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New Media and Technology Law Blog

Ninth Circuit Rules on License versus Sale of Software

Posted in Copyright

The Register of Copyrights may have concluded that precedents defining the difference between a license and a sale of software are conflicting (see our prior blog post on that point), but a panel of the Ninth Circuit had no difficulty in resolving the issue in its recent opinion Vernor v. Autodesk, Inc., 2010 U.S. App. LEXIS (9th Cir. Sept. 10, 2010). The panel reconciled a series of prior panel rulings deemed inconsistent by the lower court, and ruled that proposed resales of packaged software via an eBay auction were not protected by the copyright first sale doctrine because the initial transaction between the software developer and its transferee was a license, not a sale.

The ruling will please software developers seeking to limit resales and other downstream transfers of their products, and will likely also benefit content owners who distribute their content digitally. In brief summary, the court held 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.”

The transaction between Autodesk and its transferee was deemed to have met that test without difficulty. Licensing attorneys should take note of the specific factors that the court considered:

  • The software was initially transferred by Autodesk pursuant to a Softtware License Agreement that expressly retained title to the software.
  • The SLA included express prohibitions against further transfers or leases of the software without the developer’s express written consent; use outside the Western Hemisphere; modifications, translations or reverse-engineering; removal of proprietary marks on the software or related documentation; or circumventing any copy protection device.
  • The SLA also provided for termination of the license for unauthorized copying by the licensee, or for failure to comply with other license restrictions.

The appeals court rejected the argument that the dispositive factor in distinguishing a license from a sale is whether the transferee was entitled to retain possession of the copy of the copyrighted work in question. The court also rejected the argument that is ruling created a split of authority with the Federal and Second Circuits.

There are some other elements pertinent to the transaction that the court recited in the opinion although it did not specify that these affected the determination of the license/sale issue, perhaps in order not to unduly narrow its ruling. Nevertheless, note should be taken of them.

  • The SLA accompanying the software had to be accepted before installing the software. If a customer chose not to accept the SLA, the software could be returned for a full refund.
  • The developer offered several different SLAs with different terms for commercial, educational institution and student users, with the commercial license (which applied to the software at issue) being the most expensive, but with the fewest restrictions.
  • The SLA provided that if the software is an upgrade of a previous version, the customer must destroy any previously licensed copies, including those resident on a hard drive; the developer reserved the right to require proof that the copies had been destroyed.
  • The developer utilized license enforcement measures that included the use of serial numbers attached to each copy. Customers were also required to input a separate activation code, obtain from the developer, within a month after installing the software. This code could be reused, however.

The Ninth Circuit panel heard oral argument in Vernor v. Autodesk in June. On the same day, the same panel heard arguments in two other cases that presented similar or related issues. The appeal from the ruling in  MDY Industries, LLC v. Blizzard Entertainment, Inc. (D. Ariz. 2008) concerns whether a purchaser of a copy of a videogame is the owner of the copy under 17 U.S.C. § 117(a).  The appeal from the ruling in Universal Music Group v. Augusto (C.D. Cal. 2008) concerns ownership of a copy of a music recording on a promotional CD.

The court has yet to release opinions in those cases.