Jan 25 2011

Ninth Circuit in Vernor got first sale doctrine right

The Ninth Circuit revisited the ownership question involved in copyright first sale in Vernor v. Autodesk, Inc., 2010 WL 3516435 (9th Cir. 2010) and got it right, adopting a variation of the Federal Circuit’s DSC decision and the approach taken by all other Circuit Courts that have looked at the question.  The terms of the contract control whether the transferee becomes the owner of the copy.

Vernor involved a single payment, perpetual software license that limited the licensee’s use and right to transfer the software.  Copies of the software were sold by the licensee to Vernor, who then offered them for resale on eBay.  Vernor did not use the software and did not assent to the licenses.  But the original licensee did.  The question was whether Vernor’s intended resale was protected by first sale doctrine.  The parties and the court agreed that if the first transfer was not an authorized sale and did not give the first licensee the right to make a sale under the authority of the licensor, Vernor was not protected by first sale doctrine.  This is an application of ordinary rule that there is no good faith purchaser in copyright law. That rule exists because the rights involved are intangible in nature while good faith purchase concepts typically focus on rights in tangible objects.

 

            The District Court held that the single payment perpetual license terms controlled and that the first transfer was a sale.  The Ninth Circuit reversed.  It adopted an integrated approach reconciling its prior opinions and properly focused on the overall terms of the license and whether the license gave rights equivalent to the owner of a copy.  The issue is not ownership of the plastic, but ownership of the copy, which includes rights in the work. The Ninth Circuit set out a more structured approach to distinguishing between when a license does and does not transfer ownership than did the Federal Circuit in DSC.  But the ruling was simple and correct:

 

We hold today 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 court’s analysis did not conclude that these three elements were the only elements that make a license transaction not a sale of a copy, but the three elements clearly indicate a license, rather than a transfer of copy ownership.

 

            In the particular case, the court held that there was no transfer of copy ownership:

 

Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is nontransferable, the software could not be transferred or leased without Autodesk's written consent, and the software could not be transferred outside the Western Hemisphere. The [license agreement] also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the [license agreement] provided for termination of the license upon the licensee's unauthorized copying or failure to comply with other license restrictions.

 

The focus is not simply on ownership of the plastic, but whether the transaction gave rights in the work that is part of the copy and that are consistent with copy ownership.  This is consistent with the congressional judgment in both of the first sale exemptions (§§ 109; 117) and creates a setting in which, if it chooses to do so and can obtain acceptance of the relevant contractual terms in the market, the rights owner can use its property rights to manage how the copies are used and redistributed.

 

            This allows the copyright owner to contractually shape commercialization of its work.  Whether in fact a choice to license rather than sell copies results in higher economic return depends on the quality of the work and the reception of the marketing choice.  But the rule places the choice in the proper hands - the copyright owner.

 

            The primary contrary position argues that copyright owners’ rights should be narrow and not allowed to be expanded through the use of contract terms.  This is the rights-restrictors argument that I have discussed.  At its core is the premise that only the minimum rights necessary should be allowed to creators of copyrighted works.  One variation is the argument that contracts should not be allowed to “over-ride” the policy in first sale doctrine.  That alleged statutory policy is one that frees up distribution and use of copies after a first distribution.  But this is not the policy that Congress adopted.  Instead, the statute limits the first-sale privilege to persons who become owners of a particular copy.  So the statutory policy decision actually makes the property rights in this respect specifically subject to the terms of the contract.

 

            Vernor was part of a trilogy of case dealing with first sale in the Ninth Circuit.  The second, involving a license of gaming software, applied the standards laid out in Vernor and concluded that the licensee was not an owner of the gaming program.  MDY Industries, LLC v. Blizzard Entertainment. Inc., 2010 WL 5141269 (9th Cir. 2010) (licensee under a EULA not an owner under Section 117). 

 

            Both Vernor and MDY involved contractual relationships.  The third case did not.  In UMG Recordings, Inc. v. Augusto, 2011 WL 9399 (9th Cir. 2011) the copyright owner distributed unsolicited CD’s of new music to a large list of recipients.  The lawsuit was against a person who obtained some of the free copies and resold them.  The CD’s contained labels that purported to restrict their use.  As the court described:

 

The sparest promotional statement, “Promotional Use Only—Not for Sale,” does not even purport to create a license. But even the more detailed statement is flawed … [It] provides: “This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed …”  It is one thing to say … that “acceptance” of the CD constitutes an agreement to a license and its restrictions, but it is quite another to maintain that “acceptance” may be assumed when the recipient makes no response at all.

 

There was no evidence as to whether the recipients of the free CD’s accepted the terms of the license or used the CD’s, only that they received the CD’s and did not object or make any other response.  This brings into play traditional contract law doctrine that while behavior, writing or words can manifest acceptance of terms, mere silence is not enough to form a contract.

 

            UMG also faced a federal law dealing with unsolicited deliveries of product.  In relevant part, federal law allows the recipient of an unsolicited product to treat it is a gift and to transfer, use or otherwise deal with it as the recipient’s own.  As the court commented: “This provision is utterly inconsistent with the terms of the license that UMG sought to impose on the recipients.”

 

So a gift with no contract terms transferred ownership under first sale doctrine.

 

The Ninth Circuit may have got it right three times.  But one wonders what is the effect of Augusto on the free software community, some members of which argue that their licenses are not contracts?

 

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