In Vernor v. Autodesk, Inc., the federal district court in Seattle added a new decision to the mix of software-related first sale doctrine cases. See Vernor v. Autodesk, Inc. 555 F. Supp. 2d 1164, (W.D. Wash 2008). The decision is available online. In analyzing the software license transaction in the case, the court found that Autodesk had sold, not licensed, the software at issue, thereby affording the downstream seller of the software the protections of the first sale doctrine, including the right to re-sell the software to third parties.
As background, Timothy Vernor purchased several copies of AutoCAD (a computer-aided drafting program) from a company that had previously acquired the copies from Autodesk as part of a settlement arrangement. The settlement with Autodesk included a license agreement covering the use of the software. Each copy of AutoCAD also contained a license agreement, which was almost identical to the settlement license. All of the license agreements prohibited transfer of the software to any other person without Autodesk's prior written consent.
In 2007, Mr. Vernor put some of the copies of AutoCAD up for sale on eBay. After selling three copies, his account was suspended by eBay for alleged repeat copyright infringement, after eBay received notice from Autodesk. Mr. Vernor sought a declaratory judgment that he was entitled to make the sale, asserting that the first sale doctrine protected his right to sell the software program. Autodesk sought a dismissal of Mr. Vernor's action or, in the alternative, summary judgment in its favor.
Autodesk's principal argument was that it had licensed—not sold—the software under the settlement agreement and that therefore no "first sale" had occurred sufficient to trigger the first sale doctrine. "The [first sale doctrine does] not . . . extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it." See 17 U.S.C. § 109(d). Mr. Vernor disputed this argument, arguing that although the transaction had been "characterized" as a license, it was, in fact, a sale. Mr. Vernor cited numerous reasons in support of his argument, including 1. the typical purchaser of an AutoCAD license pays the full price for the software up front, 2. the software can be used perpetually by the buyer and there is no provision for renewal of the license, and 3. the software does not have to be returned and may be destroyed at will by the purchaser.
The court first acknowledged the protections afforded by 17 U.S.C. § 109(a), finding that the "first sale doctrine permits a person who owns a lawfully made copy of a copyrighted work to sell or otherwise dispose of the copy." When a copyright holder chooses to sell a copy of his work, he "exhausts his exclusive statutory right to control its distribution." The court then determined that the key issue was whether the transaction in question constituted a "license" or a "sale," finding that "[i]f there were no License, there is no dispute that Mr. Vernor's resale of the AutoCAD packages would be legal." The court conducted an analysis of the facts and circumstances of the transaction, ignoring the software "license" label imposed by the parties on the transaction.
The court drew its primary guidance from the Ninth Circuit's decision in United States v. Wise, 550 F.2d 1180 (9th Cir. 1977), which, although not a software case, considered the key distinctions between a sale and a lease, loan or other non-sale. The Wise court considered many types of transactions in which movie prints were provided to recipients and determined that the determining factor was whether the recipient was allowed to keep the print or whether it had an obligation to return the print. It concluded that if the transferee was entitled to retain the materials, a transfer of title had taken place. The Vernor court applied this reasoning and determined that a sale of the software had occurred because the AutoCAD copies did not have to be returned to Autodesk—rather, they could be used indefinitely or destroyed by the holder.
The court acknowledged, however, that three other decisions of the Ninth Circuit addressing cases under 17 U.S.C. § 117—which allows owners, but not licensees, of computer programs to make copies for backup purposes -- were in conflict with the result of its reasoning. See MAI Sys. Corp. v Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995) and Wall Data Inc. v. L.A. County Sheriff's Dep't, 447 F.3d 769 (9th Cir. 2006). Each of these so-called "MAI Trio" decisions held that a license existed pursuant to a software license agreement but engaged in little analysis regarding the "license" versus "sale" issue, and none cited the Wise decision. The Vernor court acknowledged that if it were to "apply this trio of precedent to the license before it, it would conclude that Autodesk did not sell AutoCAD copies to CTA," and therefore that there would not have been a "first sale." Because of this direct conflict of authority, the court applied Ninth Circuit case law regarding conflicts of three-judge panel decisions and held that it must follow the earliest decision, and therefore followed Wise.
The court also acknowledged a "great divergence" of opinion among other courts regarding the first sale doctrine addressing software, but did not discuss the decisions of any other courts outside of the Ninth Circuit. Many such decisions finding a sale have relied on the basic premise that software licenses are disguised sales—that is, the purchaser, after making payment, is getting the full benefit of the software similar to any other purchaser of a good—and typically have not given much credence to the restrictions of any applicable license agreement. By contrast, cases finding that there was no "first sale" often focus on the specific terms of the license agreement in question and often determine that there is a practical distinction between software and other copyrightable work. See, e.g., Adobe Sys. Inc. v. Stargate Software Inc., 216 F. Supp. 2d 1051, 1060 (N.D. Cal. 2002) (finding a license, not a sale, "based on the clear and unambiguous language of the relevant contracts" and citing the importance of "provid[ing] enhanced copyright protection for [software] inventors and developers").
The Vernor decision provides strong support for first sale doctrine proponents and, if followed, could lead software developers to change certain aspects of the way they distribute software. Vendors may attempt to implement procedures for tracking and recovering software that is beyond a defined license term, which could respond to the court's focus on whether the transfer was perpetual. This, however, may not be a practical approach, as it will impose new burdens on distribution and may encounter purchaser resistance. Further, there is no clear direction from the court in Vernor as to what kind of software recovery model would be sufficient to support a claim that the software was licensed. It should also be noted that the court in Vernor did not find that the license terms were invalid or unenforceable with respect to the parties to the contract. Therefore, courts may still be willing to enforce contractual remedies if a "licensee" violates a "do not transfer" obligation. However, contracts will likely only provide a remedy with respect to the "licensee," not a downstream purchaser, copyright infringement remedies would not be available, and courts may be reluctant to enforce restraints against the alienation of personal property that has been "bought" by the "licensee" in the face of the first sale doctrine.
Interestingly, soon after the Vernor holding, a decision in UMG Recordings, Inc. v. Augusto,—F. Supp. 2d—, 2008 WL 2390037 (C.D. Cal 2008) was issued. That district court, also applying Wise, found that the delivery of promotional CDs to music industry insiders constituted an actual transfer of title, not a license (as the label on the CDs purported). The Augusto court held that "the music industry insiders' ability to indefinitely possess the Promo CDs [was] a strong incident of ownership through a gift or sale," and also found it relevant that there was no recurring benefit to UMG, further confirming that a transfer of title had taken place. The court cited approvingly to software cases in which "sales" were found to occur because full payment for the software was received up front and the license was for an indefinite term, with no requirement for renewal. This case provides further support for the first sale doctrine and the reasoning of Vernor.