Three recent copyright cases from the Ninth Circuit Court of Appeals, Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010), UMG Recordings Inc. v. Augusto, 628 F.3d 1175 (9th Cir. 2010) and MDY Industries, LLC v. Blizzard Entertainment, Inc., 629 F.3d 928 (9th Cir. 2011), underscore how methods of distribution and license terms can be mutually reinforcing or, alternatively, mutually destructive. Software licensors should re-examine their methods for distributing their software and the terms of their licenses in light of these three important cases.

First Sale and Licenses. Let us take the first sale cases first. As a general rule, someone who becomes an owner of a copy of a copyrighted work may distribute that copy without infringing the copyright owner’s distribution rights under the Copyright Act; owners of copies of computer programs have certain additional “first sale” rights, including the right to make copies essential to use. The owner of the copyright still retains ownership of the copyright and may enforce it. However, the owner of a particular copy (or any person “authorized by the owner”) can re-sell that particular copy without infringing the copyright owner’s exclusive right to distribute the copyright work. You can see why a software licensor would not want first sale to apply to its software: if the licensee were treated as owner of the copy, she could freely transfer that copy without infringing the licensor’s copyright.

So who owns a copy? This question is relatively easy to answer when one is talking about a traditional medium of expression, such as a book purchased from Brazos Bookstore in Houston, our favorite bookstore (which just happens to be partly owned and addictively patronized by Jeff Dodd). This question is not so easily answered with respect to software that is subject to a license. Technically, by granting a license, the licensor unmistakably signals that limitations attach to the use. The courts have grappled with the circumstances in which a copy held under the auspices of a license could nonetheless be lawfully owned by the licensee so that the licensee could transfer the copy without regard to restrictions on distribution.

The most recent cases, exemplified by Vernor, examine the full range of rights reserved and granted in the license to determine whether ownership of the copy of the software passed. Vernor 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 the license terms reserved title for Autodesk and imposed “significant” transfer and use restrictions, making the customers licensees, not owners, of the copies of software and preventing them (and their transferees) from transferring the copies under the shelter of first sale doctrines. Interestingly, the “significant” transfer and use restrictions (save, perhaps, the prohibitions on transfer or use outside the Western Hemisphere) were the unremarkable fare of standard forms: the license was not transferable (though that would be true as a matter of law); the software “could not be transferred or leased without Autodesk’s written consent”; the license prohibited modifications, reverse-engineering, removal of proprietary marks and circumventing copy protection devices; and the license called for termination if the licensee engaged in unauthorized copying or failed to observe other license restrictions. Rare will be the software license that fails to include such rudimentary restrictions. Indeed, Vernor has petitioned the Supreme Court to review this decision, arguing (in part) that because such rudimentary restrictions are ubiquitous, the Ninth Circuit’s decision effectively abolishes the first sale doctrine for the software industry. In any event, our first practice point is, “If you are a software licensor, good licensing hygiene practice is to include in your licenses an explicit reservation of title and, at the very least, the standard restrictions on transfer and use catalogued in Vernor.”

UMG Recordings followed Vernor but added a very important caveat: To constitute a “license” that would defeat a first sale defense, the arrangement had to be based on an “agreement.” In UMG Recordings, Augusto bought and resold promotional music CDs handed out to disc jockeys. Each CD, however, bore a label that purported to limit use and to prohibit resale of the CDs. For example:

This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.

Pointing to these labels on the CDs, UMG denied that it had transferred title to the particular copies of the CDs.

The Ninth Circuit disagreed. The CDs were distributed without any prior arrangements and without any attempt to track or monitor their distribution or use. Moreover, no license would be found absent an agreement: Here there was no evidence of any response or other action by an original recipient of the promotional CD to show that the recipient had accepted or otherwise agreed to the terms of UMG’s “license.” With no evidence that the original recipients had agreed to the terms of the purported license, the Ninth Circuit concluded that UMG had transferred title to the CDs.

So called “label” licenses like the one UMG used are not as rare as one might think. They have been featured in patent and copyright cases relating to products as diverse as cameras, printer cartridges, medical products, and, of course, movie and music media. In fact, some licensors will use a variant of a unilateral label license such as, “By opening this package, and installing the software, you will be deemed to have agreed to the terms of the license included in the package.” Indeed, consider what the Free Software Foundation advises software developers to do to make their programs subject to the General Public License (version 2):

How to Apply These Terms to Your New Programs

If you develop a new program, and you want it to be of the greatest possible use to the public, the best way to achieve this is to make it free software which everyone can redistribute and change under these terms.

To do so, attach the following notices to the program. It is safest to attach them to the start of each source file to most effectively convey the exclusion of warranty; and each file should have at least the "copyright" line and a pointer to where the full notice is found.

one line to give the program's name and an idea of what it does. Copyright (C) yyyy name of author

This program is free software; you can redistribute it and/or modify it under the terms of the GNU General Public License as published by the Free Software Foundation, either version 2 of the License, or (at your option) any later version.

This program is distributed in the hope that it will be useful, but WITHOUT ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the GNU General Public License for more details.

You should have received a copy of the GNU General Public License along with this program; if not, write to the Free Software Foundation, Inc., 51 Franklin Street, Fifth Floor, Boston, MA 02110-1301, USA.

If UMG Recordings is followed by other courts, we question whether merely imposing such notices, without more, really establishes an agreement that would suffice as a license that could defeat first sale defenses. [A patent case, Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002), also looks to contract law to test the efficacy of label limitations on uses of patented articles that are sold]. According to the GPL instructions, no one has to assent to the terms, no one has to track or monitor use or distribution. The panoply of limitations and restrictions supposedly attach merely because the software includes a notice that the GPL applies and because of distribution or modification of the open source software covered by the GPL.

