On September 10, 2010, the Ninth Circuit issued its decision in Vernor v. Autodesk Inc., holding that, where software is transferred pursuant to a license agreement that restricts its use and distribution, the first sale and essential step defenses to copyright infringement do not apply. In its decision, the Court articulated a 3-part test for distinguishing between a license and a sale. According to the Ninth Circuit, an agreement is a license if it (1) states that the user receives a “license,” (2) restricts transfer of the copyrighted work, and (3) restricts types of permissible use.

Timothy Vernor brought a declaratory judgment action against Autodesk to establish that his resale of authentic used software on eBay was protected by the first sale and essential step defenses. These defenses allow for, respectively, distribution and copying in limited circumstances without the authority of the copyright owner. Under the first sale defense (17 U.S.C. § 109), an “owner” of a “lawfully made” copy is permitted to resell that copy. Under the essential step defense (17 U.S.C. § 117), an “owner” of a copy of a computer program is permitted to make a copy in certain narrow circumstances. Both affirmative defenses only apply to an “owner” of a copy and do not apply to a licensee. Although Autodesk distributes its proprietary software pursuant to a software license agreement (“SLA”) that prohibits transfer, the district court held that Vernor was an “owner.”

Overruling the district court’s decision, the Ninth Circuit held Vernor was a licensee. According to the Court, Autodesk’s SLA explicitly granted only a license. Moreover, it imposed transfer and use restrictions, and contained a termination provision in the event the user failed to comply with the SLA’s restrictions. Finding the agreement to be a license, not a sale, the Court reversed the district court’s decision that Vernor was protected by the first sale and essential step defenses.

The Court was careful to note that no single factor is dispositive, and specifically rejected the district court’s reliance solely on the fact that Autodesk’s customers were not required to return the software. Similarly, the Court dismissed any requirement that recurring royalties are needed to form a license. Though unnecessary to reach its resolution of the case, the Court found that the legislative history of the Copyright Act also supported its conclusion that the first sale and essential step defenses apply only to “outright sales” to an “owner” – not merely a “rightful possessor.”

Conclusion and Application. A licensee’s right to transfer and use copyrighted software, including the right to copy the software into random access memory (RAM) of a computer, is conferred by the terms of its license agreement. If the use or transfer is not permitted by the SLA, there may be copyright infringement. Therefore, it is important that software companies seeking to restrict distribution of their software ensure that their SLAs clearly state that only a limited license to the software is granted. The 3-part test in Vernor v. Autodesk provides some useful guideposts for provisions that may be deemed sufficient to create a license and avoid a “sale.” Most importantly, SLAs should be labeled as limited use “licenses” and provide significant restrictions on the use and transfer of the software