22 September 2010

US Copyright First Sale Doctrine Not Applicable to Licenses for Digital Medial Products

As reported on the Internet Cases blog and the Austin Technology Law blog, the Ninth Circuit Court of Appeal recently decided the case Vernor v. Autodesk, relating to copyright of software products and the US first sale doctrine according to 17 U.S.C. § 109 of the US Copyright Act of 1976 (comparable to the exhaustion doctrine of US and European of patent law), which limits copyright in that a purchaser of a copyrighted work is allowed to transfer a lawfully made copy of the purchased work without permission of the copyright holder.

In this case the first sale doctrine was verified for applicability to digital copies of software (as opposed to a physical copy of a work) and to a licensed work (as opposed to being sold), whereas the Court found that the doctrine is not applicable if the copyrighted work is distributed under a license. Consequently, the licensee or any subsequent possessor of the work cannot anymore use the “first sale doctrine” as a defense to a copyright infringement action, as opposed to the owner of a purchased work.

Mr. Vernor, who bought several used copies of Autodesk's AutoCAD software suit from Seattle based architecture firm Cardwell/Thomas & Associates (CTA) and tried to sell them on eBay. As Autodesk asserted that Vernor infringed Autodesk’s exclusive copyrights to distribute the software, Vernor filed a declaratory judgment action to ask the Court to declare that such sales were not infringing, which the lower instance Court granted. Later, upon appeal of Autodesk, the Ninths Circuit held that Vernor's conduct was not protected under the first sale doctrine, due to the software license agreement between Autodesk and CTA, the original distributor and copyright owner of the software, according to which Autodesk retained ownership of the copyright.

While the lower court held that Venor was the “owner” of the copies of software, the Court of Appeals held that both CTA and Vernor only were licensees and thus cannot claim protection under the first sale doctrine. The court remanded the case for consider of other issues including a claim that Autodesk misused its copyright.

Criticism: Evan Brown of Hinshaw & Culbertson (Internet Cases Blog) fears that this case opens the doors for non-software vendors to restrict use and transfer of virtually any media product by calling the arrangement a license to retain ownership and that the case gives great power to software companies to really tie up tangible media to the detriment of consumers. Likewise, Paul Stanfield of Stanfield & Hiserodt (Austin Technology Law Blog) regards the decison right under the law but suspects that owners will start inserting “magic words” and turning everything into a license, which is why he is convinced that the US Congress will follow the Court's invitation to statutory changes.

Further, Erik Sherman took the position in a related BNET article, that "this isn’t about AutoCAD [but] about all manner of electronic media" and pointed out that Amazon's MP3 music store strongly restricts transfer of songs and the Kindle digital content terms are even more restrictive, while the Apple iTunes terms do not show similar restrictions for music and videos, but the App Store specifies that "the software products made available through the App Store are licensed, not sold, to you". Based on this finding, Mr Sherman further analysed that
[t]his raises some interesting business questions. Is there a competitive advantage to selling copies of files rather than licensing them because customers will perceive greater value? Will the entire industry continue to gravitate toward walled garden models? Not just Apple, but Amazon, wireless carriers selling handsets, and others. Most importantly, how long can the industry make use of licensing rather than outright sales and keep customers from getting irate?

Granted, software companies have used licensing language for decades. However, apps, music, video, ebooks, and digital magazines have a different sense to them and consumers are more likely to want to sell and trade them, just as they sell old books, music CDs, and DVDs. It may be a case where companies will have to give up restrictions if only to keep their customers placated.

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