LaFrance on Distinguishing between Sales and Licenses of Software

LaFrance on Distinguishing between Sales and Licenses of Software

As digital media overtake more traditional publication means, disputes over the distinction between sales and licenses of copyrighted materials are more frequent. Disputes involving software have dominated, but the distinction is also problematic with respect to other categories of copyrighted works, such as motion pictures and sound recordings. In this Analysis, Mary LaFrance discusses the new test created in Vernor v. Autodesk, Inc., 2010 U.S. App. LEXIS 18957 (9th Cir. Wash. Sept. 10, 2010) [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law] and its implications. She writes:

     In Vernor v. Autodesk, 2010 US App LEXIS 18957  (9th Cir. Sept. 10, 2010), the first of several appellate opinions on the sale/license distinction which are expected to issue in the coming months, the Ninth Circuit developed a new test for resolving this question, at least in the context of software. Specifically, the litigants disputed whether a particular copy of copyrighted software had been sold or licensed to a customer, for purposes of determining (1) whether the customer was entitled to resell the copy under the first sale rule, 17 U.S.C. § 109(a), and (2) whether a later purchaser of that copy was entitled to copy the software as an essential step in its utilization under 17 U.S.C. § 117.  In resolving these questions, the court held that a copy of software has been licensed rather than sold if the copyright owner (1) specifies that it is a license, (2) significantly restricts the user's ability to transfer the software, and (3) imposes "notable use restrictions."

     . . . .

II. Underlying Copyright Principles

A. The First Sale Rule

     Although a copyright owner has the exclusive right to publicly distribute copies of the copyrighted work (whether by sale, rental, lease, lending, or gratuitous transfer) under 17 U.S.C. § 106(3), that right is limited by the first sale rule. The first sale rule grants several privileges to the "owner" of a lawfully made copy, or a person acting under the owner's authority. Among these privileges is the right "to sell or otherwise dispose of the possession of that copy." This right applies to all types of copyrighted works, subject to an exception which allows copyright owners to prohibit rentals (and, in some cases, lending) of software and sound recordings. The latter exception was not at issue in Vernor.

B. The Essential Step Rule

     Section 117 creates an exception to the copyright owner's exclusive reproduction right, by allowing the "owner of a copy of a computer program" to make (or authorize the making of) an additional copy (or adaptation) of the software as an "essential step" in using the software, or for archival purposes (i.e., as a back-up copy). Enactment of the "essential step" privilege was deemed necessary because merely using software in a computer arguably involves "copying" the software from its original storage medium into the computer's Random Access Memory (RAM).

     . . . .

     Although the Vernor court stated that its holding was required by precedent, in fact its opinion marks the Ninth Circuit's first attempt to articulate a general principle for distinguishing between sales and licenses of copyrighted goods. It remains to be seen, however, whether the court will apply the same test in cases involving goods other than software, or in cases where the "license" in question is non-negotiable, as in the typical purchase of consumer software. These issues are likely to be explored soon, in the upcoming decisions on appeal in UMG Recordings, Inc. v. Augusto, 558 F.Supp.2d 1055 (C.D. Cal. 2008) [enhanced version], and MDY Indus., LLC v. Blizzard Entertainment, Inc., 2008 U.S. Dist. LEXIS 53988 (D. Ariz. 2008) [enhanced version].

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