Vernor v. Autodesk: Ninth Circuit test for distinguishing software owners from licensees

On Friday, the Ninth Circuit clarified its test for determining whether a software purchaser is a licensee or an owner of the purchased copy in Vernor v. Autodesk, Inc. The result affirms the ability of software publishers to restrain licensees’ ability to sell, rent, or otherwise transfer their copies, but has left some concerned about the implications for customers buying movies, music, and other media.

Vernor resulted from a dispute over the sale of used software. Caldwell/Thomas & Associates, Inc. (CTA) purchased copies of Autodesk’s AutoCAD Release 14 software. The terms of Autodesk’s license agreement for Release 14 stated that Autodesk retained title to all copies and granted the licensee a nontransferable license to use the software. In addition, it contained provisions that forbade licensees from “renting, leasing, or transferring the software” and requiring that licensees who choose to upgrade to a newer version destroy their older copies of the software. CTA later purchased copies of a later version of AutoCAD for a reduced upgrade price, but sold their copies of the older software at an office sale instead of destroying them.

Vernor purchased four copies of Release 14 from CTA and listed them for sale on eBay. Although he was aware that the software was sold under a license agreement, he did not believe that he was bound by its terms since he did not personally open the software, install it, or otherwise indicate acceptance. Over the course of several years, Autodesk filed notices that Vernor was infringing its copyright by attempting to auction copies of Release 14 on eBay. The first several times his auctions were delisted, Vernor fought back and had them relisted, but eventually eBay suspended Vernor’s account. Shortly thereafter, Vernor sought a declaratory judgment supporting his claim that his actions did not infringe Autodesk’s copyrights. The parties’ primary disagreement involved whether CTA owned its copies of Release 14 or merely licensed them from Autodesk. The answer could determine whether Vernor’s auctions infringed Autodesk’s copyrights or not.

17 U.S.C. §106 enumerates the rights exclusive to the owner of a copyright in a work, including distribution of a copy of the work by “sale or other transfer of ownership, or by rental, lease, or lending.” Believing that customers who buy a copy of a copyrighted work outright should be able to convey it to others as they please, the Supreme Court established what we now know as the first sale doctrine in Bobbs-Merill Co. v. Straus, 210 U.S. 339 (1908). The modern form of the doctrine, found in 17 U.S.C. §109, grants “the owner of a particular copy or phonorecord” the right to “sell or otherwise dispose of the possession of that copy or phonorecord” without the copyright owner’s permission. However, this right does not extend to those who possess a copy of a work without acquiring ownership of the copy. 17 U.S.C. §109(d).

Vernor argued that Autodesk licensed CTA to use Release 14, but that CTA owned the physical copies of the software and conveyed ownership to Vernor. As such, Vernor would have the right to sell those copies on eBay. Autodesk countered that CTA never owned the copies but merely licensed them, along with the right to use them, and therefore could not convey ownership to Vernor. Under this view, Vernor never owned the copies, and thus had no right to convey them to another purchaser. Autodesk moved for summary judgment or dismissal for failure to state a claim.

At trial, the Western District of Washington court looked to earlier Ninth Circuit opinions for guidance on how to determine whether the copies were licensed or sold. The court first considered United States v. Wise, 550 F.2d 1180 (9th Cir. 1977), where the Ninth Circuit urged courts to “look at a transaction holistically” and consider various features of transfer agreements (including payment schedule, provisions for destruction of copies, and so on) to determine whether a sale or license took place. The court contrasted this approach with the rule from a trio of cases beginning with MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993) finding that customers who licensed software did not qualify as “owners” for the purposes of the Copyright Act. The court found that these two approaches were irreconcilable, and followed Wise as “the oldest precedent among conflicting opinions from three-judge Ninth Circuit panels.” Although Wise instructed that no single factor would be dispositive, the district court in Vernor focused on the fact that the Wise court found ownership in all the transfers where “the transferee could . . . retain possession of the transferred copy indefinitely, and the copyright holder had no right to regain possession.” The court found that Autodesk’s license agreement transferred ownership of the copies to CTA, concluded that Vernor’s sales did not infringe Autodesk’s copyright, and denied Autodesk’s motion.

In Friday’s opinion (PDF), a Ninth Circuit panel vacated the district court’s judgment. The court disagreed with the trial court’s interpretation of Wise, implying that it gave undue importance to the transferee’s ability to retain its copies indefinitely. Interpreted correctly, Wise and the MAI trio of cases could be reconciled, and precedent required the court to do so. It announced a new rule: “A software use 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.” Under this test, the court found that CTA merely licensed its copies from Autodesk and could not convey ownership to Vernor. Unconvinced by Vernor’s counterarguments and by policy arguments presented by eBay and the American Library Association, the court remanded the case for reconsideration under the newly announced rule. The AP reports that Vernor’s attorney plans to request an en banc review of the decision and appeal to the Supreme Court if necessary.

Several early reactions have speculated that this opinion will have consequences beyond the software market. Writing for Ars Technica, Nate Anderson compared the license terms of music purchased from Amazon’s MP3 store favorably with the terms of Autodesk’s successful license and concluded “Used music stores? Out of business in the digital age.” Others feared that similar licenses would make their way into more traditional media. The AP article mentioned above quotes Corynne McSherry with the Electronic Frontier Foundation predicting that copyright owners will now be searching for “the magic words that prevent a buyer of intellectual property from being considered the owner.” The American Library Association brought these concerns to the Vernor court’s attention—it called “fears that the software industry’s licensing practices could be adopted by . . . book publishers, record labels, and movie studios” a “serious contention”—but it suggested that any policy-driven modifications to the first sale doctrine should come from Congress, rather than the courts.

Since the rule announced in Vernor specifically refers to “software user[s],” it remains to be seen how the Ninth Circuit would regard similar license agreements accompanying traditional media. Two years ago in UMG Recordings, Inc. v. Augusto, 558 F. Supp. 2d 1055 (C.D. Cal. 2008), a district court within the Ninth Circuit found that the defendant owned CDs even though they arrived with labels reading “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 and may be punishable under federal and state laws.” In doing so, it cited Wise and found that the defendant’s “ability to indefinitely possess the Promo CDs” was a “strong incident of ownership through a gift or sale.” Now that the Ninth Circuit has rejected a similar argument in the context of software licensing, publishers are sure to be wondering whether a court would find such a license agreement on a CD or book to convey a mere license in the copy instead of ownership. Since UMG appealed the decision in Augusto to the Ninth Circuit, there may be a definitive answer soon.