Ninth Circuit: AutoCAD purchasers are licensees, so first sale doctrine does not apply to resaleSeptember 15, 2010

In a decision last week, the Ninth Circuit held the purchaser of a copy of AutoCAD software was not an owner of the copy, but instead a licensee. As a result, the purchaser did not have the protection of the first sale doctrine (codified in 17 U.S.C. § 109(a)) when attempting to resell the software to a third party.

The declaratory judgment plaintiff was attempting to sell used copies of AutoCAD on eBay. Autodesk, makers of AutoCAD, sent takedown notices to eBay asserting copyright infringement, which resulted in eBay removing the auctions. The plaintiff sued to have the sales declared noninfringing based on the first sale doctrine. The district court agreed, holding the first sale doctrine protected the sales of the used copies of AutoCAD.

The Ninth Circuit reversed. Reconciling its earlier precedent, the court identified conditions where a purchaser is a licensee, rather than an owner of a copy. Specifically, a purchaser is a licensee when:

[T]he 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.

In this case it was undisputed the agreement stated the user was granted a license. Further, the shrinkwrap license from Autodesk prohibited: transfer of the software without its consent, transfer or use outside the Western Hemisphere, reverse engineering or modifying the software. In addition, the license required destruction of prior versions of the software upon upgrading if an upgrade license was purchased. Based on all of these restrictions, the court held the three criteria were satisfied, and the purchaser of the software was a licensee, not an owner, and therefore could not rely on the first sale doctrine as a defense to copyright infringement.

More detail of Vernor v. Autodesk, Inc. after the jump.

Timothy Vernor is a fairly prolific eBay seller, having sold more than 10,000 items on the auction site. Between 2005 and 2007, Vernor purchased several authentic used copies of Release 14 of Autodesk's AutoCAD software. He attempted to sell them on eBay, and each time was met with a takedown request from Autodesk asserting copyright infringement. Vernor filed a counternotice to which Autodesk did not respond, and the auctions were reinstated. However, the last time, eBay suspended his account pending resolution of the takedown, due to the repeated charges of infringement. This prompted Vernor to write to both Autodesk and eBay asserting the first sale doctrine as a defense to Autodesk's claims of infringement in an attempt to prevent future takedown notices. Autodesk's counsel told Vernor to stop selling the software, so Vernor brought suit for a declaratory judgment that his sales of used copies of AutoCAD were protected under the first sale doctrine and therefore did not infringe Autodesk's copyrights. The district court granted summary judgment to Vernor, holding the sales were protected by the first sale doctrine. Autodesk appealed.

The Ninth Circuit reversed. First, the court reviewed its prior precedent that the district court had determined was irreconcilable. In United States v. Wise, a criminal copyright infringement case, the Ninth Circuit considered several factors in determining whether an agreement was a license or a sale, specifically whether the agreement:

(a) was labeled a license, (b) provided that the copyright owner retained title to the prints, (c) required the return or destruction of the prints, (d) forbade duplication of prints, or (e) required the transferee to maintain possession of the prints for the agreement's duration.

As summarized by the court, Wise held that "where a transferee receives a particular copy of a copyrighted work pursuant to a written agreement, [the court] consider[s] all of the provisions of the agreement to determine whether the transferee became an owner of the copy or received a license."

The court next addressed three cases decided many years later, the "MAI trio." In those cases, the Ninth Circuit addressed the issue of whether software purchasers were owners of the copies of software they bought or just licensees. In those cases, the court held when a copyright holder grants a license and significantly restricts the user's ability to transfer the software, the purchase is not of the copy, but of a license to the copy.

Reading the precedent together, the court reconciled them stating:

We read Wise and the MAI trio to prescribe three considerations that we may use to determine whether a software user is a licensee, rather than an owner of a copy. First, we consider whether the copyright owner specifies that a user is granted a license. Second, we consider whether the copyright owner significantly restricts the user’s ability to transfer the software. Finally, we consider whether the copyright owner imposes notable use restrictions. Our holding reconciles the MAI trio and Wise, even though the MAI trio did not cite Wise.

The court then applied these factors to this case. It was undisputed the agreement stated users were granted a license. As described by the court, the AutoCAD license has several restrictive features:

The SLA for Release 14 first recites that Autodesk retains title to all copies. Second, it states that the customer has a nonexclusive and nontransferable license to use Release 14. Third, it imposes transfer restrictions, prohibiting customers from renting, leasing, or transferring the software without Autodesk’s prior consent and from electronically or physically transferring the software out of the Western Hemisphere. Fourth, it imposes significant use restrictions:

YOU MAY NOT: (1) modify, translate, reverse engineer, decompile, or disassemble the Software . . . (3) remove any proprietary notices, labels, or marks from the Software or Documentation; (4) use . . . the Software outside of the Western Hemisphere; (5) utilize any computer software or hardware designed to defeat any hardware copy-protection device, should the software you have licensed be equipped with such protection; or (6) use the Software for commercial or other revenue-generating purposes if the Software has been licensed or labeled for educational use only.

Fifth, the SLA provides for license termination if the user copies the software without authorization or does not comply with the SLA’s restrictions. Finally, the SLA provides that if the software is an upgrade of a previous version:

[Y]ou must destroy the software previously licensed to you, including any copies resident on your hard disk drive . . . within sixty (60) days of the purchase of the license to use the upgrade or update . . . . Autodesk reserves the right to require you to show satisfactory proof that previous copies of the software have been destroyed.

Based on this restrictive language, the court held there were also significant restrictions on the transferability and use of the software. As a result, the court held purchasers of AutoCAD were only licensees, not owners of a copy, and thus could not rely upon the first sale doctrine. The court was unpersuaded by the arguments of the several amici who filed briefs in support of Vernor, even though it acknowledged the arguments in its decision. Essentially, the court stated the policy arguments on both sides had potential merit, but it was up to Congress to make any adjustments to take those issues into account.

Finally, because the district court granted summary judgment on the first sale doctrine, it did not reach Vernor's copyright misuse argument. Because of the Ninth Circuit's decision, it remanded the case to consider that issue in the first instance.

To read the full decision in Vernor v. Autodesk, Inc., click here.

There has already been substantial commentary on the case from various sites, including those who joined in some of the amicus briefing. Below is a small sampling:

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