“Magic Words” Protect Software Developer’s Copyright

Kendra Rosenberg

SEATTLE — In Vernor v. Autodesk, a three-judge panel on the Ninth Circuit recently held that customers purchasing second-hand computer software are licensees–not owners–and therefore cannot invoke “first sale doctrine” or “essential step” affirmative defenses to copyright infringement lawsuits. This means a purchaser of second-hand software will not be able to resell the software if the “magic words” of a three-part test appear in the software use agreement.

Timothy Vernor purchased copies of Autodesk Inc.’s AutoCAD Release 14 software–with handwritten activation codes–at an office sale by Cardwell/Thomas & Associates, Inc. (“CTA”).  Vernor then tried to sell the software on eBay.  Autodesk filed a Digital Millennium Copyright Act (“DMCA”) take-down notice claiming Vernor’s sale infringed on its copyright.  eBay initially removed Vernor’s auction, but reinstated it after Vernor filed a counter-notice contesting Autodesk’s copyright claim.

Vernor sought a declaratory judgment that the “first sale” doctrine protected his resale of the software and therefore did not infringe on Autodesk’s copyright. The first sale doctrine is an affirmative defense to copyright infringement that permits owners of copyrighted work to resell those copies. The doctrine allows book owners, for example, to sell their used books to others. A first sale affirmative defense requires showing (1) a legal purchase, (2) of copyrighted material, (3) which the seller had the right to resell without restriction by the copyright owner.  17 U.S.C. § 109. The defense is only available to owners–not licensees–of software.

Venor also raised the “essential step” affirmative defense. Under this defense, if copying software is necessary (“essential step”) to using the software (such as temporarily loading software during installation), such copying is not infringement. Again, this affirmative defense is only available to an owner of copyrighted software. 17 U.S.C. § 117(a)(1).

The software at issue in Vernor was provided on a CD-ROM accompanied by a Software License Agreement (“SLA”).  The SLA granted customers a nonexclusive and nontransferable license to use Release 14, imposed transfer and use restrictions, and required destruction of older software copies if the customer received an upgrade. The issue was whether CTA was an owner of the software under this SLA–and therefore able to pass title to Vernor–or merely a licensee.

The district court initially found Vernor’s sales were non-infringing under the first sale doctrine and the essential step defense because Venor purchased the software from an end-user, granting him indefinite possession, regardless of the restricting language in the SLA.  Because Vernor retained indefinite possession, the first sale doctrine permitted him to freely resale the software.

The Ninth Circuit, however, devised a new three-part test and reversed because the SLA: (1) specifically authorized only one license; (2) significantly restricted the user’s ability to transfer the software; and (3) imposed notable use restrictions:

CTA was a licensee rather than an ‘owner of a particular copy’ of Release 14, and it was not entitled to resell its Release 14 copies to Vernor under the first sale doctrine. 17 U.S.C. § 109(a). Therefore, Vernor did not receive title to the copies from CTA and accordingly could not pass ownership on to others. Both CTA’s and Vernor’s sales infringed Autodesk’s exclusive right to distribute copies of its work. . . .

In other words, the court used a three-prong test to determine that Autodesk retained title under the SLA and CTA was therefore a licensee–rather than owner–of the Release 14 copies. As such, CTA did not grant title to Vernor so Vernor could not pass ownership to others. In fact, anyone who purchased Venor’s software on eBay and installed it would be violating Autodesk’s copyright and also unable to invoke the first sale doctrine or essential step defense.

In 2009, Thomas A. Hackett, in a Shidler Journal of Law, Commerce + Technology (now the Washington Journal of Law, Technology & Artsarticle analyzing the district court’s decision, approached the issues in a similar manner to that of the Ninth Circuit: “Vernor v. Autodesk may be a last stand of sorts for the first sale doctrine with software sales as digital media is increasingly sold via downloads.” Hackett observed that the district court provided a fresh approach to the transfer of software, but concluded that the practical realities of software downloading would likely give way to the position the Ninth Circuit ultimately adopted.

Following the Ninth Circuit’s decision, it appears software makers can protect their copyrighted material by drafting SLA provisions that comply with Vernor’s three-prong test and specifically authorize users to only one license and prohibit the transfer of licenses. Software makers may grant a nonexclusive and nontransferable license with transfer and use restrictions to protect their copyright.

The Ninth Circuit has two similar cases pending, UMG v. Augusto and MDY v. Blizzard, which both involve transfer of copyrighted materials. These cases will decide whether transactions involving copyrighted works including books, music, and movies, are also subject to Vernor’s three-prong test for whether someone is an owner or licensee.

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