Introduction

Marketplaces such as eBay, vintage bookstores, and GameStop flourish at least partly through resale of secondhand copies of copyrighted works. Three recent cases decided by the Ninth Circuit may have significant implications for these kinds of marketplaces and, more generally, the structure of transactions involving copyrighted works. All three cases were argued before the same Ninth Circuit panel on June 7, 2010, though their decisions were rendered sequentially and build on one another. Vernor v. Autodesk, MDY Industries v. Blizzard Entertainment and UMG Recordings v. Augusto concern how much control copyright owners may exercise over the distribution of their copyrighted works.

Vernor v. Autodesk: Creating the Three-Part Test1

On September 10, 2010, the Ninth Circuit issued an opinion in the first of the three cases, Vernor v. Autodesk. In Vernor, the issue was whether an individual’s sale of used software on eBay constituted copyright infringement. In this case, Cardwell/Thomas & Associates (CTA) had purchased copies of Autodesk’s AutoCAD software, which was accompanied by a software licensing agreement that prohibited customers from renting, leasing or transferring the software without Autodesk’s consent.2 When CTA decided to upgrade its software, it sold its copies of the older versions of the software to Timothy Vernor at an office sale for substantially less than the retail price. Vernor then posted these copies for sale on eBay, leading Autodesk to send a series of notices asking eBay to take down Vernor’s listings. Because Vernor believed that Autodesk was interfering with his sales, he filed a declaratory relief action against Autodesk claiming that his resale of the software was protected by the first-sale doctrine.3

Generally, the first-sale doctrine allows the owner of a copy of a copyrighted work to resell or distribute his or her copy of the work, despite the copyright owner’s otherwise exclusive right to distribute such works. In this case, the district court found that Vernor was the "owner" of his copy of the software,4 but the Ninth Circuit disagreed. The Ninth Circuit found that the software copies were licensed, not sold, and thus Vernor had no right to re-sell them on eBay. In so doing, the court set forth a new three-part test for the applicability of the first-sale doctrine. "We hold today 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."5

MDY Industries v. Blizzard Entertainment: Applying the Vernor Test

Following Vernor, the Ninth Circuit issued its opinion in MDY Industries v. Blizzard Entertainment on December 14, 2010. This case involved the issue of whether the use of a computer program called a "bot" constituted copyright infringement of the World of Warcraft (WoW) software.6

MDY created and sold Glider, a software program that automatically played the early levels of WoW for players, so they could skip to the more difficult levels.7 MDY sought declaratory relief to establish that its sales of Glider did not infringe Blizzard’s copyright or other rights. Blizzard asserted claims of secondary copyright infringement, violations of the Digital Millennium Copyright Act (DMCA) and tortious interference with contract.8

To hold MDY liable for secondary copyright infringement,9 Blizzard was required to show that Glider users directly violated one of Blizzard’s exclusive rights under the Copyright Act.10 When a Glider user plays WoW, his computer creates a copy of the game’s software in the computer’s random access memory (RAM) and potentially infringes Blizzard’s copyright.11 However, in the context of computer programs, there is a limitation on the copyright owner’s exclusive reproduction right, known as the "essential step defense." This doctrine permits the owner of a copy of a computer program to make a copy of that program so long as the copy is created and used only "as an essential step in the utilization of the computer program in conjunction with a machine."12 Therefore, the Glider user is insulated from liability if he or she "owns" the copy of the WoW software.13

The district court found that the Glider users of WoW did not "own" their copies of the WoW software; consequently, MDY was liable for copyright infringement.14 While the Ninth Circuit agreed that WoW players were mere licensees and therefore not entitled to the essential step defense after applying the Vernor test,15 it also found that the Glider users did not infringe any of Blizzard’s exclusive rights — the users did not alter or copy the WoW software, even if they violated the terms of use that prohibited the use of bots and unauthorized third-party software.16 The Court distinguished between mere violation of any covenant in an agreement (which would not be actionable copyright infringement, though it might be a breach of contact), versus violation of a condition that implicated the licensor’s exclusive rights of copyright (which would give rise to copyright infringement).17 As a result, the court found that MDY was not liable for copyright infringement.

UMG Recordings v. Augusto: There’s More than One Way to Find a Sale

On January 4, 2011, the Ninth Circuit issued its opinion in UMG Recordings v. Augusto, the last of the three opinions to issue.18 UMG, the copyright holder, had sent certain unsolicited CDs to music critics and radio DJs for marketing purposes.19 The CDs were labeled for promotional use only, a so-called "label license." Troy Augusto, while not a music critic or other intended recipient of the unsolicited CDs, obtained them from various sources and, as with Vernor, proceeded to offer them for sale on eBay.20

UMG filed a complaint against Augusto, alleging that Augusto was violating UMG’s exclusive right to distribute. The district court concluded that the label license did not create an agreement between the record company and the original recipients of the CDs.21 Therefore, the initial distribution of the CDs was an effective "sale" and Augusto’s subsequent sales would not constitute copyright infringement. The Ninth Circuit agreed, and rested its opinion on two grounds.

