US Ruling on Software Resale

October 11, 2009

Can an individual  re-sell software on sites such as eBay under the US’s first sale doctrine? According to a decision from the US District Court for the Western District of Washington, the answer is Yes. The court added that the existence of the shrinkwrap ‘licence’ does not prevent the ‘licensee’ from doing so.

The case, Timothy S Vernor v Autodesk Inc, concerned an eBay merchant named Timothy Vernor. Over a number of years Mr Vernor has bought authentic AutoCAD packages at garage/office sales and put them up for auction on eBay. Each time Autodesk, the makers of AutoCAD, issued DMCA cease and desist notices to try and block the auctions, arguing that it only licenses copies of its software, rather than selling them, and that therefore any resale of the software constitutes copyright infringement, and warning Vernor that they would take further legal action if he persisted in his actions.

The Licence Agreement that comes with the AutoCAD software includes a number of restrictions on use, including a prohibition on ‘rent, lease, or transfer [of] all or part of the software. Documentation, or any rights granted’ without the written consent of Autodesk.

Last year Judge Jones dismissed Autodesk’s motion to dismiss or grant summary judgment, finding that, whilst the mere possession of a copyrighted copy pursuant to a licence is not a sale, in this case the critical issue was whether the person who paid for the software was allowed to keep it or not. If they were then it was a sale regardless of any licence agreement.

Finding conflicting precedents, Judge Jones decided that the Ninth Circuit court’s ruling in United States v Wise, which directly addressed the classification of sales and licences for the purposes of first sale with respect to film prints, was the most appropriate despite the fact it did not deal with software. In that case, the court drew a distinction between a licence and a sale based on whether there was a provision for the copy of the film print to be returned to the film studio at some point or whether the ‘buyer’ kept the film indefinitely. The former would be a licence, the latter a sale.

Following that precedent led the Court to a conclusion that ‘the transfer of AutoCAD packages from Autodesk to CTA – the company Vernor bought his copies from in an office sale – was a sale with contractual restrictions on use and transfer of the software’. As a result the copies could be resold and Mr Vernor could invoke the first sale doctrine and sell his copies of the software without committing a copyright violation.

Judge Jones also dismissed a further argument by Autodesk that Mr Vernor and anyone he subsequently sold the software to are bound by the Autodesk licence saying ‘The Autodesk License is expressly ‘nontransferable.’ License: Grant of License. Autodesk does not explain how a nontransferable license can bind subsequent transferees.’

However, he added if they believed the licence did bind Mr Vernor and others it would need to file a new motion addressing that argument.

The parties then filed cross-motions for summary judgment. On 30th September 2009 the court issued a new judgment, once again in favour of Mr Vernor.

Judge Jones wrote that little had changed in the intervening 17 months and there were no materially different facts before the court than at that time. He did not accept Autodesk’s assertion that the court’s interpretation of owner would harm both software producers and consumers, and found Autodesk’s attempt to establish the common understanding of ‘ownership’ by citing a legal dictionary equating ownership with unrestricted ownership as consistent neither with Wise nor with common understanding.

He said: ‘For example, a person who buys a home is nonetheless restricted in his use and subsequent transfer of the home by property laws, zoning ordinances, and fair housing statutes. No one would characterize the person’s possession, however, as something other than ownership. Similarly, the court cannot characterize Autodesk’s decision to let its licensees retain possession of the software forever as something other than a transfer of ownership, despite numerous restrictions on that ownership’.

It seems likely that Autodesk will appeal this ruling. It would not be a big surprise to see another court take a different line and accept Autodesk’s argument that, unless the shrinkwrap licence itself is struck down as unenforceable, the licence makes it clear that the author retains ‘ownership’ of the software, and all a user is ‘buying’ is the licence to use the software. As such, you cannot ’sell’ that software to anyone else, because you don’t own it.

Indeed the conflicting precedents that Judge Jones decided not to follow would have certainly led to a victory for Autodesk. The Ninth Circuit court’s ruling in MAI Sys. Corp. v Peak Computer, cited in two subsequent cases, found that if a company licensed its software, its customers do not qualify as ‘owners’ of the software.

They might also look to a more recent decision by the US District Court for the District of Arizona in MDY Industies v Blizzard Entertainment, which also cited MAI, in finding that purchasers of the game World of Warcraft (WoW) did not own their copy but are mere licensees of the game.

On the other hand, another court might agree with Judge Jones that, whilst the cases above did all deal with software, there remains no basis for concluding that an agreement to permit perpetual possession of property could be construed as reserving ownership. If the sale of the software and the ‘licence’ doesn’t include any provision for the copyright ‘owner’ to regain possession of the copy of the software then software licensing should be seen as a simple sale of goods not a mere licence to use.

A July 2008 decision, from the District Court for the Central District of California, certainly found this to be the case. In UMG v Augusto, the Court dismissed claims by Universal Music (UMG) that warnings on ‘Promo CDs’  stating that: (i) they are the property of the record company; (ii) are licensed to the intended recipient for personal use only; and (iii) that resale or transfer is not permitted,  created a licence and prevented the resale of the CDs. The Court ruled that the initial recipients of ‘promo CDs’ own them, as ‘UMG gives the Promo CDs to music industry insiders, never to be returned’. It also added this ownership was not dependent on the recipient paying UMG for the CDs. UMG are appealing this decision to the Ninth Circuit.

If AutoDesk do decide to appeal, the Ninth Circuit should reach its own conclusion in 2010. 

Scott Vine is Senior Information Officer, Communications Media and Technology Group, Clifford Chance LLP; and author of the Information Overlord Blog:

The judgment can be read here