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Computer Program License Not a First Sale Under the Copyright Act

The Ninth Circuit Court of Appeals in Vernor v. Autodesk Inc., Case No. No. 09-35969 (9th Cir. Sept. 10, 2010)(available here) held that when purchaser Vernor (a reseller of used software) obtained copies of AutoDesk’s AutoCAD program from earlier purchaser-licensees of copyright owner Autodesk, Vernor was not permitted to resell the AutoCAD on eBay.  Vernor purchased several used copies of AutoCAD software from one of Autodesk’s direct customers, and resold the software copies on eBay. Vernor brought a declaratory judgment action in the U.S. District Court against Autodesk to establish that these resales did not infringe Autodesk’s copyright. The District Court had earlier held that Vernor’s sales were lawful in light of two of the Copyright Act’s affirmative defenses that apply to owners of copies of copyrighted works, the first sale doctrine and the essential step defense.  See generally the Copyright Act, 17 U.S.C. sec. 101 et seq.  The 9th Circuit disagreed and reversed and remanded the case to the District Court.

“We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.”  Also, the Court stated: “Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is nontransferable, the software could not be transferred or leased without Autodesk’s written consent, and the software could not be transferred outside the Western Hemisphere. The SLA [Service Level Agreement] also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee’s unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to [AutoCAD] Release 14 copies and imposed significant transfer and use restrictions, we conclude that its customers are licensees of their copies of Release 14 rather than owners.”  See Vernor.

As a result, “Autodesk distributes [AutoCAD] Release 14 pursuant to a limited license agreement in which it reserves title to the software copies and imposes significant use and transfer restrictions on its customers. We determine that Autodesk’s direct customers are licensees of their copies of the software rather than owners.”  See Vernor.

The federal Copyright Act protects an author’s “original works of authorship,” including software programs. 17 U.S.C. §§ 101-103. The Copyright Act confers several exclusive rights on copyright owners, including the exclusive rights to reproduce their works and to distribute their works by sale or rental. Id. § 106(1), (3). The exclusive distribution right is limited by the first sale doctrine, an affirmative defense to copyright infringement that allows owners of copies of copyrighted works to resell those copies. The exclusive reproduction right is limited within the software context by the essential step defense, another affirmative defense to copyright infringement. Both of these affirmative defenses are unavailable to those who are only licensed to use their copies of copyrighted works.

The First Sale Doctrine
The Supreme Court articulated the first sale doctrine in 1908, holding that a copyright owner’s exclusive distribution right is exhausted after the owner’s first sale of a particular copy of the copyrighted work. See Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350-51 (1908).  The Vernor Court stated: “To determine whether a first sale occurred, we considered multiple factors pertaining to each film distribution agreement. Specifically, we considered whether the agreement (a) was labeled a license, (b) provided that the copyright owner retained title to the prints, (c) required the return or destruction of the prints, (d) forbade duplication of prints, or (e) required the transferee to maintain possession of the prints for the agreement’s duration.” See Vernor, citing  United States v. Wise, 550 F.2d 1180, 1190-92 (9th Cir. 1977)(a criminal copyright infringement case).

The Essential Step Defense
With respect to software, the enforcement of copyright owners’ exclusive right to reproduce their work under the Copyright Act, 17 U.S.C. § 106(1), has posed special challenges. “In order to use a software program, a user’s computer will automatically copy the software into the computer’s random access memory (‘RAM’), which is a form of computer data storage. See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 513 (9th Cir. 1993). Congress enacted the essential step defense to codify that a software user who is the ‘owner of a copy’ of a copyrighted software program does not infringe by making a copy of the computer program, if the new copy is ‘created as an essential step in the utilization of the computer program in conjunction with a machine and . . . is used in no other manner.’” See Vernor, quoting 17 U.S.C. § 117(a)(1).

Background Facts
In May 2005, Vernor purchased an authentic used copy of AutoCAD Release 14 at a garage sale from an unspecified seller. He never agreed to the SLA’s terms, apparently never opened a sealed software packet, or installed the Release 14 software on any computer. Though he was aware of the SLA’s existence, he believed that he was not bound by its terms. He posted the software copy for sale on eBay as an auction item.

Autodesk filed a Digital Millennium Copyright Act (“DMCA”) take-down notice with eBay claiming that Vernor’s sale infringed its copyright 17 U.S.C. § 512(c)(1)(C). Vernor filed a DMCA counter-notice with eBay contesting the validity of Autodesk’s copyright claim.  The DMCA provides that a user whose material has been removed or disabled may provide a “counter-notification” to the service provider (herein eBay), including a sworn statement that the user has a good-faith belief that the material was mistakenly removed or disabled. 17 U.S.C. § 512(g)(3)(C). Autodesk did not respond to the counter-notice. eBay then reinstated the auction.  Vernor then filed his declaratory judgment action in the U.S. District Court.  Although Vernor won in the District Court, the 9th Circuit reversed the lower court, found against Vernor on the “first sale” affirmative defense and the “essential step” affirmative defense, and remanded the case back to the lower court for a ruling on Vernor’s copyright misuse defense.

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