor as the downstream buyer. Unfortunately, the panel drafted a rule to preclude the architecture firm’s windfall but failed to distinguish the more legitimate asset liquidation situation. In contrast, the equities in the Augusto case point much more favorably towards a First Sale defense, so perhaps that case will effectively limit this ruling to the resale-after-upgrade situation.

As Venkat kindly noted, the High Tech Law Institute is holding a conference on the First Sale doctrine on November 5. Our timing couldn’t be better, as we have a lot to talk about. I hope you’ll join us there.