In Vernor v. Autodesk, Inc., 87 USPQ2d 1501 (W.D.Wash. 2008), the Western District of Washington recently held that the unauthorized sale of used software packages on an internet auction site could be permissible under the first-sale doctrine. The action was brought as a declaratory judgment claim by plaintiff Timothy Vernor, who sought a declaration that his sale of certain used Autodesk software on eBay would not infringe the copyright in the software. As the court described the facts,
In 2007, Mr. Vernor bought four authentic, used AutoCAD packages from an office sale at Cardwell/Thomas Associates (“CTA”), a Seattle architecture firm. Mr. Vernor sold three packages on eBay, but each time he put a package up for auction, an exchange of DMCA notices from Autodesk, suspension of the auction by eBay, counter-notices from Mr. Vernor, and reinstatement of the auction followed. When Mr. Vernor attempted to sell the fourth AutoCAD package, Autodesk filed another DMCA notice, and eBay responded by suspending Mr. Vernor's eBay account for one month for repeat infringement. . . .
Mr. Vernor now has two AutoCAD packages that he wishes to sell. By tracing the serial numbers on the packages, Autodesk has determined that both were originally transferred from Autodesk to CTA in a settlement of an unrelated dispute. According to the Settlement Agreement, CTA paid just over $44,000. That sum “include[d] the acquisition by [CTA] of ten (10) packages of AutoCAD®, Release 14 software....” Autodesk shipped the packages to CTA; CTA eventually resold some of the packages to Mr. Vernor, including the two AutoCAD packages that Mr. Vernor now possesses.
The software delivered to CTA was also subject to a License Agreement which imposed a number of restrictions. Notwithstanding this License Agreement, Vernor argued that the software packages he acquired from CTA and sought to sell on eBay had already been subject to an authorized first sale. Accordingly, under § 109 of the Copyright Act, Vernor argued that his re-sale of the software packages was not infringing.
The court explained the first sale doctrine:
The first sale doctrine is a narrow limitation on a copyright holder's rights. The Copyright Act gives a copyright holder the exclusive right to reproduce his copyrighted work (17 U.S.C. § 106(1)), the exclusive right to prepare derivative works based on his copyrighted work (17 U.S.C. § 106(2)), and the exclusive right to distribute copies of his work (17 U.S.C. § 106(3)). When a copyright holder chooses to sell a copy of his work, however, he “exhaust[s] his exclusive statutory right to control its distribution.” Quality King Distribs., Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135, 152, 118 S.Ct. 1125, 140 L.Ed.2d 254 (1998). Because a first sale exhausts the copyright holder's distribution right, future distributions of the copy do not implicate the Copyright Act. United States v. Wise, 550 F.2d 1180, 1187 (9th Cir.1977) (noting that after “first sale,” a vendee “is not restricted by statute from further transfers of that copy”). A first sale does not, however, exhaust other rights, such as the copyright holder's right to prohibit copying of the copy he sells. Wise, 550 F.2d at 1187 (noting that “other copyright rights (reprinting, copying, etc.) remain unimpaired”). For example, the first sale doctrine permits a consumer who buys a lawfully made DVD copy of “Gone With the Wind” to resell the copy, but not to duplicate the copy.
Obviously, the critical issue was whether Autodesk's transfer of AutoCAD packages to CTA was a sale or a mere transfer of possession pursuant to a license. If the transaction was a sale, then the restrictions of the License could give rise, at most, to a breach of contract claim, not a copyright infringement claim.
