For software developers seeking to protect copyright in their works, a recent appeals court decision underscores the importance of carefully drafting shrink-wrap agreements so that those agreements are construed as licences and not sales agreements.

Autodesk, Inc. had provided copies of its AutoCAD software to a customer, CTA, as part of a settlement. CTA then purported to sell the software to Mr. Vernor, who in turn sought to resell the software on eBay. Autodesk sent eBay a takedown notice under the Digital Millennium Copyright Act claiming copyright infringement, and eBay suspended the auction. Mr. Vernor then sought a declaration from the court that the resales did not infringe Autodesk’s copyright.

As we reported in TLQ 4:2, the District Court ruled that Mr. Vernor’s sale of the software on eBay did not violate the terms of the AutoCAD shrink-wrap licence agreement with CTA. The court found that CTA did not violate the agreement because the transfer of software from Autodesk to CTA was not a licence in the first place, but rather a sale of software subject to certain restrictions. As a software sale, the "first sale" doctrine of US copyright law protected CTA’s sale to Vernor and Vernor’s subsequent sales on eBay. That doctrine "permits a person who owns a lawfully made copy of copyrighted work to sell or otherwise dispose of the copy."

Autodesk appealed the District Court decision to the US Court of Appeals for the Ninth Circuit. In conducting its analysis, the appeals court identified three characteristics that distinguish software sales from software licences. A licence will be found where the transfer agreement:

  1. includes an express statement of license grant;
  2. significantly restricts the transferee’s ability to re-transfer the software; and
  3. imposes other notable restrictions on the use of the software.

The court observed that the shrink-wrap agreement in this case:

  • indicated that the licence could only be transferred with Autodesk’s consent;
  • imposed restrictions on modifying, translating, and reverse-engineering the software;
  • prohibited removing company marks; and
  • prevented circumvention of the software copy protection.

Since the court found that Autodesk "imposed significant transfer and use restrictions" on the software copies, the court ruled that CTA was a licensee rather than an owner of the program. As Autodesk’s transfer to CTA was not a sale, CTA was not entitled to resell its copies of the software to Vernor under the first sale doctrine. Since Vernor did not receive title to the software, he could not, in turn, pass ownership of the copies to his eBay customers. Consequently, the court found that the sales by CTA and Vernor infringed Autodesk’s exclusive right to distribute the software.

McCarthy Tétrault Notes

The ruling highlights the importance of drafting clear and unambiguous licensing terms for software and other copyright-protected works. Even though CTA had obtained the copies of the software under a "Settlement Agreement and Licence," the lower court still originally ruled that Autodesk’s transfer to CTA was a sale rather than a licence.

For software developers wishing to license their software, the appeals court decision highlights the importance of including significant limits on the use and transferability of the programs in their shrink-wrap agreements. Imposing periodic licence fee payments rather than a single upfront charge will also help to demonstrate a clear intent to license rather than sell a program.