USCA Ninth Circuit, September 10, 2010

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  • The Ninth Circuit, reconciling earlier precedent, held that to determine whether a transferee of software is a licensee (and not an owner), a court must consider: (1) whether the copyright owner specifies that a user is granted a license; (2) whether the copyright owner significantly restricts the user’s ability to transfer the software; and (3) whether the copyright owner imposes notable use restrictions.

Defendant Autodesk, Inc. (“Autodesk”) distributes a software program called AutoCAD Release 14 (“Release 14”). Customers who purchase Release 14 from Autodesk must accept the terms of an accompanying software licensing agreement (the “SLA”) before installing the program.

The SLA states that Autodesk retains title in all copies of Release 14. It further states that the customer has a nonexclusive and nontransferable license to use Release 14. In addition, the SLA imposes various transfer restrictions, such as prohibiting renting or leasing the software without prior written consent. Further, the SLA imposes significant restrictions on how customers may use Release 14 and provides for license termination if a customer uses Release 14 without authorization or does not comply with the SLA restrictions.

Plaintiff Timothy Vernor is an eBay vendor. Vernor purchased several copies of Release 14 from Cardwell/Thomas & Associates (CTA), a customer of Autodesk, and later resold the Release 14 copies on eBay. When Autodesk learned of the eBay sales, it notified eBay that Vernor was infringing its copyright in Release 14. Autodesk informed Vernor that it conveyed Release 14 pursuant to a non-transferable license and thus any resale of the software constituted copyright infringement.

Soon thereafter, Vernor filed an action seeking a declaratory judgment that he did not infringe Autodesk’s copyright when he resold the Release 14 software on eBay. The district court denied Autodesk’s motion to dismiss, finding that Vernor’s sales were non-infringing pursuant to the first sale doctrine and the essential step defense. The district court later granted summary judgment in Vernor’s favor, and Autodesk appealed.

On appeal, the Ninth Circuit examined whether Vernor was entitled to the protection of the first sale doctrine and/or the essential step defense, both of which limit the exclusive rights of a copyright owner. Neither defense, the Ninth Circuit emphasized, was available to those who are only licensed to use copies of copyrighted works. Thus, the Ninth Circuit found, the main issue was whether or not Autodesk sold copies of Release 14 to its customers or whether it merely licensed the copies.

Turning to the first sale doctrine – which allows owners of copies of copyrighted works to resell those copies – the Ninth Circuit reiterated that the doctrine only applied to those who owned the particular copies and not to licensees – who merely possess the work without owning it. Similarly, it found that the essential step defense – which allows copies of computer programs that are created as an essential step in the utilization of the computer program – was available only to owners of copies, not licensees.

The court then analyzed its own precedent to determine how to distinguish whether a transferee is a licensee or an owner. Reconciling its various precedents on the issue, the Ninth Circuit stated three considerations that courts may use to determine whether a software user is a licensee, rather than an owner: (1) whether the copyright owner specifies that a user is granted a license; (2) whether the copyright owner significantly restricts the user’s ability to transfer the software; and (3) whether the copyright owner imposes notable use restrictions.

Applying this test to the Vernor case, the court concluded that CTA (the direct customer of Autodesk) was a licensee and thus neither CTA nor Vernor were entitled to invoke the first sale doctrine or the essential step defense. In reaching this conclusion, the court relied on the fact that Autodesk retained title in the software and imposed significant transfer restrictions, such as prohibiting the transfer of the software outside the Western Hemisphere. The court also emphasized that the SLA provided for termination of the license upon the licensee’s unauthorized copying or failure to comply with license restrictions. The court thus concluded that because CTA was merely a licensee, Vernor did not receive title when it purchased the software from CTA.

The court then proceeded to address and reject Vernor’s various arguments for why he was entitled to the affirmative defenses, including his contention that the “economic realities” of the Autodesk sales, wherein customers possess their copies indefinitely and are not required to make recurring licensing payments, demonstrate that Autodesk makes “first sales.”

Thus, the Ninth Circuit reversed the district court’s grant of summary judgment in Vernor’s favor on copyright infringement. Because the district court had declined to determine whether Vernor was entitled to a “copyright misuse” defense, the Ninth Circuit remanded that issue to the district court.