First, the court applied the Vernor three-part test and found there was a sale. The court distinguished UMG from Vernor, emphasizing that the "nature of UMG’s distribution" weighed in favor of finding a sale — the CDs were sent to recipients without any prior arrangements, and UMG made no attempts to keep track of the copies.22

Second, the court found that a federal statute — the Unordered Merchandise Statute — effected a "sale."23 The Unordered Merchandise Statute, 39 U.S.C. § 3009, provides that where a recipient receives unordered merchandise, he has the right to "retain, use, discard, or dispose of it in any manner he sees fit without any obligation to the sender."24 Because the statute granted the recipients the right to treat the CDs as their own, the subsequent transfers to Augusto and Augusto’s later transfers did not violate UMG’s copyright.25 While recognizing the validity of and applying the Vernor three-part test, the UMG opinion demonstrates that there is more than one way to find a sale — the effect of the Unordered Merchandise Statute was to find a "sale" even though there was no exchange of consideration in the traditional sense.

Thus, UMG is the only one of these three cases where the alleged infringer was found to be the "owner" of his copy of the work and not a mere licensee.

Vernor, MDY, and UMG: Putting It All Together

A few important lessons can be gleaned from this trio of cases.

The License Agreement: Front and Center

The existence of a license agreement, and its terms, have emerged as key to determining how much control a copyright owner can exercise over distribution of its works. In all three cases, the Ninth Circuit reviewed the agreements to analyze the copyright holder’s reservation of title in the copy, the scope and breadth of transfer restrictions, and the significance of any use restrictions — so much so that it has subjected the court to criticism by some as inflating "magic words" in the agreement above the economic realities of the transaction.26 While UMG also relied on an obscure federal statute to find a "sale" rather than a license, it was the only one to venture outside the Vernor test.

Despite exalting the license agreement, these cases leave open some interesting issues. For example, if UMG had taken the shrinkwrap software approach and put these CDs in sealed envelopes with a notice that breaking the seal constitutes acceptance of the license terms, it is conceivable that the court could have come to a different conclusion (though the Unordered Merchandise Statute still may have been found to trump the license).

As another example, it remains unclear whether the court intended to create a special body of first-sale law applicable to software as distinct from other types of copyrighted works, but that may be the effect of its opinions, particularly when looking at Vernor and UMG. Repeatedly in UMG, the court emphasized the distinct nature of software and software licenses, when compared to traditional media.27 It is possible that the court was implicitly suggesting a more limited application of the Vernor test to books and other traditional media.

Burden of Proving First Sale Defense

Both Vernor and UMG leave open the issue of whether the plaintiff or defendant bears the burden of proving the existence of a sale before applying the first-sale defense.28 This may become more important as courts further interpret and refine the Vernor test. If the alleged copyright infringer bears the burden, then he or she must bring forth evidence to show that there was an outright sale, and that any use and transfer restrictions are insignificant. Additionally, evidence of a copyright holder’s enforcement of its license provisions (or lack thereof) may be important to the determination of the copyright holder’s rights in relation to the first-sale doctrine, as in UMG, although this evidence may not be readily available to the alleged infringer.

Copyright Misuse as a Viable Defense Against Infringement

While the doctrine of copyright misuse was not central to any of these three cases,29 it could become an important equitable defense for alleged copyright infringers and thus blunt the effects of the Vernor test. The copyright misuse defense "forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office," and keeps the copyright holder from enforcing his or her rights during the period of misuse.30

At the district court level, Vernor argued that Autodesk misused its copyright, and therefore could not maintain an infringement suit against him.31 While Vernor offered "little argument or authority" to support his misuse defense,32 courts have found copyright misuse based on restrictive licensing terms.33 This would turn the Vernor test on its head. At the crux of the Vernor test is the use of the restrictive licensing terms to find a license, and not a sale — typically because the license imposes so many use and transfer restrictions that the parties could not have intended there to be a sale. However, in theory, a licensee could use the very same restrictive license agreement to absolve the licensee of liability through a misuse defense.

Conclusion

While the Ninth Circuit attempted to fashion a clear-cut test for determining ownership in the copyright context, its three-part test may not have sufficiently taken into account the impact it would have on secondhand markets. For instance, recent news articles have highlighted GameStop’s dependence on used games, and the negative impact Vernor has had on its sales.34 Whatever the long-term effect of these cases, though, it is clear that these decisions have had and will continue to have a real impact on secondhand and other markets.