Computing Applications Viewpoints

When Is a ‘License’ Really a Sale?

Can you resell software even if the package says you can't? What are the implications for copyright law of the Quanta decision discussed in the November 2008 column?
  1. Introduction
  2. UMG v. Augusto
  3. Vernor v. Autodesk
  4. What Will the Ninth Circuit Do?
  5. Author
  6. Footnotes
close-up of statement on retail item prohibiting sale or transfer

When you purchase a software package, the package will often inform you (or the software will inform you when you install it on your computer), that you are not the "owner" of a copy of it, but only a "licensee" whose entitlement to use the software is subject to certain restrictions. This may include a restriction on transferring your copy of that software to anyone else.

Suppose you ignore the no-transfer restriction and sell the software to someone. Have you breached an enforceable contractual obligation to the software’s developer? By transferring the package to someone else, have you infringed copyright or induced the purchaser of the software to infringe copyright? Is the purchaser of the used software an infringer when he loads it on his computer? Is he too bound by the license restrictions?

There is, oddly enough, no definitive court ruling on these questions. In Vernor v. Autodesk, Inc., a judge recently ruled that a purchaser of used software could lawfully sell the package on eBay because he was entitled to the benefits of the "first sale" rule of copyright law. This rule provides that although copyright owners may control distributions of their works to the public, the first sale of a particular copy to the public exhausts their right to control any further distribution of that copy. The rule applies to all transfers of ownership, including gifts or bequests, but not to licenses.

Reinforcing the Vernor ruling was UMG Recordings, Inc. v. Augusto, in which a judge recently refused to enforce a restrictive legend forbidding recipients of promotional CDs from selling or otherwise transferring the CDs to other people. As in Vernor, the court ruled that it was lawful for Augusto to sell the used CDs on eBay under the first sale rule.

UMG has already appealed the Augusto ruling to the Ninth Circuit Court of Appeals (which reviews lower court decisions from California and Washington where Vernor and Augusto were rendered), and Autodesk is likely to appeal as well. I predict that the Augusto ruling will be affirmed. Vernor is a closer case, but it too may be affirmed unless the Ninth Circuit overturns one of its long-standing precedents.

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UMG v. Augusto

Augusto buys and sells promotional CDs that UMG, among others, ship to insiders in the music business in hopes they will listen to the CDs and thereafter promote the music by spreading positive buzz about it. The CD packaging typically states: "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."

Augusto buys promotional CDs from music stores and online auctions and advertises them on eBay. When UMG found out about this practice, it sent Augusto a cease and desist letter, asserting that selling these CDs would infringe its copyrights. UMG made a similar claim to eBay and asked it to suspend Augusto’s account. EBay initially did so, but later reinstated the account after Augusto asserted that his sale of these CDs was lawful under the first sale rule.

UMG then sued Augusto for copyright infringement, alleging that the eBay sales infringed its exclusive right to control distribution of its works. The first sale rule did not apply, in UMG’s view, because the CDs had been licensed, not sold, to recipients.

Characterizing a transaction as a license does not, however, automatically make it so. The judge in Augusto looked to economic realities to see if the transaction was more like a sale or a license.

One important incident of ownership is a right to an unlimited duration of possession, whereas an incident of a license is an expectation that the property will be returned to its owner when the license expires or is breached. Recipients of the CDs seemed to be entitled to keep the CDs, and UMG produced no evidence that it expected to repossess the CDs. UMG could do nothing, moreover, if recipients destroyed these CDs, even though this would extinguish UMG’s claimed property rights. Nor were insider recipients of the CDs under any obligation to UMG to promote the music.

One can generally not obtain broader property rights in an artifact than had the person from whom you got it.

The judge concluded that UMG’s shipment of the CDs was a gift to the recipients, not a license. The recipients were, therefore, entitled to transfer their ownership interests in the CDs to Augusto under the first sale rule, and Augusto was free to resell the CDs on eBay.

The software industry will likely weigh in heavily on the Augusto and Vernor cases, for the decisions challenge a long-standing industry practice.

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Vernor v. Autodesk

CTA is an architectural firm that bought 10 copies of AutoCAD software. Some years later, it sold four copies of this software to Vernor at an office sale. Vernor has sold some of them already on eBay. Each time Vernor has tried to sell used AutoCAD software on eBay, Autodesk has contacted him and eBay to assert that the sale would infringe its copyrights because the software had been licensed, not sold, to CTA.

