A recent decision issued by the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit) strengthens copyright owners' ability to prevent the resale and further distribution of products subject to copyright protection through narrowing the applicability of the "first sale doctrine." While such decision is a positive development for companies in the software, video game, and digital publishing industries, as well as potentially any copyright owner, it is a negative development for many others, including online auction sites, outlets selling used DVDs or computer equipment and even ordinary consumers seeking to sell their outdated possessions.
The U.S. Copyright Act grants copyright owners several exclusive rights, including the exclusive right to "distribute" their works. 17 U.S.C. §106. Such distribution right, however, is limited by the "first sale doctrine," which states that "the owner of a particular copy or phonorecord lawfully made under this title [...] is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord." 17 U.S.C. §109(a).
Vernor v. Autodesk, Inc.
On 10 September 2010, the Ninth Circuit held in Vernor v. Autodesk, Inc. "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 result is that persons who "purchase" products that include software or other copyrighted works subject to enforceable license agreements may not be free to dispose of those products despite the fact that they view themselves as the owner of the copy they purchased. The Ninth Circuit did not specify particular restrictions that satisfy the "notable" use restriction requirement, but determined that copies of Autodesk's software were licensed instead of sold because of the following: (i) the software was subject to a Software License Agreement (SLA) pursuant to which Autodesk retained title of the software; (ii) the SLA was non-transferable and the software could not be transferred or leased without consent; and (iii) the SLA prohibited modifying, translating and reverse-engineering, removing proprietary marks and circumventing copy protection mechanisms, and was terminable upon breach of any SLA restriction.
Copyright Owners: Copyright owners who desire to limit further distribution of their products should consider offering such products subject to enforceable license agreements that include terms to satisfy the Ninth Circuit's 3-part test. Until future cases further specify "notable" use restrictions, copyright owners seeking to limit further distribution of their products should endeavor to include as many of the restrictions, as practicable, that were included in Autodesk's SLA.
Resellers and Resale Service Providers: Resellers and others who enable the resale of copyrighted works should likewise be mindful that they may not necessarily have the right to engage in such activities. This appears to be true regardless of whether the person agreed to or was subject to the applicable license terms. In Vernor, the reseller sold the subject software products on eBay and argued that he was entitled to do so because he obtained them from Autodesk's authorized licensees, he never installed the software and he never otherwise agreed to the SLA. While Vernor was aware of the SLA's existence, this fact was not mentioned in the Ninth Circuit's analysis and is arguably irrelevant as to whether a person can resell copyrighted works that were initially licensed as opposed to sold.
On the Horizon
The U.S. Supreme Court will hear arguments this November on the Ninth Circuit's decision in Omega S.A. v. Costco Wholesale Corp. holding that the "first sale doctrine" is limited to works first sold in the United States, and thus, cannot be used as a defense to copyright infringement claims involving the unauthorized distribution of products sold initially outside the United States and then imported into the United States without the owner's permission. The products at issue in such case are Omega-branded watches and the copyright at issue is Omega's logo that is subject to copyright protection. Numerous entities filed briefs with the Ninth Circuit in the Vernor case and the U.S. Supreme Court in the Omega case either in support of or opposition to the narrowing of the "first sale doctrine." In addressing such third party submissions, the Ninth Circuit expressly recognized that there "are serious contentions on both sides," and that "Congress is free, of course, to modify the first sale doctrine [...] if it deems these or other policy considerations to require a different approach." Regardless of how the U.S. Supreme Court rules, it is quite possible that interested parties will take their battle to Capital Hill in an effort to persuade the U.S. Congress to take action to prevent exclusive copyrights or the first sale doctrine, as applicable, from resulting in alleged unjust consequences.