A recent decision by the Ninth Circuit Court of Appeals underscores the importance of distributing software under a carefully drafted software license agreement (“SLA”). In Apple, Inc. v. Psystar Corp., 2011 U.S. App. LEXIS 19707 (9th Cir., Sept. 28, 2011), Apple sued Psystar, a manufacturer of unauthorized Macintosh “clone” computers, for copyright infringement. Psystar manufactured computers capable of running Apple’s Macintosh OS X operating system software (“OS X”). However, OS X utilized a “lock and key” technological measure to keep OS X from being used on non-Applebranded computers. Psystar circumvented the restriction to get OS X onto its computers. It then purchased individual copies of OS X and shipped them with each computer it sold. Upon discovery of Psystar’s products, Apple filed suit for copyright infringement, alleging that Psystar’s activities violated Apple’s SLA, which required that OS X be used only on Apple-branded computers. In its defense, Psystar asserted the first-sale doctrine and the copyright misuse defense, both of which failed.

Ordinarily, when a person purchases a copy of a copyrighted work such as a book or painting, the first sale doctrine applies. This doctrine provides that once a copy of a work is sold, the seller no longer controls further distribution of that copy, and the buyer can dispose of that copy however he or she chooses. However, courts have held that the first sale doctrine does not apply if the work is only licensed, not sold, to the buyer. Where copyrighted software is licensed, for example, the terms of use for that work are governed by the applicable SLA. Software manufacturers have been taking advantage of this exception for some time, and rather than selling copies to customers, they have made it their standard practice to license the software to customers, subject to a SLA, which the customer must agree to in order to install and use the software.

n the Psystar case, the court affirmed a three-part test adopted in previous cases for distinguishing a license from a sale in the context of software. Under this test, a software user is deemed merely to be a licensee when the copyright owner: (i) specifies that the user is granted a license, (ii) significantly restricts the user’s ability to transfer the software, and (iii) imposes notable use restrictions. The court held that Apple’s SLA met this test and, therefore, the software was licensed to Psystar, not sold. As a result, the first sale doctrine did not apply, and Psystar did not have the right to redistribute copies of OS X with its own computers.

As another defense, Psystar asserted that the terms of Apple’s SLA constituted copyright misuse, which prohibits copyright owners from setting conditions on the use of their works where those conditions stifle competition. However, this is a narrow defense, and it only applies where competing products are of the same nature. For example, in Practice Management Info. Corp. v. American Medical Ass’n, 121 F.3d 516 (9th Cir. 1997), the copyright misuse defense was successful where the SLA prevented the defendant from using any coding system other than the plaintiff’s copyrighted coding system. This restriction prevented others from developing competing coding systems, since the plaintiff’s system was the industry standard. However, in Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995), the copyright misuse defense failed where the licensing restriction merely prohibited licensees from making copies of the plaintiff’s copyrighted software and from allowing third parties to use the software. While this restriction prevented the plaintiff and others from effectively servicing the defendant’s computers, it did not prevent anyone from developing competing hardware and software.

The district court decided the Psystar case on summary judgment, holding that Psystar’s use of Apple’s software violated Apple’s copyright, and that the terms of Apple’s SLA did not constitute copyright misuse. The Ninth Circuit affirmed the decision of the district court stating that Apple’s SLA was intended to make sure the operating system was used on the computers for which it was designed, rather than to prevent others from designing competing hardware and operating systems.

As Apple v. Psystar demonstrates, whether a plaintiff prevails on a copyright infringement claim may depend entirely on the terms of the SLA. This highlights the importance of ensuring that SLAs are cautiously drafted to reduce the likelihood that a court will rule that the first sale doctrine applies and, therefore, that the software at issue was sold, not licensed. Careful drafting can also reduce the likelihood that a user can successfully argue copyright misuse.