Two recent federal district court decisions from the 9th Circuit may impact significantly the way in which software manufacturers distribute their copyrighted software.

In Vernor v. Autodesk, Inc., 555 F. Supp. 2d 1164 (W.D. Wash. 2008), and UMG Recordings, Inc. v. Augusto, 558 F. Supp. 2d 1055 (C.D. Cal. 2008), the Western District of Washington and Central District of California each held that the recipient of a copy of a copyrighted work was permitted to resell the copy despite the fact that the initial transfer was structured as a license, not a sale, and the applicable license agreements prohibited resale of the works. The courts concluded that the transfers were sales, instead of licenses, because the licensees could keep their copies forever and had no obligation to return them to the copyright owners. Therefore, under the first sale doctrine of the Copyright Act, the transferees owned the copies and could resell them at any time.

First Sale Doctrine

Section 106 of the Copyright Act outlines the exclusive rights enjoyed by owners of a copyright, including the exclusive right to "distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending."1 The first sale doctrine, codified under Section 109(a) of the Copyright Act, is an exception to the copyright owner's right to control distribution of its copyrighted work. Section 109(a) states that "the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord."2 In other words, the sale of a lawfully made copy terminates the copyright holder's authority to interfere with subsequent sales of that particular copy.3 It should be noted that the first sale doctrine diminishes the right to distribute a copy of a copyrighted work; however, it does not impact the copyright owner's exclusive right to copy the work. The first sale doctrine only applies when ownership of the copy is transferred to the transferee. Thus, when the copyright owner licenses the copy, the transferee does not own the copy, but merely obtains a license, from the copyright owner, to use the copy, but merely obtains a license to use the copy.4

The Vernor and UMG Recordings Decisions

In Vernor, Autodesk provided copies of its copyrighted software to an architectural company under a license agreement. The architectural company agreed not to "rent, lease or transfer all or part of the Software . . . to any other person without Autodesk's prior written consent." The architectural company subsequently sold the copies to Vernor, who in turn attempted to sell the copies on eBay. Vernor instituted a declaratory judgment action, seeking a declaration that his resale of the copies was lawful. The main issue for the court was whether the first sale doctrine applied, and specifically, whether Autodesk's initial provision to the company was a license or a sale under the guise of a license. The court noted that the "label placed on a transaction is not determinative" of whether it is a sale or license.5

It cited United States v. Wise, 550 F.2d 1180 (9th Cir. 1977), a case involving copies of motion pictures, to hold that the transaction was in fact a sale. In Wise, the 9th Circuit considered a number of transactions involving films, and determined that some were sales, while others were licenses – regardless of whether the agreements were labeled as license agreements. In distinguishing the transfers that the Wise court held to be licenses from those determined to be sales, the court in Vernor noted that a transfer in which the transferee was permitted to keep the acquired copy forever was a sale, whereas an agreement in which the transferee was required to return the acquired copy to the transferor was a licenses.6 Applying that reasoning, the court held that the transaction was a sale because there was no provision requiring the transferee to return the copy to the transferor, and therefore Vernor could resell his copy of the software under the first sale doctrine.

The facts in UMG Recordings are very similar to those in Vernor in that the transaction was labeled a license, and the court relied on Wise to hold that it was actually a sale. In UMG Recordings, the plaintiff owned the copyrights to a number of songs, which were compiled as a promotional CD. The plaintiff distributed the promotional CD to music industry insiders. The CD labels stated that the "CD is the property of the record company and is licensed to the intended recipient for personal use only . . . resale or transfer of possession is not allowed."7 As in Vernor, the original recipient transferred the CD, and it eventually made its way to Mr. Augusto, who attempted to sell it on eBay. The court held that Augusto was permitted to sell the CDs under the first sale doctrine because the initial transfer from UMG Recordings was a sale, not a license.8 As in Vernor, the court relied heavily on the fact that the terms of the license did not require the recipient to return the copy to UMG Recordings, and cited Wise as the authoritative law on the issue.

Aftermath of Vernor and UMG Recordings

While these decisions may result in a change to the way in which software copyright owners distribute copies of their works, UMG Recordings has been appealed to the 9th Circuit. Vernor was not appealed. Leading to somewhat more uncertainty, a number of 9th Circuit opinions after Wise have reached a contrary result. Vernor specifically noted the contrary 9th Circuit decisions, but nevertheless followed Wise. In addition, other district courts in the 9th Circuit have explicitly rejected the proposition that a transaction in which the software recipient makes a single payment and may keep the copy forever is a sale instead of a license.9

Thus, the issue of whether a software license is a sale that is subject to the first sale doctrine, where the license does not include a "return to licensor" provision, is not entirely resolved. These two decisions could cause unintended consequences for copyright owners who intend to restrict the transfer of a copy – including perhaps to third parties in other countries where pirating is of particular concern. Therefore, although the decisions do not adversely impact all copyright owners, many are vulnerable to losing control over resales that a software license appears to give them.

In view of these decisions, software vendors that wish to limit uncontrolled resales should consider inclusion into their agreements of a specific requirement that the licensee return the copy upon termination of the license.