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Eliminating the First Sale Doctrine for Software Resellers in the Ninth Circuit

Published onDec 15, 2010
Eliminating the First Sale Doctrine for Software Resellers in the Ninth Circuit

In September, the Ninth Circuit strengthened the protection of software vendors in Vernor v. Autodesk Inc., holding software customers are licensees of their copy rather than owners, so long as the software vendor reserves title to sold copies in sales agreements.

The shifting tide in favor of software vendors is based on the Ninth Circuit’s development of a new test regarding the first sale doctrine.  Under this doctrine, once a vendor or manufacturer of a copyrighted work has sold a copy of that work, the first purchaser may sell that copy without the permission or authority of the copyright holder.  Some limits apply to the doctrine, though, such as the first sale must be made in the United States and the right of first sale does not apply to anybody holding a copy by lease, loan, license, or any other non-ownership position.

The new test resolves what the Western District of Washington called an “irreconcilable conflict” between existing lines of precedent.  One line of precedent extends from United States v. Wise, where the Ninth Circuit established that even a transfer that places severe restrictions on the use and disposition of a copy of copyrighted material may transfer ownership of that copy.  The other strand of precedent comes from the “MAI trio” (MAI Sys. Corp. v. Peak Computer, Inc.Triad Sys. Corp. v. Southeastern Express Co.Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t) of cases, wherein the Ninth Circuit was more deferential to the view that a transfer of possession pursuant to a license is a license, rather than a transfer of ownership.

Clearing all of that up, the Ninth Circuit set out a new test for determining whether a purchaser is a licensee or an owner: 

“[A] software user is a licensee rather than an owner 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 restrictions.”

So why does this ruling matter?  First, this holding is a significant finding in favor of software vendors that essentially cuts the bottom out of the first sale doctrine in the Ninth Circuit, where many software companies are located.  Software vendors now need only say the magic words to transform an owner into a licensee.  The transformation only requires the vendor to state explicitly in the software licensing agreement that the copy is only a license, may be used only as a license, expressly limits the user’s ability to transfer the software, and obligates the user to restrictions on use.   Even more significantly, most users will not read these types of agreements word for word before buying or using; hence, the software vendor may be protected without the buyer ever recognizing it.

Second, Vernor may have implications for the sale and licensing of other software and software-based products.  It could apply to all transactions that require a terms of use agreement or a software licensing agreement, such as the sale of goods with firmware and software installed (think iPhone, iPad, iPod), digital media (Amazon’s MP3s, iTunes downloads, Kindle downloads, etc.) entertainment products, and even pre-owned video games

Lastly, Vernor clears up the tangle of Wise and the MAI Trio and establishes a reasonable framework for analysis.  The Ninth Circuit is one of the most popular forums for Intellectual Property related cases, so other federal courts may look to the new standard for guidance.  The effects of Vernor may continue to ripple through the software industry; however, Timothy Vernor has filed a petition for rehearing en banc to which the Ninth Circuit required Autodesk to Answer.  The issue may yet be unsettled.

 

 

*Joseph Norman is a second-year law student at Wake Forest University School of Law.  He holds a Bachelor of Science in Management from North Carolina State University and an MBA in Finance from the McColl School of Business at Queens University of Charlotte.  Prior to enrolling in law school, Mr. Norman worked for Wells Fargo Wealth Management in Equity Research.  Upon graduation in May 2012, Mr Norman intends to practice corporate law.

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