Although eBay initially suspended Vernor’s account, Vernor told eBay that the resales were lawful under the first sale rule. Autodesk ultimately acquiesced to some earlier resales by Vernor, but after it objected to his most recent effort to sell a copy of AutoCAD, Vernor sought a declaratory judgment that his resale of the software was lawful under the first sale rule. Autodesk moved to dismiss the complaint, arguing that the first sale rule did not apply.

The judge concluded that Vernor could resell the Autodesk software on eBay because the economic realities of the transaction rendered it a "sale." CTA, after all, had made a one-time payment for permanent use of the software, which is typical of sales transactions. Unlike typically licensed property, Autodesk had no interest in return of the software.

The judge relied on the Ninth Circuit’s ruling U.S. v. Wise. It held that an actress was the owner of a copy of a film, not a licensee, because she had obtained the right to possess it for an indefinite period and without an obligation to return it, even though she had also agreed not to transfer it and to use it only for personal use.

Applying Wise, the judge held that Autodesk had sold the software to CTA, and because of this, the first sale rule protected Vernor’s resale of the software on eBay.

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What Will the Ninth Circuit Do?

Augusto is an easier first sale case because the restrictive legend printed on the CDs resembles one that was printed in a book that the Supreme Court refused to enforce in Bobbs Merrill Co. v. Straus, which established the first sale rule in copyright law.

Recipients of the CDs cannot reasonably be understood to have agreed to UMG’s restrictive legend. Indeed, they demonstrated their lack of assent to it by selling or giving the CDs away. Because they were free to transfer the CDs to anyone, so was Augusto.

Consumers Union is submitting an amicus curiae (friend of the court) brief in Augusto pointing out that if the Ninth Circuit enforces UMG’s restrictive legend and rules that Augusto infringes copyright by reselling the CDs on eBay, this precedent would encourage manufacturers of all types of goods embodying some patented or copyrighted innovation to adopt similar restrictive legends. Such a ruling would substantially undermine competition in the marketplace for used goods.

Enforcing UMG’s restrictive legend also seems inconsistent with the Supreme Court’s recent decision in Quanta v. LGE Enterprises. As I explained in my November 2008 column, the Supreme Court ruled that a patent owner’s effort to restrict commerce in licensed technologies was inconsistent with patent law’s first sale rule. The Court left open the question about whether purchasers of the technologies could be held liable for breaching contractual restrictions, but made clear that they were not patent infringers.

Vernor is a tougher first sale case than Augusto for at least two reasons. First, CTA had agreed to abide by terms of the AutoCAD license. More generally, there is a stronger basis for inferring assent to "license" restrictions when a purchaser of a software package clicks "I agree" to terms of a license when installing the software (although it is not clear from the Vernor opinion whether CTA had installed the Autodesk programs). Second, the case law on whether the first sale rule applies to mass-marketed software is mixed.

Some judges have been persuaded that software developers should be free to contract as they wish with their customers who may return the software if they find license terms unacceptable Some defer to the widespread practice in the software industry of licensing software rather than selling it. If customers have agreed to be licensees and the license forbids transfer of the software, moreover, third-party purchasers such as Vernor are arguably incapable of being "owners" of that software. One can generally not obtain broader property rights in an artifact than had the person from whom you got it.

Yet, other judges have agreed with the Vernor decision that a one-time payment of money for a package of mass-marketed software that gives the purchaser rights to use software for an unlimited duration should be treated as a sale, even if it may be subject to some restrictions. Unless the Ninth Circuit overrules the Wise decision, Vernor may win the right to resell used software on eBay.

It is a separate question whether CTA breached a contractual obligation to Autodesk by transferring the software to Vernor. But even so, should Vernor be bound by the contract’s restrictions on transfers? It would seem not since he has not installed the software on his computer and has not agreed to its terms. A fundamental difference between contract rights and intellectual property rights is that the former bind only the parties to the agreement, whereas the latter bind the world. Besides, Autodesk chose to make the license nontransferable, so how could it bind Vernor or his customers? The Ninth Circuit may view Vernor as an ordinary guy trying to make a buck in the used goods market, rather than an infringer of copyrights.

The software industry will likely weigh in heavily on the Augusto and Vernor cases, for the decisions challenge a long-standing industry practice. (Negotiated licenses will be unaffected if the Ninth Circuit affirms both rulings.) It remains to be seen whether the Ninth Circuit will recognize as legitimate the interests of people like Augusto and Vernor and their customers in the existence of a market for used goods protected by copyright law.

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