A prior entry to this blog discussed the recent district court decisions in Vernor v. Autodesk and Blizzard v. MDY, both of which addressed the question of whether to give effect to a software publisher's "license" to software, or to treat the transaction as a "sale."  We concluded that the Vernor decision was wrong, while Blizzard was correct.  We now compare the two decisions in more detail.

Though the Vernor and Blizzard decisions deal with different provisions of the Copyright Act, they squarely conflict.In Vernor, Judge Jones’ conclusion that the Autodesk customer was the “owner,” not “licensee” (in spite of having negotiated and signed a license agreement) gave downstream possessors of that software a defense to copyright infringement.Namely, the judge held that selling those used copies of Autodesk software on eBay – although prohibited by Autodesk’s license – was permitted by the “first sale” defense available to “owners” of copyrighted works under section 109 of the copyright law.  Specifically, the first sale defense allows “the owner of a particular copy [of a copyrighted work]” to sell or otherwise dispose of the possession of the work without the authority of the copyright owner. The first sale defense would not have applied in Vernor if the judge had ruled that the Autodesk software was licensed.

In Vernor, Judge Jones declined to follow three Ninth Circuit software cases that addressed the question of whether a typical software license is really a "sale" due to the context of the transaction.  Though these three cases all eventually ruled on a different section of the Copyright Act (section 117, at issue in Blizzard), the core question was the same as in Vernor: do contextual facts such as allowing a user to keep the software, and collecting a one-time payment, convert a software "license" into a sale? All three prior Ninth Circuit cases held that they did not - the license was treated as a license, in light of various limitations on use similar to those at issue in Vernor.  But instead of following the recent Ninth Circuit precedent, the Vernor court applied a much older Ninth Circuit case, United States v. Wise.This was surprising, considering that Wise (1) had not been followed for some time in the Ninth Circuit on the issues relevant to this case, (2) Wise involved the transfer of physical movie film prints, not software, (3) Wise applied an older, different version of the copyright law involving different language at issue, (4) Wise was a criminal copyright infringement case, placing the burden of proof on the government to show the absence of a first sale, and requiring a higher burden than a civil case, and (5) Wise actually upheld the defendant’s conviction and found no first sale on most counts, including the counts most analogous to the Vernor case.

In Wise, the Ninth Circuit analyzed the defendant’s resale of films that had been obtained contrary to the terms of distribution licenses between studios and various exhibitors.All of the activities at issue occurred prior to the 1976 Copyright Act taking effect, so the 1909 Act applied.The majority of licenses at issue expressly retained title in the film with the studio, and contained limits on the licensees’ uses of the films.Thus, the Court ruled that no first sale occurred, and the defendant’s subsequent attempts to resell the films constituted infringement.The Court found two very limited exceptions.First, the conviction on one of the counts was reversed because the particular license at issue did not reserve title in the studio, and allowed the recipient to retain the copy at his election, and the government provided no evidence whether the recipient exercised this right.A second count was reversed because a single “VIP” agreement contained language distinct from all of the other VIP agreements, suggesting that the particular transaction was meant to be a payment in full for exchange in ownership of the film.All of the other VIP agreements, which expressly retained title in the studio, were found to be licenses.

Nevertheless, in the Vernor case Judge Jones relied upon Wise for its key holding that the Autodesk transactions were sales because the recipients were not required to return their copies.Not only does Wise not support that position, but the case was essentially ignored by the parties in their briefing of the Vernor case (appearing a single time in a string of citations).  Apparently the parties assumed, reasonably, that Wise had little or no bearing on their case.

In the Blizzard case, decided a few weeks later by an Arizona court, the judge avoided criticizing the Vernor decision, and instead attempted to distinguish it.Judge Campbell explained that the defense at issue in Blizzard was the section 117 “essential copy” defense, which was the exact same provision at issue in the three Ninth Circuit software cases. Because these three cases constitute binding precedent directly on point with the Blizzard case, the court was obligated to follow the reasoning and holding of these cases in determining whether a person is the “owner” of a software program.The defense at issue in Vernor was the first sale defense – not the section 117 “essential copy” defense.Thus, apparently Judge Jones believed in the Vernor case that he had the freedom to depart from the three Ninth Circuit software cases (and the test for determining when a person is an “owner” or licensee of a software program), and instead chose to rely on the Wise case.

In truth, there is no principled distinction between section 109 cases and section 117 cases for the purpose of determining an “owner” of software.Both exceptions contain the same controversial term – “owner” – and each of the Vernor and Blizzard cases stands or falls on how that term is interpreted by the courts.It is still hard to fathom how Judge Jones could disregard the Ninth Circuit’s repeated, recent interpretation of this term and instead rely on Wise when:

• The three Ninth Circuit software cases involved software licenses similar to the software license at issue in Vernor.The Wise case involved film prints and the Ninth Circuit is on record in Wall Data as saying that the software license must be treated differently than prints, noting that “[s]oftware fundamentally differs from more traditional forms of medium, such as print …;”
• The three Ninth Circuit software cases were decided under the 1976 Copyright Act.However, the Wise case was decided under the 1909 Copyright Act, which used very different terminology than the 1976 Act.In fact, the 1909 Act does not even use the term “owner,” but rather refers to mere “possession.”
• The terms of the Autodesk license at issue in Vernor are more restrictive than the licenses found to be licenses in the three software cases and the Blizzard case.For example, the Blizzard license allows certain transfers, whereas, the Autodesk license prohibits all transfers.

The Vernor case, and perhaps the Blizzard case, will be appealed.  We will offer further thoughts as those appeals progress.