Rejecting the authority of a trio of more recent Ninth Circuit cases on the ground that their holdings could not be reconciled with an earlier Ninth Circuit decision, a Washington District Court has held a transfer of computer software to represent a sale, not a license. Vernor v. Autodesk, 2008 WL 2199682 (W.D. Wash. May 20, 2008). Although an agreement with an earlier purchaser barred resale, and contract remedies would be available against that party, the agreement’s “ban on transferring the software is of no consequence under the Copyright Act,” ruled the Court, and the first sale doctrine allows a subsequent purchaser to auction the software on eBay.

Vernor sells goods on eBay. When he offered lawfully-made packages of Autodesk’s AutoCAD software for sale, Autodesk sent eBay a DMCA take-down notice, claiming Vernor’s sale would infringe its copyright, and eBay ended the auction. Vernor lodged a counter-notice, to which Autodesk did not respond. eBay reinstated the auction, and Vernor sold the Autodesk software. After this happened four more times in 2007, eBay suspended Vernor’s eBay account for repeat infringement, and Autodesk threatened to “take further action” should Vernor attempt to continue to sell copies of AutoCAD.

Vernor possesses two further copies of AutoCAD which he wishes to sell. He sued for declaratory relief of non-infringement and for unfair competition.

Factual Background

The copies at issue were originally produced by Autodesk and transferred to an architectural firm, Cardwell/Thomas Associates (“CTA”), as part of the settlement of an unrelated dispute. The Settlement Agreement provided that CTA would adhere to an Autodesk Software License Agreement, which in turn granted only a “Non-transferable License to Use” the program, and expressly barred “transfer [of] all or part of the Software.”

Since the copies at issue were lawfully made, if CTA (then Vernor) were deemed to be the “owners” of the copies, they would plainly be allowed — pursuant to the first sale doctrine — to sell their copies to others without thereby violating the copyright holder’s distribution right. 17 U.S.C. § 109(a).

First Sale or License?

Autodesk’s motion turned on its assertion that, because of the License, the transfer of AutoCAD packages to CTA was not a sale. Without a sale, there can be no “first sale.” Or, phrased in the language of § 109(a), without a sale, CTA was not an “owner of a . . . copy” of Autodesk software. If CTA was not an owner within the meaning of the statute, Mr. Vernor was also not an owner within the meaning of § 109(a).

The court noted that “mere possession of a copyrighted copy pursuant to a license is not a sale, and thus not a basis to invoke the first sale doctrine.”

The issue before the court, then, was whether a contract styled as the “Autodesk Software License Agreement” was a license or a first sale to CTA. Bright line rules do not distinguish mere licenses from sales, the court observed, nor is the title or label on the agreement determinative. Instead, the District Court was guided by a 30-year-old precedent, United States v. Wise, 550 F.2d 1180 (9th Cir. 1977).

Wise involved prints of motion picture films, not computer software, and that court considered a range of agreements, finding most of the movie prints agreements to be licenses but some sales. The Vernor court concluded:

In comparing the transactions found to be sales in Wise with those that were not, the critical factor is whether the transferee kept the copy acquired from the copyright holder. When the film studios required that prints be returned, the court found no sale. When the studios did not require the transferee to return the prints, the court found a sale.

Based on this principle, and consistent with the specific details of the instances in which Wise found sales, Vernor held that Wise mandated the conclusion that the AutoCAD transfer to CTA was a sale.

So far, the district court’s analysis appears to have been straightforward. The difficulty is this: Wise was the Ninth Circuit’s last and only word on what constitutes a “sale” for purposes of the first sale doctrine. But it was not the Ninth Circuit’s last or only word on what is a sale or license in other contexts, particularly involving computer software transfers. Three other, more recent cases considered the sales versus license issue in the context of § 117 of the Copyright Act, and concluded that contract terms comparable to those in Wise represented licenses and not sales: MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995); Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t., 447 F.3d 769 (9th Cir. 2006).

Section 117(a) allows owners of computer software to make or authorize the making of a copy insofar as necessary for the use of the program in a machine — a recognition, basically, that one cannot use a purchased program without making at least one copy in a computer’s random access memory. The well-known MAI decision held that the possessor of a program did not have the right to authorize an independent service organization to boot up a computer containing the program. MAI reasoned that this caused a copy to be made, and that the purchaser could not authorize the creation of that copy since the purchaser was a licensee, not an owner of the copy. Similarly, the courts in Triad Systems and Wall Data held software agreements styled as licenses not to be sales.

