Good Company

The Tide Turns (At Least on the West Coast) - The Continuing Saga of Leases of Software as Sales

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In an earlier issue of Good Company I covered what appeared to be a trend among some lower courts (particularly some of the lower courts on the west coast - see, for example, Softman Products Co., LLC v. Adobe Systems Inc., 171 F. Supp.2d 1075 (U.S.D.C. C.D. Cal. 2001); Vernor v. Autodesk, Inc., 2009 WL 3187613 (U.S.D.C. W.D. Wash. 2009)) to treat a license of software as a sale under certain circumstances. The courts reaching that conclusion tend to focus on the "economic realities" of the transaction, concluding that where the licensee can retain the copy of the software after the transfer, there is in reality a sale, not a license. By treating the license as a sale of the copy of the software, the courts conclude that the so-called "first sale doctrine" applies under the copyright law. That doctrine, embodied in Section 109 of the United States Code (17 U.S.C. § 109(a)), provides that (with some exceptions) the owner of a particular copy of a copyrighted work is entitled to sell or otherwise dispose of the possession of that copy without the authority of the copyright owner. Therefore, third party transferees could freely sell copies of the software without fear of copyright infringement. Another potential consequence of this approach is that a third party competitor transferee could acquire ownership of the copy without the license restrictions, including any license restrictions on modification, translating, reverse engineering, and the like. In a recent decision, however, the Ninth Circuit Court of Appeals took a step towards vindicating the expectations of licensors of software, overturning the judgment of the district court in the Vernor v. Autodesk, Inc. case (see Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010)).

In the Autodesk case, Vernor had purchased several used copies of Autodesk's AutoCAD software (along with the activation codes) from one of Autodesk's direct customers, and resold them on eBay. Vernor argued that he was protected from copyright infringement liability by the first sale doctrine. Autodesk argued that Vernor could not be an owner of the copies because Autodesk's direct licensee, Caldwell/Thomas & Associates, from whom Vernor purchased the copies, was not an owner of the copies. The district court had concluded that the license to Caldwell was in essence a sale, mainly because Caldwell was entitled to keep the copies of the software.

Overturning the district court, the Ninth Circuit held that a software user is a licensee, rather than an owner, of a copy of software 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. Applying that rule of law to the facts, the Court concluded that Caldwell was a licensee, not an owner, of its copies of the software because in the license agreement Autodesk:

(a) specified that the transfer of the software was a license only, retained title to the software, and specified that the license would terminate upon any unauthorized copying or failure to comply with other license restrictions;

(b) imposed significant transfer restrictions by stating that the software license was nontransferable, the software could not be transferred or leased without Autodesk's written consent, and the software could not be transferred outside the western hemisphere; and

(c) imposed notable use restrictions by prohibiting use of the software outside the western hemisphere, and by prohibiting modifying, translating, or reverse engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection devices.

Given that the transaction between Caldwell and Autodesk was a license and not a sale, Caldwell was not an owner of the software who could transfer title to Vernor. Therefore, both Caldwell and Vernor had committed copyright infringement of Autodesk's exclusive right to distribute copies of its software.

The Vernor decision of the Ninth Circuit represents a step back to honoring the expectations of the licensor where it takes specific measures in the licensing agreement to make it clear that the transfer of possession is merely a license and not a sale. The elements that were critical to the court's decision should be followed by software licensors, in order to avoid the determination that a license is a sale where the "economic" realities of the transaction support that conclusion due to a lack of restrictions on use of the software.