For decades, software vendors have allowed customers to obtain and use their computer software programs under contracts known as End User License Agreements (“EULAs”). A typical EULA states that the customer has not purchased the software from the vendor, but instead is merely licensed to use the software for a specific purpose and for a limited period of time. These restrictions serve to protect a vendor’s intellectual property rights in the software and its ability to obtain future revenues by restricting a customer’s right to transfer or resell the software.

The Copyright Act of 1976, 17 U.S.C. §109, gives a copyright owner several exclusive rights related to the copyrighted work, including the exclusive right to distribute copies of the copyrighted work. However, if the copyright owner chooses to sell a copy of the copyrighted work, the “first sale” of such copy serves to exhaust the exclusive right for this particular copy. After the sale of the copy, the new lawful owner of the copy is free to sell or dispose of such copy. This right is known as the “first sale doctrine.” A consumer who purchases a copy of a book, for example, may resell that copy of the book without infringing the copyright owned by the copyright holder even though such consumer is not allowed to make any copies of the book. While failure to comply with terms of a contract for the original sale would likely expose the original purchaser to a breach of contract claim, it should not affect a subsequent purchaser’s right to possess the copy.  

In the case Vernor v. Autodesk, the plaintiff, Timothy Vernor, purchased authentic used copies of Autodesk’s AutoCAD software for the express purpose of reselling them through eBay. Autodesk claimed that those eBay auctions infringed their copyrights in the AutoCAD software, and that the EULA, accepted by the original customer, prohibited resale of the software as well as transfer of the license to use the software without Autodesk’s consent. As we reported in an earlier advisory, despite the express prohibitions in the EULA, the U.S. District Court for the Western District of Washington (the “District Court”) ruled that Autodesk’s conveyance of the AutoCAD software to the original customer was a sale of the software, not a license of the software and thus the original customer and Vernor had the right to resell the software under the Copyright Act’s “first sale doctrine.” Autodesk appealed the decision. Had the original conveyance from Autodesk been considered a license the EULA would have controlled the terms of any subsequent transfer and prevented the applicability of the first sale doctrine.

On September 10, 2010, the U.S. Court of Appeals for the Ninth Circuit reversed the District Court’s ruling holding that Vernor’s sale of the software through eBay was not a sale protected by the first sale doctrine and instead was a license subject to the terms and conditions of the EULA. The Ninth Circuit Court ruled that because Autodesk’s original customer obtained the software under license it did not have the legal right to resell the AutoCAD software to Vernor in the first place. The EULA stated, among other things, that Autodesk retained title to all copies of the software and that the customer only had a non-exclusive, nontransferable license to use the software. The EULA also imposed significant transfer and use restrictions prohibiting any rental, lease or transfer of the software without the express written consent of Autodesk.

The Ninth Circuit reconciled two lines of cases that the District Court viewed as irreconcilable and concluded that whether a user owns or licenses software is determined by consideration of three factors: (i) does the copyright owner specify that the user is getting a license; (ii) does the license significantly restrict the user’s ability to transfer the software; and (iii) does that license impose notable use restrictions? If the answer is “yes” to all three, the user will be considered a licensee and not an owner who would have the first sale doctrine available as a defense to copyright infringement.

What this means for your business

The District Court’s ruling had undercut software vendors’ ability to restrict software resales by EULA. The Ninth Circuit decision has restored this ability. Software copyright owners and licensors may want to reassess their current software license agreements to confirm that they provide sufficient restrictions to pass the three part inquiry applied by the Ninth Circuit.

To prevent the application of the “first sale doctrine” to software conveyed under your EULA, it is important to assure that the initial conveyance of the software is characterized as a license rather than a sale. A software vendor should consider the following:

  • Clear Statement of License – The license must state that the agreement is, in fact, a license not a sale of software. While this alone will not guarantee that the agreement is actually considered a license, it satisfies the first factor stated by the Ninth Circuit, and is a necessary feature of any enforceable license.  
  • Significantly Restrict Transfer – To satisfy the second factor stated by the Ninth Circuit, the license must explicitly limit the conditions under which the software can be transferred to another user. Such conditions can include:  
    • Explicit prohibition of both resale and transfer  
    • Return of all copies upon expiration or termination of the EULA  
    • Destruction of the software upon expiration or termination of the EULA  
    • Require written consent of the licensor to sell or transfer  
  • Impose Notable Use Restrictions – To satisfy the third factor, the license can impose additional restrictions on the use of the software. Such restrictions should include:  
    • Prohibitions on modifying, translating, or reverse engineering the software  
    • Geographic limitations on where the software can be used  
    • Prohibitions on defeating any copy protection devices incorporated in the software  

It is important to remember that this decision does not mean that software is not transferable. Instead, it means that the transferability of the software will be dictated by the terms in the EULA under which the software was licensed. Also, it is important to note that this is a Ninth Circuit decision and may not necessarily be followed in other circuits.