The Vernor District Court observed that none of the decisions cited Wise, and that — except to some extent in the case of Wall Data — the decisions embodied no analysis of the agreements at issue. Rather, they largely assumed the agreements at issue were licenses, not sales.

Finding no basis for distinguishing the MAI trio from Wise, the district court concluded they were in direct conflict, and considered itself bound to follow Wise. “Where opinions of three-judge Ninth Circuit panels conflict,” the court noted, “the court must rely on the earliest opinion.”

Importantly, the court did not consider the fact that there had been a “tsunami of technological change between the decisions in Wise and the MAI trio” to provide any basis to avoid the conflict between the decisions. First, public policy considerations should play no role, the court believed, in allowing a district court to decide which of conflicting circuit court decisions to follow. Second, those changes had no bearing (in the court’s view) on the non-technological matter at issue: Vernor’s right to sell a package of physical objects containing copies of copyrighted material.

Considering itself bound by Wise and only Wise, the court denied Autodesk’s motion for summary judgment.

Lessons of Vernor

Three points are worthy of further consideration.

First, under Vernor and Wise, the distinction between a license and sale seemingly turns entirely on whether the transferee can keep or must return the copy. Various fairly onerous restrictions on use do not appear to make any difference, provided the transferee need not return the copy.

Second, let us consider what software vendors are to do if they conclude that they are in, or may face litigation in, a jurisdiction that chooses to follow Vernor. One possible fix might be a contractual requirement that the purchaser return the copy after, say, ten years, with perhaps an option to renew for another additional ten year term for one dollar. Since the “limited term” of lawful possession would generally exceed the useful life of nearly all programs, it is difficult to say whether a Vernor- Wise following court would regard the requirement as a subterfuge or as illusory. Nor is it clear whether terms like this are commercially feasible. (Incidentally, we note that an agreement to destroy the transferred copy at a certain time was held insufficient to make the transaction a sale, under Wise, so return does appear to be what is required.)

Finally, we should be clear on what Vernor did not decide. Vernor did not hold the “license” terms and limitations to be invalid or unenforceable as against a contracting party. Software end users who are deemed owners, rather than mere licensees, under Vernor still may be contractually constrained by the terms of their “sale” arrangements not to reverse engineer, to limit the number of users, or even not to transfer their copies — though they will apparently not have a copyright remedy if this last provision is breached. (Perhaps in some circumstances, then, this might be a reason to provide for liquidated damages regarding such breaches.) Of course, this may be of limited comfort to vendors, since a buyer who obtains a copy of a program from a seller who breaches such terms simply will not be bound by the license restrictions.

What of EULAs authorizing transfer of the entire program, providing no copies are made and (purportedly) “subject to” the original terms and conditions? Although the answer is far from clear, in light of Vernor it would appear dubious whether mere acceptance of a transfer constitutes a manifestation of assent to the original license, even if the new acquiree has actual knowledge of those terms.

It seems obvious that the Ninth Circuit should address the division within its own ranks over the license-sale issue, but it is not evident that this will happen any time soon. Vernor itself is now proceeding toward trial, and we do not know if it will ever get there, nor whether there will be an appeal, nor how a new panel of the Ninth Circuit would see the tension between Wise and the MAI trio, nor whether en banc review would ever be granted. Meanwhile, software companies and their high-tech lawyers will continue to do what we always have done: adjust again to shift in a climate still characterized by rapid change and high legal uncertainty.

Postscript: UMG Recordings v. Augusto. On June 10th, a district court in the Central District of California ruled on a similar license-first sale issue. UMG distributed CDs to music industry insiders for promotional purposes. The Promo CDs bore a purported license that barred resale or transfer of possession. Augusto came into possession of same Promo CDs and tried to sell them on eBay, occasioning a lawsuit similar to Vernor. Relying on Krause v. Titleserv, Inc., 402 F.3d 119 (2d Cir. 2005), as well as Wise, the district court held the transfer to be a gift or sale, not a license, on the primary ground that recipients had the right to possess the CDs in perpetuity. The court also held the transfer to be a gift under 39 U.S.C. § 3009, a section of the Postal Reorganization Act governing unordered merchandise sent through the mail. UMG Recordings, Inc. v. Augusto, 2008 WL 2390037 (C.D. Cal. June 10, 2008).