The court’s analysis of the sale vs. license issue was guided by the Ninth Circuit’s U.S. v. Wise, 550 F.2d 1180 (9th Cir. 1977), a criminal case concerning film prints, decided under the 1909 Copyright Act. Under Wise, there are no bright-line rules, and the label the parties place on the transaction is not determinative. The court paid particular attention to the way Wise dealt with restrictions (or the lack thereof) on the physical disposition of the film prints there at issue:
Wise charts a path to distinguishing sales from non-sales in determining if the first sale doctrine applies. The Wise court considered numerous transfer contracts between movie studios and recipients of movie prints, and found that almost all of them were licenses, loans, or other non-sale transactions. Many of the contracts “reserved title to the film prints” in the studio, and required that the recipients return the prints following the expiration of a fixed term. Wise, 550 F.2d at 1190.Those contracts were labeled “licenses,” and all transferred “only limited rights for the exhibition or distribution of the films for a limited purpose and for a limited period of time.”Id. In some contracts, the studios did not expressly reserve title to the film print. Nonetheless, the court found that this omission was not determinative because “the general tenor of the entire agreement [was] inconsistent” with a sale. Id. at 1191.As to all of these contracts, the court found that they were not “first sales, since both on their face and by their terms they were restricted licenses and not sales.” Id. at 1190.The court reached the same conclusion as to several “V.I.P. agreements” in which studios loaned film prints to movie stars for their private use, expressly retaining title to the prints. Id. at 1192.
When the Wise court considered three types of contracts that allowed the recipient to keep the film print, however, it found sales. One contract allowed a television network receiving the film prints to retain one print, without restrictions on its resale. Wise, 550 F.2d at 1191-92 & n. 20.Another contract, for the sale of a film print to actress Vanessa Redgrave (“the Redgrave Contract”), required Ms. Redgrave to pay a fee to receive a film print that was subject to draconian transfer restrictions. Id. at 1192.Ms. Redgrave could use the print only for her “personal use and enjoyment,” was required to retain possession of the print “at all times,” and could not sell, lease, license, or loan the print to any other person. Id. Despite the absolute bar on transferring the film, the court found that the “transaction strongly resembl[ed] a sale with restrictions on the use of the print.” Id. The court held that the defendant could rely on the first sale doctrine with respect to his later sales of the print. Id. at 1192, 1194. Finally, the court found that film prints transferred solely for salvage or destruction were sold. Id. at 1192-93.
In comparing the transactions found to be sales in Wise with those that were not, the critical factor is whether the transferee kept the copy acquired from the copyright holder. When the film studios required that prints be returned, the court found no sale. When the studios did not require the transferee to return the prints, the court found a sale. Even a complete prohibition on further transfer of the print (as in the Redgrave Contract), or a requirement that the print be salvaged or destroyed, was insufficient to negate a sale where the transferee was not required to return the print.
Applying Wise, the court in Vernor concluded that the transfer of AutoCAD packages from Autodesk to CTA was a sale:
Like the Redgrave Contract, the Settlement Agreement and License allowed CTA to retain possession of the software copies in exchange for a single up-front payment. Like the Redgrave Contract, the Settlement Agreement and License imposed onerous restrictions on transfer of the AutoCAD copies. Similar to the salvage transactions in Wise, the License required CTA to destroy the software in the event that it purchased a software upgrade. Under Wise, however, this is a “sale with restrictions on use,” and is a sufficient basis to invoke the first sale doctrine.
The court declined to apply a number of contrary decisions dealing with the question of software ownership under § 117, favoring Wise over other, more recent, Ninth Circuit precedents because it was the earliest of the conflicting decisions. Cases from other circuits, and from other district courts within the Ninth Circuit, were likewise disregarded because the court considered Wise to be binding notwithstanding the “persuasive authority” of the cited decisions.
The motion to dismiss Vernor’s declaratory judgment claim was therefore denied, and the docket sheet indicates that the matter has not been resolved.
The court’s reliance on Wise, a decades-old criminal case decided under the predecessor to the current Copyright Act, seems difficult to reconcile with the more recent Ninth Circuit cases specifically dealing with software, and indeed the court itself notes that the current case law is “in irreconcilable conflict” with Wise. It will be interesting to see if the matter goes up on appeal once the district court proceedings are concluded. Perhaps the Ninth Circuit alone will be in a position to undo the doctrinal confusion that Vernor so pointedly identifies.