November 04, 2010
Intellectual Property, Internet & E-Commerce Alerts

Software Owners Breathe Collective Sigh of Relief
by Cyrus Wadia

Software owners breathed a collective sigh of relief last month when the United States Court of Appeals for the Ninth Circuit ruled that a software user is a licensee rather than an ownerpursuant to a Software License Agreement ("SLA") with a use and transfer restriction.  As such, a software user is not entitled to affirmative defenses of the "first sale doctrine" and "essential step doctrine," that secondary owners, not licensees, of copyrighted works can evoke against an infringement claim.  Timothy S. Vernor v. Autodesk, Inc.  __ F 3d __ (9th Cir. September 10, 2010). 
  
AutoCAD is a computer-aided design software developed by Autodesk, Inc. for architects and engineers.  The underlying dispute arises from Timothy Vernor, an eBay seller, placing several used copies of the software for sale online.  Autodesk had originally sold the same copies to a direct customer under a restrictive commercial SLA barring transfer to a third-party, and promptly filed a Digital Millennium Copyright Act ("DMCA") take-down notice against Mr. Vernor for copyright infringement.  The eBay seller filed a declaratory action against Autodesk, arguing that his resales are protected by the Copyright Act of 1976 17 U.S.C. § 109 which does not protect the copyright holder's distribution rights after a particular copy is sold. 
  
The district court ruled in Mr. Vernor's favor, finding him the owner of the disputed copies under  (1) the first sale doctrine and (2) the essential step doctrine.  The first sale doctrine "allows the 'owner of a particular copy' of a copyrighted work to sell or dispose of his copy without the copyright owner's authorization."  The essential step doctrine allows for duplication of the copy that is "an essential step in the utilization of the computer program," i.e. the installation process where a copy is stored temporarily onto a computer's RAM.  The dispositive factor making the eBay seller an owner, with the abovementioned protections, rather than a licensee, restricted from the same protections, was that the AutoCAD's SLA did not explicitly require customers return the physical software copies back to its developer.  Since Mr. Vernor was found to be an owner of the AutoCAD copies, the district court held that he and his customers were protected by these defenses. 
  
The Ninth Circuit overruled this decision after finding that "first sale" did not occur due to stipulations of AutoCAD's SLA that makes its direct customer a licensee, rendering Mr. Vernor's defenses moot.  The court reconciled two tests for  determining whether the first sale and essential step defenses apply in this conext: 
  
"[A] software user is a licensee rather than an own of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restriction." 
  
Since AutoCAD's SLA forbid transfer of the license and required destruction of the software upon upgrading to a new version, the application of this standard made any subsequent purchaser of AutoCAD a licensee.  The Ninth Circuit vacated the lower court ruling and remanded for further proceedings. 
  
The decision has a potentially wide-reaching industry implications, reflected by amici curiae arguments for both sides of the case.  eBay and the American Library Association argued that the decision could cause economic harm to secondary markets for copyrighted works.  On the other hand, the Software & Information Industry Association and the Motion Picture Association of America argued that it bolsters efforts to combat piracy.  The court did offer a caveat for a legislative solution to this controversial issue, that "Congress is free, of course, to modify the first sale doctrine and the essential step defense if it deems these or other policy considerations to require a  different approach." 
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