Attorneys and IT consultants who handle intellectual property due diligence will want to note a recent decision by the Ninth Circuit relating to the transferability of licensed software. In Vernor v Autodesk, the Court considered the case of Timothy Vernor, who sold used copies of Autodesk’s AutoCAD software on eBay. Autodesk argued that the sales constituted copyright infringement. Vernor argued that the software copies were governed by the “first sale” doctrine, which is an affirmative defense to copyright infringement that allows owners of copies of copyrighted works (e.g., books, CDs, DVDs) to resell those copies.
The court analyzed the AutoCAD license agreement to determine whether AutoCAD users were “owners of a copy” or “licensees”, as only “owners of a copy” are eligible to assert the first sale doctrine. Reviewing the AutoCAD license agreement, the court noted that the agreement prohibited customers from renting, leasing, or otherwise transferring the software without Autodesk’s prior written consent. Focusing on the assignability and use restrictions of the license agreement, the court found that AutoCAD users are mere licensees and thus not permitted to resell the software:
We hold today 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.
The court’s decision should remind entities involved in merger and acquisition due diligence that software licenses may not automatically transfer in the transaction. If the license “significantly restricts the user’s ability to transfer” and imposes use restrictions (each of which is the case in many software licenses), then the purchaser may need to obtain consent before the software can transfer to the new entity.