When is a Sale Not a Sale?

When a Software License Says So

 

By Meredith Ainbinder, a member of our Litigation Practice Group

 

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n 2008, we reported on Vernor v. Autodesk, Inc., a federal judge's ruling that caused alarm for software vendors. The decision concluded that slapping the word “license” on a software transaction that smells more like a sale than a license cannot prevent downstream sales of the program.   

Mr. Vernor tried to resell on eBay copies of Autodesk’s CAD software that he bought second-hand. Autodesk argued that Vernor was bound by the “license” under which the original purchaser bought the software. That license forbade resale or other transfer of the software. 

Because the original purchase involved a single payment and allowed the buyer to retain the software, the judge called it a sale, one that triggered the first-sale doctrine under copyright law.

That doctrine allows the initial transferee to sell or give away his lawfully acquired copy of the software without violating copyright law (although there could still be a breach of contract if the sales agreement prohibited further sales). In turn, downstream transferees such as Vernor could also sell the software without running afoul of copyright laws. 

This decision stirred anxiety among software companies that believed they had entered into proper license agreements. Businesses were faced with the difficult task of revamping agreements to require the return of software and with the job of policing compliance with these new provisions.

In a recent opinion, the Ninth Circuit Court of Appeals reversed the decision, determining that the district court judge focused too closely on the buyer’s right to infinite possession of the software. Reconciling earlier cases that the district court had found inconsistent, the Ninth Circuit concluded 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.” 

Under these guidelines, Autodesk prevailed because in the initial sale it retained title, prohibited transfer of the license and restricted use in a number of ways. As the case heads back to the district court, Mr Vernor, who purchased copies of the software from Autodesk’s original customer, can no longer invoke the first sale doctrine.

While the Ninth Circuit’s decision does not control all federal courts’ interpretations of the first sale doctrine, it will provide software makers with a degree of comfort and helpful guidance for how to formulate license agreements that will pass judicial muster.