Ninth Circuit Addresses "Owner vs. Licensee" Determination in Applying First Sale Doctrine
On June 7, 2010, the Ninth Circuit heard oral argument in Seattle in three cases that, to one degree or another, raise important questions regarding the meaning of the term “owner” under the Copyright Act with respect to a copy of a copyrighted work and how to determine whether ownership of such a copy has been transferred or whether a mere license to use the copy was granted with no transfer of ownership of the particular copy. The three cases are: UMG Recordings, Inc. v. Augusto, No. 08-55998 (9th Cir.) from the Central District of California; MDY Industries, LLC v. Blizzard Entertainment, Inc., Nos. 09-15932, 09-16044 (9th Cir.) from the District of Arizona; and Vernor v. Autodesk, Inc., No. 09-35969 (9th Cir.) from the Western District of Washington.
The Ninth Circuit issued its first opinion in these cases today in the case of Vernor v. Autodesk.
Timothy Vernor makes a living from selling merchandise on eBay. Autodesk makes computer-aided design or CAD software including AutoCAD, a software program for 2-D and 3-D design and drafting.
In 2005, Vernor purchased an authentic, used AutoCAD package (containing one or more CDs with the AutoCAD software, a copy of license agreement and perhaps other documentation) at a garage sale which he then put up for auction on eBay. In response, Autodesk sent a DMCA notice to eBay claiming that Vernor’s sale would infringe its copyright. eBay suspended the auction and Vernor responded with a DMCA counter-notice claiming that the sale was lawful. Autodesk did not respond, eBay reinstated the auction and Vernor sold the AutoCAD package.
In 2007, Vernor bought four authentic, used AutoCAD packages from an office sale at a Seattle architecture firm, Cardwell/Thomas Associates (“CTA”). Vernor sold some of these packages on eBay but each time he posted an auction Autodesk sent a DMCA notice to eBay, Vernor’s auction was suspended by eBay, a counter-notice from Vernor was sent and the auction was reinstated. When Vernor then attempted to sell others of these packages, however, following Autodesk’s DMCA notice, eBay suspended Vernor’s eBay account for one month for repeat infringement.
Vernor then filed suit against Autodesk seeking a declaratory judgment that his sales of the AutoCAD packages, including any future sales, would not violate the Copyright Act. In May 2008, the District Court for the Western District of Washington denied Autodesk’s motion to dismiss Vernor’s complaint or to grant summary judgment. The District Court concluded that the transfer of the AutoCAD packages from Autodesk to CTA was a sale that had “contractual restrictions on use and transfer of the software.” As a result, it concluded that Vernor, who received the packages from CTA, could invoke the first sale doctrine. A copy of the District Court’s May 2008 opinion can be found here.
Following discovery, the parties filed cross-motions for summary judgment. The District Court noted that the parties’ motions presented the same issues addressed in the court’s May 2008 order, namely, (1) whether Vernor has a first sale right to resell the AutoCAD packages, and (2) whether Vernor’s sales are contributory copyright infringement. The court had answered those questions in Vernor’s favor in May 2008 and did so again on the parties’ summary judgment motions.
The issue as framed by the District Court was the nature of the transaction between Autodesk and CTA. Autodesk argued that it did not transfer ownership of the AutoCAD packages but rather licensed the packages to CTA while retaining ownership of the copies of the copyrighted software in CTA’s possession. After describing in some detail the Autodesk software license agreement ("SLA"), the court further clarified the question presented:
There is no dispute that Autodesk licensed its software to CTA. The court makes this observation because the parties and their witnesses too often suggest that their dispute is about whether Autodesk “sold” rather than “licensed” its software. That dispute is not determinative, because the use of software copies can be licensed while the copies themselves are sold. Autodesk unquestionably licensed the software in that it limits the right to use it. . . . There is also no question that most software is transferred to consumers via licenses that restrict and expand their right to use it, although no party has presented competent evidence of the terms of any other software maker’s license. The question before the court is whether the Autodesk License is a license that transfers ownership of the software copies included in AutoCAD packages. To capture that distinction, the court will use the terms “mere license” and “mere licensee” in reference to licenses that do not transfer ownership of any copies. The question before the court is whether Mr. Vernor is the “owner” of the copies of the copyrighted material in the AutoCAD packages he acquired from CTA, or whether CTA was a mere licensee who had no ownership to transfer to Mr. Vernor.
Having concisely and precisely framed the question, the District Court examined relevant Ninth Circuit precedent and again concluded that it gave two different answers to the question of what distinguishes an “owner” from a “mere licensee.” The court concluded that the earliest case, United States v. Wise, 550 F.2d 1180 (9th Cir. 1977), “establishes that even a transfer that places severe restrictions on the use and disposition of a copy of copyrighted material can transfer ownership of that copy.” A trio of later cases—MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995); Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006)—“were more deferential to the characterization of a transaction as a mere license” and deemed the transfer of possession pursuant to a license to be a mere license with no transfer of ownership.
