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9th Circuit Allows Copyright Holders’ Rights To Go On… and On… and On…

By J. DeVoy

On September 10, 2010, the Ninth Circuit Court of Appeals ruled that software producers can forbid the transfer or resale of their products in their shrink-wrap or click-wrap licenses.  The court’s opinion in the case, Vernor v. Autodesk, Inc., No. 09-35969 (9th Cir. 2010), is available here.

The decision deals a blow to the first sale doctrine that Eric Cartman would best describe as a “kick in the nuts.”  Under the first sale doctrine, established in Bobbs-Merrill Company v. Straus, 210 U.S. 339 (1908), and codified in 1976 as 17 U.S.C. § 109, a purchaser can transfer a lawfully made copy of the copyrighted work without permission once it has been obtained.  As long as the purchaser makes no unauthorized copies of the work, the copyright holder’s rights in a particular copy of the work end once it has been sold.

Vernor essentially exempts software makers from this rule.  Vernor, a frequent user of eBay, had sold more than 10,000 items using the site, including software.  In April 2007, Vernor purchased four used copies of Autodesk’s AutoCAD software, then in its 14th Release.  When Vernor attempted to sell this software on eBay, Autodesk sent DMCA takedown notices to the auction site.  For the first three notices, Vernor filed counternotices, alerting eBay that the sales were not copyright infringement, and eBay reinstated the auctions.  After Autodesk’s fourth DMCA notice, eBay suspended Vernor’s account due to fears of repeat infringement.  eBay feared that if it did not terminate Vernor’s account for repeat infringement, it would vitiate eBay’s safe harbor protections for copyright infringement under 17 U.S.C. § 512(c).

At the heart of the debate lies the distinction between a purchaser and a licensee.  While the firs purchase doctrine protects purchasers, it doesn’t offer its protections to licensees.  The trial court found Vernor’s actions to be protected under the first sale doctrine, as it evaluated Autodesk’s license agreement and Vernor’s actions under United States v. Wise, 550 F.2d 1180 (9th Cir. 1977).  Under Wise, the court determines whether a software user has a license or ownership based upon “1) whether the agreement was labeled a license, and 2) whether the copyright owner retained title to the copy, required its return or destruction, forbade its duplication, or required the transferee to maintain possession of the copy for the agreement’s duration.” Id. at 1190-92.  In light of this precedent, which predated other relevant cases, the trial court found that based on the facts and other circumstances surrounding Vernor’s acquisition of the software, he was a purchaser and, thus, protected by the first purchase doctrine.

That ruling, however, was predicated on the trial court’s perception that Wise was incompatible with the MAI trio of cases decided over a decade after Wise.  See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995); Wall Data, Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006).  Those cases dealt with software owners making copies of software as an essential step in the use of software — a development intended to prevent owners from being liable for infringement every time their software was used and a full copy was loaded into their random access memory, or RAM. See 17 U.S.C. § 117(a)(1).  The conclusion of these cases is that only outright owners of software are entitled to use the essential step defense, but that licensees are not, as the creation of a full copy of the software violates the copyright holder’s right of reproduction.  In these cases, the distinction between owners and licensees was determined by the restrictiveness of the software’s license agreement; the more restrictive the agreement, the more likely the court was to find it a license and not a sale.

Reversing the trial court and synthesizing the circuit’s precedents, the Ninth Circuit held 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.  The court found that Autodesk’s end user license agreement satisfied all of these conditions, as does presumably most professional grade software — the Software & Information Industry Association, with members including McAfee, Adobe, Oracle and Google, urged the court to rule as it did.

Consequently, Vernor did not own the software, and could not transfer it freely to his customers.  In turn, those customers could not become owners of the software by buying it from Vernor.  Instead, they would be infringers on Autodesk’s right of reproduction because they lacked the company’s license to install and use its software.

The decision then goes on to consider the economic realities of its decision.  It is true that allowing licenses that restrict transfers of the work theoretically eliminate deadweight loss, and allow the producer to slice the market into various price points it can target with ease.  As Guy A. Rub notes in his article Contracting Around Copyright, though, this his not necessarily a good thing: The ability to provide limited access on the low end of the market provides an incentive – and justification – for making people who require unlimited access to overpay for it.  This is avoidable with the first sale doctrine because everyone pays the same price for a product, and transferability is affected only by what puts into the product.  Therefore, different products must be put onto the market at different price points in order to engage in price discrimination so long as the first purchase doctrine applies; if it can be avoided, as the Ninth Circuit indicates it can be in this most recent decision, there is less incentive for creation.  Under this regime, producers are rewarded for slowly creating a large, bloated product for which they can overcharge consumers who need all of the product’s features, all while offering neutered versions to price sensitive consumers who require less functionality.

This is a great proposition if you’re a producer and have a dominant product like the Adobe Creative Suite, but comes at the expense of a secondary market and competition from businesses that may offer a lower-cost product targeted at a market segment with needs less intense than those at the top of the market.  As previously noted on this blog, this is a damaging proposition for consumers, whose software purchases will always have an invisible tether back to the original copyright holder and never truly be theirs for purposes of ownership and resale.

The opinion notes that it is superficially at odds with other Circuits’ handling of this issue, but the competing decisions seem to be distinguishable.  On one hand, the Ninth Circuit is the Supreme Court’s problem child and most oft-overturned court, but generally for reasons other than copyright law.  As home to much of the country’s entertainment and technology businesses, the Ninth Circuit, and more specifically California’s courts, have the most to say about these issues and frequently have the opportunity to speak first.

How the first sale doctrine’s tension with expanded copyright licensing and licensor rights will be resolved is yet to be seen.  The interests of consumers and producers are at odds, as they usually are, but the consequences of this dispute are much more significant than most people would imagine.  In the mind of the consumer, buying software means it’s theirs, to do whatever lawful activity they desired with it, which until now included selling it.  To the benefit of producers, that seems to be changing, and may not be limited to software for very long.

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