In Vernor v. Autodesk, Inc.,12 the United States Court of Appeals for the Ninth Circuit held that a reseller of software that had originally been distributed through a license agreement could not invoke the first sale or essential step defenses to copyright infringement. The court found that to invoke either of those defenses, a party accused of infringement must demonstrate an ownership interest in the copies of the work at issue as opposed to a mere license right. The case is important to software licensors because it offers drafting guidance on how to provide effective limitations on the use, sharing and transfer of software as well as tools to protect valuable commercial revenue streams.
Plaintiff Timothy Vernor makes his living by selling items on eBay. Between 2005 and 2007 he purchased five used copies of Autodesk, Inc.’s AutoCAD Release 14 software. Each copy of Autodesk’s software required the original purchaser to accept a license agreement that restricted the user’s right to transfer the software. If any user upgraded to a more recent version of the software, the license required the destruction of any copies of the previous version. In addition, the license prohibited the user from modifying the software, using it in ways that would interfere with Autodesk’s intellectual property rights or using it outside of the Western Hemisphere. The license also contained customary restrictions against decompiling and reverse engineering. Vernor argued that because he never agreed to the terms of any license agreement or installed the software on any computer, he was not bound by Autodesk’s licensing terms. When Vernor listed the software on eBay, Autodesk filed a series of take-down notices13 claiming that Vernor’s sales infringed its copyright. In August 2007, Vernor brought a declaratory judgment action against Autodesk to establish that his resales were non-infringing. The district court granted summary judgment to Vernor, finding that under the first sale doctrine and the essential step defense, Vernor was not liable for infringement.
The Ninth Circuit reversed the district court on the ground that Vernor could not assert those defenses, either on behalf of himself or his customers, because he lacked an ownership interest in the software.
The Copyright Act confers on the copyright holder the exclusive right to control the distribution of copyrighted works.14 The first sale doctrine limits that right to the initial sale of a copy of a work such that the copyright holder cannot control downstream sales after it has passed title on to a third party. Nonetheless, the first sale defense is only available to the “owner of a particular copy” of a copyrighted work.15 The Ninth Circuit pointed out that even in Bobbs-Merrill Co. v. Straus,16 the case that initially recognized the first sale doctrine, the Supreme Court was careful to note that the defense did not apply to licensees.
The Copyright Act also guarantees a copyright holder’s exclusive right to control the reproduction of copyrighted works.17 However, to use most computer software, it is necessary for the user to make a temporary copy of the program in the computer’s random access memory or RAM. Congress therefore codified the essential step defense, which permits the “owner of a copy” of copyrighted software to make a copy of the program if it is “created as an essential step in the utilization of the computer program….”18 Once again, the Ninth Circuit indicated that this defense was restricted to owners, not licensees, of copyrighted software.
The availability of either defense, and the outcome of the case, therefore hinged upon whether Vernor or his customers could claim an ownership interest in the software that Vernor had sold. To determine whether Autodesk had transferred ownership of the software through its license agreement, the Ninth Circuit reviewed its prior decisions on the issues and determined that “a software user is a licensee rather than an owner… 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.”19
The court found that Autodesk’s license agreement satisfied all three components of this test. The license specifically noted that Autodesk retained title over the copyrighted work and that the user was merely granted a license. It also imposed significant transfer restrictions; the license stated that it was non-transferable and that the software could not be transferred to third parties without Autodesk’s consent. Finally, the license contained significant use restrictions, which prohibited the user from modifying, translating or reverse engineering the software, removing any proprietary marks, or using the software outside the Western Hemisphere. Accordingly, the court found that Autodesk’s “sales” to its initial purchasers created a licensing relationship. Because those initial purchasers never acquired an ownership interest in the software, they could not ultimately pass ownership to Vernor. The Ninth Circuit, therefore, reversed the district court’s award of summary judgment because the first sale and essential step defenses were not available to Vernor or the previous parties because they were licensees.
The case is currently under review for a possible rehearing before an en banc panel of the Ninth Circuit.20 As it stands, the Autodesk decision virtually guarantees that a software company’s intellectual property rights will be protected on its terms if the company distributes its software with restrictive licensing terms that meet the Ninth Circuit’s three-part test. The decision should be used as guidance in drafting future software license agreements, particularly in crafting licensee-side restrictive covenants. Another interesting question is how relevant these defenses will be in the future as the manner of software distribution moves toward cloud-based and downloadable models, and less software is distributed on tangible media. While the analysis will still focus on the same test, the absence of a physical copy of certain software may make the foregoing analysis less complicated, at least conceptually. Regardless, Software-as-a-Service type providers and those already distributing software via download should also consider the impact of Autodesk in drafting their agreements.