After examining this Ninth Circuit precedent, the District Court concluded that it was faced with an unavoidable conflict among these opinions. Given that conclusion, the court cited the rule that it must follow the oldest precedent among conflicting opinions from three-judge Ninth Circuit panels, namely, Wise. Applying that precedent, the District Court concluded that the transfer of the AutoCAD copies by Autodesk to CTA via the license agreement was a transfer of ownership which therefore entitled Vernor to assert the first sale doctrine. Specifically, the court found that the license purported to reserve title in the copy to the copyright holder but made no provision for the copyright holder to regain possession of that copy; Autodesk licensees pay a single price to Autodesk at the outset; and the license severely restricted the use and transfer of the copy.
Having reached this conclusion, the District Court closed its discussion by touching upon the policy concerns raised by the parties. Although it acknowledged that the parties’ “contentions make for interesting debate,” the court emphasized that its decision was not based on any policy judgment. Rather, “[p]recedent binds the court regardless of whether it would be good policy to ignore it. The court has followed Wise solely for the reasons stated in this order, not because of any policy judgment.”
Autodesk appealed the District Court’s decision to the Ninth Circuit. Autodesk’s briefing on appeal argued that the District Court had misread Wise which in turn had relied upon an even earlier case, Hampton v. Paramount Pictures Corp., 279 F.2d 100 (9th Cir. 1960), in which the Ninth Circuit purportedly held that if a contract characterizes the transaction as a license, that characterization controls. In short, Autodesk argued that Ninth Circuit precedent established that “where the parties’ agreement makes clear that the copyright holder is only licensing its property while retaining ownership, and imposes restrictions on the licensee’s use and right to transfer, the transaction is a license, not a sale.” Thus, in that instance, the first sale defense would not be available.
A copy of Autodesk’s opening brief can be found here and its reply brief here. Vernor’s appellate brief can be found here. This appeal spawned four amicus curiae briefs: from the Motion Picture Association of America, Inc. in support of reversal (found here); from the Software & Information Industry Association in support of reversal (found here); a collective brief from several library associations, the Consumer Federation of America, the Electronic Frontier Foundation, Public Knowledge and the U.S. Public Interest Research Group in support of affirmance (found here); and from eBay Inc. in support of affirmance (found here).
You can listen to the oral argument before the Ninth Circuit on the appeal here.
In its opinion issued today, the Ninth Circuit reversed the District Court, concluding that Vernor was not entitled to invoke the first sale defense.
The Ninth Circuit framed the issue similarly to the District Court--if CTA was the "owner" of the AutoCAD packages received from Autodesk then Vernor's subsequent sales of those packages were non-infringing under the first sale doctrine. Conversely, if Autodesk only licensed the packages to CTA, Vernor's sales are not protected under the first sale doctrine, which only applies to "owners" of copies of copyrighted works.
As an initial matter, the Ninth Circuit acknowledged that it had not yet resolved the disputed issue of which party bears the burden of proving the first sale and avoided deciding the question, noting that the facts in the case were undisputed.
Not surprisingly, the Ninth Circuit's opinion focused on an examination of the four cases addressed by the District Court, namely, Wise and the so-called "MAI trio."
From the Wise opinion, the Ninth Circuit gleaned the following guidance on the "owner vs. licensee" question:
Thus, under Wise, where a transferee receives a particular copy of a copyrighted work pursuant to a written agreement, we consider all of the provisions of the agreement to determine whether the transferee became an owner of the copy or received a license. We may consider (1) whether the agreement was labeled a license and (2) whether the copyright owner retained title to the copy, required its return or destruction, forbade its duplication, or required the transferee to maintain possession of the copy for the agreement's duration. . . . We did not find any one factor dispositive in Wise: we did not hold that the copyright owner's retention of title itself established the absence of a first sale or that a transferee's right to indefinite possession itself established a first sale.
As to the MAI trio, the Ninth Circuit first concluded that those cases' construction of the phrase "owner of a copy" of copyrighted software for the "essential step defense" in the Copyright Act (17 U.S.C. Section 117(a)(1)) controlled the analysis of the meaning of "owner of a particular copy" of copyrighted software under the first sale doctrine.
After examining the facts and holdings of the MAI trio, the Ninth Circuit then reconciled those cases with Wise, concluding that together they
prescribe[d] 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.
To the extent there remained any doubt, the Ninth Circuit made it clear that these factors constituted the test for making the "owner vs. licensee" determination:
We hold today that 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.
Perhaps notably missing from this holding is any qualifier that other factors may be relevant to the analysis.
In any event, applying these elements, the Ninth Circuit readily concluded that they established that Vernor was not an "owner" of the AutoCAD packages and was therefore not entitled to invoke the first sale defense:
Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is 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. The SLA also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee's unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to [the AutoCAD copies] and imposed significant transfer and use restrictions, we conclude that its customers are licensees of their copies of [AutoCAD packages] rather than owners.
Like the District Court, the Ninth Circuit recognized "the significant policy considerations" raised by the parties and amici but concluded that it was bound by its precedent.
The case cite is Vernor v. Autodesk, Inc., No. 09-35969 (9th Cir. Sept. 10, 2010).
