Vernor v. Autodesk: Product Distribution and Resale by Licensees May Infringe Copyright

Copyright holders must ensure that licensing agreements are airtight
09.27.10

By Kraig L. Marini Baker and Maya Yamazaki

On Sept. 10, 2010, in Vernor v. Autodesk, Inc., No. 09-35969, slip op. at 13861 (9th Cir. 2010), the U.S. Court of Appeals for the 9th Circuit held that a software reseller was liable for copyright infringement for purchasing used software from a third party and reselling it online. Specifically, the court held that the “first sale doctrine” and the “essential step” defense under copyright law did not excuse or diminish the reseller’s liability, because the underlying software company only granted a license to the software.

This decision means that any company that wants to resell software or any other copyrighted work must ensure that they are owners, not licensees, before transferring or selling those copyrighted works. Likewise, copyright owners that intend to restrict the subsequent distribution of their copyrighted works should carefully craft their licensing agreements so that they retain title to the copyrighted works.

First sale doctrine defense

The Vernor v. Autodesk case is important because of its ramifications with respect to the first sale doctrine. The doctrine, a defense to copyright infringement, permits an owner of a copy of a copyrighted work to resell the copy without infringing on the copyright owner’s exclusive distribution rights. 17 U.S.C. § 109(a). Licensees of a copyrighted work, on the other hand, cannot rely on the first sale doctrine when reselling a copy of a copyrighted work because the copyright owner never made a “first sale” to the licensee. Therefore, whether the recipient of a copyrighted work can resell the work hinges on whether the recipient is characterized as the owner of a copy or merely a licensee.

Background

Timothy Vernor ran an eBay business that included reselling copies of Autodesk, Inc.’s AutoCAD Release 14 software (AutoCAD). Vernor purchased these copies from Cardwell/Thomas & Associates, Inc. (CTA) at an office sale. CTA had acquired the copies from Autodesk subject to a software license agreement (SLA). The Autodesk SLA contained a number of provisions that (i) stated that Autodesk retained title to AutoCAD; (ii) granted to the customer a nonexclusive, nontransferable license to use AutoCAD; (iii) prohibited the customer from renting, leasing, or transferring the software; (iv) restricted the customer’s use of the software; (v) terminated the license if the customer copied the software or violated terms of the SLA; and (vi) required, when purchased as an upgrade to a previous software version, the destruction of the previous version.

After each of Vernor’s attempts to sell the software online, Autodesk, under the Digital Millennium Copyright Act, filed a take-down notice with eBay. eBay responded by taking down each of the auctions. Ultimately, eBay suspended Vernor’s account for a month, preventing him from earning any income from his online auctions. Vernor filed a declaratory judgment action against Autodesk to establish that he did not infringe Autodesk’s copyright. The district court ruled in favor of Vernor, holding that CTA’s acquisition of the software from Autodesk was a “sale.”

9th Circuit holding

The Copyright Act grants the copyright owner the exclusive right to reproduce and distribute their copyrighted works. This right, however, is limited by the first sale doctrine and the essential step defense, both of which can only be asserted by owners of copies of the copyrighted work, not by licensees of the work.

First sale doctrine

As noted above, whether the recipient of a copyrighted work can resell the work pursuant to the first sale doctrine hinges on whether the recipient is characterized as the owner of a copy or merely a licensee. To determine whether Autodesk licensed or sold its software, the 9th Circuit applied a standard established in United States v. Wise, 550 F.2d 1180 (9th Cir. 1977), a case relating to the distribution of motion pictures and related goods. The Wise rule states that a court must look at the SLA as a whole, and in particular, look to: (i) whether the agreement was labeled as a license; and (ii) whether the copyright owner retained title to the copy, required its return, or placed other restrictions on its use.

Essential step defense

The court next analyzed whether Vernor could assert the essential step defense. The Copyright Act also permits the “owner of a copy” of copyrighted software to make a copy so long as it is “created as an essential step in the utilization of the computer program in conjunction with a machine and … is used in no other manner.” 17 U.S.C. § 117(a)(1). In determining whether CTA and Vernor were owners of the AutoCAD copy, the court applied its holdings in MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995), and Wall Data, Inc. v. Los Angeles County Sherriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006). These cases held that, when developers distributed software subject to restrictive licenses, licensees could not assert the essential step defense.

Based on this prior case law, the Vernor court held that an owner of a copy of software is a licensee when the copyright owner: (i) specifies that the owner of the copy is granted a license; (ii) significantly restricts the copy owner’s ability to transfer the software; and (iii) imposes notable use restrictions.

Analysis

Because Autodesk retained title to the software, imposed transfer and use restrictions, and provided for termination of the license upon user noncompliance, CTA was merely a licensee. As a licensee, CTA could not sell its copy to Vernor, nor could Vernor or CTA make a copy of the software. Therefore, both CTA and Vernor infringed on Autodesk’s exclusive right to copy and distribute the software. The eBay purchasers who bought and installed the software also infringed Autodesk’s copyright.

A number of parties argued that the court’s holding would materially impact the use of software. In particular, they argued that this ruling: (i) places restraints on alienation of personal property; (ii) contracts the secondary markets for copyrighted goods; and (iii) restricts the ability of libraries and nonprofits to lend and preserve copies of software. The Vernor court was unmoved by this argument and responded 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.”

Conclusion/practice tips

This decision will require companies dealing in the secondary market to ensure that those goods are owned and not licensed to the sellers. Otherwise, they may be directly or contributorily liable for copyright infringement.

To protect copyright in a second sale situation, companies that own copyrighted works should ensure that their licensing agreements specify that: (i) the user is a licensee; (ii) the copyright owner retains title; and (iii) the user is restricted in his or her ability to transfer and use the content.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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