Re: Utterly imbecile pinky communist Ninth Circuit 'judges' (Vernor scandalous ruling)

[Alexander Terekhov]

http://www.lexology.com/library/detail.aspx?g=c2fa1f99-1019-4246-b357-e48e071ee7fb

"I bought it; I own it—or do I?

Fenwick & West LLP Jennifer Stanley and Mitchell Zimmerman USA 

September 13 2010 

Vernor v Autodesk: Ninth Circuit Rules on Software Transfers     

On September 10, 2010, the Ninth Circuit issued a much-awaited ruling on
appeal in Vernor v Autodesk, addressing whether software purchasers are
owners or licensees of the copies of the software in their possession.
(9th Cir. No. 09-35969.) The court held that “a software user is a
licensee rather than an owner of a copy of the software 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 distinction between owner and licensee can be critical to software
publishers because owners have rights under the first sale doctrine (17
U.S.C. § 109(a)) and the “essential step defense” (§ 117(a)), whereas
licensees and their transferees can be precluded from re-selling
software or engaging in other conduct a publisher may want to control.

The first two requirements of Vernor’s three-prong test – calling the
agreement a license and imposing transfer limitations – will be
satisfied whenever the issue is posed, so the critical question under
the Ninth Circuit’s ruling will always be whether the agreement imposes
“notable use restrictions.” Vernor holds that it is sufficient, for a
software agreement to be deemed a license, that the agreement bars use
outside the Western Hemisphere and prohibits a transferee from
modifying, translating or reverse-engineering the software, from
removing any proprietary marks, and from defeating any copy protection
device.

The ruling is important not only for its resolution of the distinction
between owners and licensees but also for the circumstances surrounding
the decision. This summer, the same panel of the Ninth Circuit, Judges
Canby, Callahan and Ikuta, had not one, but three, lower court cases
before it, all on the first sale issue and pending determination of
whether contractual terms can deem a transfer that looks like a sale a
license. The others are UMG Recordings, Inc. v. Augusto, 558 F. Supp.2d
1055 (C.D. Cal. 2008), in which a reseller of promotional CDs was sued
by Universal Music Group and the lower court concluded that promotional
CDs were not licensed but “sold” for the purposes of the first sale
doctrine; and MDY Industries v. Blizzard Entertainment, Inc., 89
U.S.P.Q.2d 1015 (D. Ariz. July 14, 2008), in which the lower court held
that the transfer of computer software represented a license. At the
time of this writing, Augusto and Blizzard had not been decided. Stay
tuned!

Background and Lower Court Ruling

To recap the facts of the Vernor case, which we wrote about in the
Summer 2008 edition of Fenwick & West’s IP Bulletin, Timothy Vernor is
an individual who sells goods on eBay. When he offered lawfullymade
packages of Autodesk’s AutoCAD software for sale, Autodesk sent eBay a
DMCA take-down notice, claiming Vernor’s sale would infringe its
copyright, and eBay ended the auction. Vernor lodged a DMCA
counter-notice, to which Autodesk did not respond. eBay reinstated the
auction, and Vernor sold the Autodesk software. After this happened four
more times in 2007, eBay suspended Vernor’s eBay account for repeat
infringement, and Autodesk threatened to “take further action” should
Vernor attempt to continue to sell copies of AutoCAD. Vernor possessed
two further copies of AutoCAD which he wished to sell. He sued for
declaratory relief of non-infringement and for unfair competition.

The copies at issue were originally produced by Autodesk and transferred
to an architectural firm, Cardwell/Thomas Associates (“CTA”), as part of
the settlement of an unrelated dispute. The Settlement Agreement
provided that CTA would adhere to an Autodesk software license
agreement, which included restrictions on the transfer of the Autodesk
software. Since the copies at issue were lawfully made, if CTA (then
Vernor) were deemed “owners” of the copies, they would plainly be
allowed — pursuant to the first sale doctrine — to sell their copies to
others without violating Autodesk’s distribution right. 17 U.S.C. §
109(a). But if Autodesk had merely licensed the software, as licensees
they would not have the right to re-sell the software. The lower court
held that the initial transfer of the software from Autodesk to CTA was
a sale, not a license.

Three-Prong Test – Software: a License or a Sale

The United States Court of Appeals for the Ninth Circuit overturned the
lower court’s decision, siding with Autodesk and concluding that the
first sale doctrine did not apply because Vernor was not an owner of the
copies of the software he possessed – he had not bought it from a
legitimate owner because CTA had merely licensed the software from
Autodesk.

Purporting to reconcile a group of earlier Ninth Circuit decisions which
suggested varying tests, the Vernor court adopted a three-pronged test
to determine whether software is licensed or sold:

“First, we consider whether the copyright owner specifies that a user is
granted a license. Second, we consider whether the copyright owner
significantly restricts the user’s ability to transfer the software.
Finally, we consider whether the copyright owner imposes notable use
restrictions.”

The Autodesk software license agreement described itself as a license
and the agreement specifically included limitations on the transfer of
the software and the software use restrictions described above. The
court therefore concluded that “Autodesk’s direct customers are
licensees of their copies of the software rather than owners,” which,
the court said, had two ramifications: “Because Vernor did not purchase
the AutoCAD copies from an owner, he may not invoke the first sale
doctrine, and he also may not assert an essential step defense on behalf
of his customers.”

The court affirmed that Congress had enacted the essential step defense
“to codify that a software user who is the “owner of a copy” of a
copyrighted software program does not infringe by making a copy of the
computer program, if the new copy is “created as an essential step in
the utilization of the computer program in conjunction with a machine
and . . . is used in no other manner.” 17 U.S.C. § 117(a)(1).” However,
the court held, this defense was not applicable to Vernor because he was
not the owner of the copy of the Autodesk software.

Policy Arguments

The court acknowledged the policy considerations raised by the parties
and their amici, the Software & Information Industry Association and the
Motion Picture Association of America supporting Autodesk, and eBay and
the American Library Association supporting Vernor. But the Ninth
Circuit declined even to comment on these arguments. There were “serious
contentions on both sides,” the court observed, “but they do not alter
our conclusion that our precedent... requires the result we reach.
Congress is free, of course, to modify the first sale doctrine and the
essential step defense if it deems these or other policy considerations
to require a different approach.”

Implications of Vernor

Vernor provides a template for software licensors who wish to make sure
that their software is licensed with certain restrictions (and not
deemed to have been “sold”) – assuming the Ninth Circuit ruling stands
and governs the transaction, or that other circuits agree with its
reconciliation of the cases on this issue. But Vernor does not make
entirely clear what use restrictions are necessary to satisfy its third
prong, other than that those restrictions set forth in Autodesk’s
Software License Agreement are sufficient. Possibly, the forthcoming
decisions in Augusto and Blizzard, which arise in different contexts,
will help clarify this issue.

Importantly, the Vernor three-prong test is not necessarily limited to
software licensing. Under Vernor, owners of any kind of content or
material may be in a position to try prohibition of certain actions in
their agreements. Certainly, the terms held sufficient in Vernor for
license status – bars on reverse engineering, removal of trademarks, and
trying to thwart copy protection – are common in the software industry,
and we would expect those whose agreements do not contain all of these
elements to consider whether their own use restrictions (present or to
be adopted) may qualify as “notable.” It will be interesting to see how
other industries outside of the software industry react to this decision
and if any of their practices will change as a result.  

Vernor’s counsel has indicated that he intends to ask a full panel of
eleven judges in the Ninth Circuit to review the September 10 decision
en banc before considering a possible appeal to the US Supreme Court.

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regards,
alexander.

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