We are not picking on the GPL; as we said above, many others have relied on similar techniques for imposing limits on the range of use. Nor are we saying that a license can never be created whenever a GPL is employed or that those who distribute or acquire GPL software would have the incentive or desire to raise a first sale defense. In some circumstances, even an accused infringer may want to prove that there is an enforceable license to limit the type of remedies to which he may otherwise be exposed. However, and here is our second practice point, all those who license software should re-examine their distribution methods to see whether they can create an inference of assent to terms, whether in connection with a downloading routine or otherwise.

Conditioning Use on Compliance with License Terms. Very often a license grant will provide that that use sanctioned by the granting clause is subject to the licensee’s performance of and compliance with all of the other provisions in the license. Sometimes the license grant is conditioned upon the performance of specific obligations. The GPL, for example, allows copying and distributing licensed software if certain notices are included and if it is distributed in (or is accompanied by a copy in) source code form and allows modification (and distribution of modifications) as long as any work distributed “that in whole or in part contains or is derived from the Program or any part thereof” is licensed as “a whole at no charge” and under the terms of the GPL. What if a licensee does not comply with one or more restrictions or obligations when the license grant expansively conditions use on such compliance? Is the licensee liable for infringement, on the theory that any breach is by definition outside of scope?

MDY Industries addressed that question (among others, including the scope of DMCA liability). In the case, § 4 of the license relating to the World of Warcraft (WoW) game software had a “Limitations on Your Use of the Service,” which, in part, stated:

You agree that you will not ... (ii) create or use cheats, bots, “mods,” and/or hacks, or any other third-party software designed to modify the World of Warcraft experience; or (iii) use any third-party software that intercepts, “mines,” or otherwise collects information from or through the Program or Service.

MDY Industries distributed a “Glider” program that “played” the initial levels of WoW for users. The question was whether a user employing the Glider program infringed (thereby making MDY Industries a contributory infringer of) the WoW copyright. The Ninth Circuit first examined whether the “Limitations” on use were mere “covenants” or “conditions.” What is the difference? Copyright remedies are available when a condition to scope of a license is not observed, whereas the breach of a covenant is actionable only under contract law. Copyright remedies are generally far more robust than contract remedies; remedies for copyright infringement can include injunctive relief, statutory damages and attorneys’ fees in addition to actual damages. In the Ninth Circuit’s view, the license prohibitions against bots and unauthorized third-party software were covenants rather than copyright-enforceable conditions.  The court first observed that “nothing in that section conditions Blizzard’s grant of a limited license on players’ compliance with … § 4’s restrictions.” The court relied on the specific words used in the Limitations paragraph, which used covenant language (“You agree that…”) instead of conditional language (e.g., “provided that”), and gave short shrift to the heading in the license (which expressly described § 4 as “Limitations”).

Far more importantly, the court also held that “for a licensee's violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor's exclusive rights of copyright.” Thus, even if Blizzard had included conditional language in § 4 of the license, violating restrictions would not give rise to infringement to the extent that the restrictions were not grounded in one of the exclusive copyright rights. For example, a prohibition on creation of derivative works would be grounded in copyright and the breach of that prohibition would exceed scope and give rise to infringement liability; in contrast, the antibot provisions in § 4(ii) and (iii) did not have a nexus to the exclusive rights of copyright and thus would be treated as a covenant, the breach of which would give rise to contractual, not copyright, remedies.

Although a license could be drafted so that every term in the license is a condition, according to the Ninth Circuit the only terms that will be construed as defining the scope of the license are those that are grounded in one of the exclusive rights of copyright. (Inconsistently, the court suggested that breach of a royalty or other payment obligation could give rise to infringement liability even though such a breach had no nexus to the exclusive rights of copyright; other courts, however, have viewed breach of payment obligations as giving rise only to a breach of contract.) According to the court, were it to hold “otherwise, Blizzard—or any software copyright holder—could designate any disfavored conduct during software use as copyright infringement, by purporting to condition the license on the player's abstention from the disfavored conduct.”

While we understand (and are sympathetic to) the Ninth Circuit’s concern about allowing licensors to transform every license provision into a condition on the scope of use, we believe that the court may have gone too far. First, it may be hard to parse out which license terms are “grounded in the exclusive rights of copyright.” Consider the GPL. Do the requirements that a licensee give its modifications without charge, in source code form and under the terms of the GPL really have a nexus to the exclusive rights of copyright held by one or more GPL licensors?

Second, and more fundamentally, we wonder whether a categorical rule about what can constitute a condition to scope—a rule that the Ninth Circuit itself promptly (and perhaps wrongly) violated as to payment obligations—is appropriate at all. Contract doctrine harbors several methods to disfavor and curb the risks inherent in conditions. Perhaps freedom of contract and other important public policies counsel a more flexible approach to allowing contract parties, especially in a negotiated license, to determine what conduct is or is not shielded from infringement, subject to the contract doctrines that blunt abusive uses of conditions.

That said, we do not wear the judicial robes, so we offer our third, and last, practice point for software licensors: You should consider reviewing your licenses to prune blanket or loose conditions to the license grant and tighten the connections between the granting or scope language and the specific activities and events that should be covered by conditions.

Jeff Dodd is co-author of Modern Licensing Law published by West; this article is derived, in part, from a forthcoming update to that treatise. He reserves (because he is contractually obligated to do so) all copyrights with respect to the work upon which this is based.