Possession may be 9/10 of the law, but that last 1/10th is a doozy. The power of license agreements. What are you getting when you "buy" software?

Usually, you're getting a license to use the software -- not an ownership interest in the copy of the software you just purchased. Think back to the days of cassette tapes with music on them. When you bought a tape, you had this physical thing you could do certain things with. If you wanted, you could resell it to someone else (i.e. at a garage sale). No worries. Publishers of content on the tape had less worry of you creating tons of unauthorized copies of those tapes because making copies of tapes was slow, hard, and not exact. Then we move into the digital age. CDs are easy to copy. Digital data is easy to copy. Those publishing digital content need to control their distribution channels.

First Sale Doctrine

Copyright protects works of authorship fixed in a tangible medium of expression. One affirmative defense to a charge of copyright infringement is the first sale doctrine. The first sale doctrine provides that once a copyright owner sells a particular copy of her work, the purchaser may sell or otherwise dispose of that copy of the work. See 17 U.S.C. 109(a).

Timothy Vernor bought a number of used copies of Autodesk's AutoCAD Release 14 software. He bought these copies from others who had directly purchased AutoCAD from Autodesk. Vernor then sold these copies on eBay. Sounds like a typical first sale, right? Wrong.

The entities that "bought" AutoCAD from Autodesk in the first place hadn't "bought"it at all. They had licensed it. And their license precluded them from transferring what they had bought to someone else without Audodesk's permission.

If you don't own it, you can't assert the first sale doctrine as a defense to copyright infringement:

The first sale doctrine does not apply to a person who possesses a copy of the copyrighted work without owning it, such as a licensee.

(citing 17 U.S.C. 109(d); Quality King Distribs. , Inc. v. L'Anza Research Int'l Inc., 523 U.S. 135, 146-47 (1998)).

Essential Step Defense

The Ninth Circuit also addressed the essential step defense. The essential step defense applies to software copyrights and provides that an "owner of a copy" of a copyrighted piece of software does not commit copyright infringement when the software is copied from a storage device (like a disk) into the memory of a computer. This copying step is an "essential step in the utilization of the computer program" and is not subject to copyright infringement liability. (Otherwise, starting a copyrighted computer program, which automatically copies portions of the program from disk into memory, would subject the user to infringement liability.) See 17 U.S.C. 117(a)(1).

In the Ninth Circuit, the essential step defense does not apply where the copyright owner grants a user a license and significantly restricts the user's ability to transfer the software. In order to benefit from the essential step defense, the defendant must be an owner of the copy (just like under the first sale doctrine above). So, the court must determine if the software user is a licensee or an owner of a copy. The Ninth Circuit prescribes three considerations for making this determination:

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.

Vernor's sales of AutoCAD

The Court then applied its tests to Vernor's activities. Autodesk distributed AutoCAD to its customers pursuant to a software license agreement. This agreement restricted what the customers could do with the software, and expressly stated that Autodesk retained title to the software. Recipients of the software could not transfer it without Autodesk's permission, and certain use restrictions were imposed.

Since the people who originally "bought" AutoCAD from Autodesk didn't "own" it, they couldn't properly sell it to Vernor. And Vernor couldn't use the first sale doctrine or essential step defense to protect himself. So the Court reversed the trial court's grant of summary judgment in Vernor's favor. All is not lost for Vernor, though, as the Court has permitted him to raise the copyright misuse defense (a topic for another post) when the case returns to the trial court.

Policy Arguments

Both sides presented important policy arguments. Vernor argued that the Court's decision is contrary to the law's aversion to restraints on alienation of personal property and could force everyone buying copyrighted property to thoroughly analyze the chain of title for what they were buying to see if an original sale were ever made.

eBay (which filed an amicus brief) argued that a broad view of the first sale doctrine was needed to help create secondary markets for copyrighted works. The American Library Association was concerned that the Court's view would hamper non-profit libraries' abilities to lend software for non-commercial purposes and would hamper their ability to distribute out-of-print software.

Autodesk argued the copyright owner's policy position in favor of the decision as it allows for tiered pricing, increases software companies' sales, lowers everyone's prices and reduces piracy.

The Court essentially punted on these issues, and said Congress is welcome to modify the first sale doctrine and essential step defense if it wants.

Conclusion

The first sale doctrine and the essential step defense only apply to defendants who own authorized copies of the subject work. Software copyright owners who want to control downstream distribution need to: (1) specify that the user is granted a license; (2) significantly restrict the user's ability to transfer the software; and (3) impose notable use restrictions. And users of software (i.e. all of us) need to be careful what we do with leftover discs and software we find -- be careful trying to sell it, because you might not own what you think you own.

(Note that other circuits have not necessarily adopted this test. Vernor tried to convince the Court not to take this approach as it would conflict with the Federal Circuit and Second Circuit's positions on the essential step defense. The Court did not find this argument persuasive. I have not found any Eleventh Circuit decisions discussing the essential step defense.)

Vernor v. AutoDesk, Inc., Case No. 09-35969 (9th Cir. Sept. 10, 2010)