As we all know, it is standard practice in the software industry to “license” software. Any software we buy, whether downloaded or physically obtained on a packaged CD, is tied to some sort of “license agreement” chock full of arcane legalese, fulsome disclaimers and severe restrictions on the use, reproduction and transfer of the software. But did you know you can license the use of software while owning the copy of the software? A metaphysical distinction, perhaps … but one with significant legal consequences, as shown in Vernor v. Autodesk, Inc., No. C07-1189RAJ (Sept. 30, 2009), a recent opinion from the U.S. District Court for the Western District of Washington.
The Copyright Act, 17 U.S.C. Section 109(a), codifies the first-sale doctrine. What this means is that if you own a particular copy of copyrighted material, you have the right to sell or otherwise dispose of that copy, and the buyer then becomes the owner of the copy. Since copyright owners normally have the exclusive right to distribute their works, the first-sale doctrine is what allows the sale of used books, to give just one example. (The buyer of a new book has the right to resell it; otherwise, selling a used book would be copyright infringement, specifically a violation of the author or publisher’s distribution monopoly!).
Another provision of the Copyright Act, 17 U.S.C. Section 117(a)(1), permits the owner of a copy of a computer program to make a copy of the computer program if doing so is an essential step in the utilization of the program. This carve-out from a copyright owner’s exclusive right to reproduce copyrighted material is necessary because when a computer program is run by a machine, it is wholly or partially copied into memory.
In the Vernor case, Autodesk accused Vernor of direct copyright infringement for selling on eBay copies of Autodesk’s “AutoCAD” software (on CDs contained in “jewel cases” which were themselves enclosed in packaging) that he had bought from an architectural firm. He was also accused of contributory copyright infringement for essentially aiding and abetting what was alleged to be unlawful reproduction of the software by his buyer (for if owership of the copies of the AutoCAD software was not transferred to Vernor, then Vernor could not transfer it to his buyer, in which case the buyer could not legally run the software under 17 U.S.C. Section 117(a)(1), which applies only to an “owner” of a copy of a computer program). Still following this?
Vernor sued for a declaratory judgment that his activities were non-infringing, which depended on the court’s finding that the architectural firm had had the right to resell the copies to Vernor under the first-sale doctrine. But for the first-sale doctrine to apply, the transaction between Autodesk and the architectural firm had to involve the transfer of ownership in the software copies (i.e., there had to be a first “sale”), as opposed to a mere license to use the copies. Naturally, the applicable license agreement used license, not ownership, terminology, contained severe restrictions on use and transfer of the software, and stated that title to the software and the copies remained with Autodesk. Autodesk moved for summary judgment dismissing Vernor’s complaint; however, the court denied the motion on the basis of the first-sale doctrine in a decision reported at 555 F.Supp.2d (2008).
Autodesk then moved for summary judgment again after some discovery had been taken. The second time around, the court also denied Autodesk’s motion, finding that the facts had not materially changed, and granted judgment for Vernor, holding as a matter of law that the transfer of the software copies to the architectural firm was a transfer of ownership in the copies, not a mere license. Consequently, the first-sale doctrine applied, Vernor could legally resell the software copies, and his buyers could legally run the programs.
At the heart of the case was the court’s interpretation and characterization of Autodesk’s software license agreement, and its reasoning highlights some critical drafting issues. No one claimed that Autodesk ever transferred ownership of the software itself (i.e., the intellectual property). What was at issue was the rights in the copies. The license agreement stated explicitly that the copies were licensed (and Autodesk retained title to the copies), yet the court overlooked this, noting that how the contract labels a transaction is just one of many factors to be considered in characterizing the whole transaction.
Ultimately, the court was swayed by certain other facts: that the license agreement did not include any right for Autodesk ever to regain possession of the software copies, that there was no unconditional right for Autodesk to force the architectural firm to destroy the copies, and that the fees for the copies were assessed as a single up-front payment rather than being spread out over time. Tying all of this together, the license agreement basically allowed the architectural firm permanent and perpetual possession of the software copies (subject to the restrictions in the agreement) in exchange for a one-time payment at the time of the transaction. To the court, this resembled a sale more than a license:
“In this court’s view, retaining title in a copy is meaningless unless the copyright holder has some means to regain possession of the copy. [United States v. Wise, 550 F.2d 1180 (1977), the Ninth Circuit U.S. Court of Appeals precedent relied upon by the court (involving sales of motion picture reels)] requires the court to look at a transaction holistically, and the court finds no basis for the conclusion that an agreement to permit perpetual possession of property can be construed as reserving ownership.”
There is a clear drafting lesson here for software licensors who want to retain the legal ability to control the transfer of copies of their software: Make sure the license agreement, in addition to reserving ownership or title in the copies, does not allow perpetual possession of the copies, but limits possession to a definite license term, after which the licensee is unconditionally obligated to return or destroy the copies. Making license fees recurring, rather than one-time, also helps.
To be sure, the Vernor case is likely to be appealed to the Ninth Circuit, which may very well reverse or modify the district court’s analysis. The Wise case invoked by the court as controlling precedent was decided in 1977, a time when disco was king and business software was still in its infancy. Later Ninth Circuit cases, such as MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993) and Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 669 (9th Cir. 2006), which examined the applicability of the first-sale doctrine to the transfer of software copies, gave far more deference to the characterization of the original transfer in the license agreement. The Vernor court found these decisions to be in irreconcilable conflict with Wise, and, therefore, using the rules of decision in the Ninth Circuit, ignored the later decisions (which it freely admitted would have required a judgment against Vernor, the software reseller) in favor of Wise.
The Ninth Circuit may soon, therefore, have a chance to clarify the legal metaphysics of what exactly distinguishes a sale from a license in a copy of software for purposes of the copyright law. For the time being, however, whether you’re a licensor or a licensee of software, it might be a good idea to take another look at that license agreement. If you need some help with this (or if you just would like to hear an exposition of the Wise ruling with “Disco Inferno” playing in the background), please get in touch with me.