Do you “license” or “sell” your software?

When a software license agreement imposes restrictions on transfer or resale of the software, is that restriction legally effective?  A recent decision from a district court in the state of Washington suggests that the answer may be “no” if the license governed a transfer of a physical copy (such as a CD) of the software and did not require the transferee to return the copy at the conclusion of the contract’s term. 

More on the court’s decision in Vernor v Autodesk follows below. 

In the U.S. Copyright Act, the “first sale” doctrine permits a person who owns a lawfully-made copy of a copyrighted work to sell or otherwise transfer the copy.  This doctrine arises under Section 109(a) of the Act, which states:

the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

A critical term in Section 109(a) is “owner”, as numerous courts have held (and the U.S. Supreme Court has acknowledged) that the first sale doctrine does not apply to a mere licensee.

A Washington state district court recently examined a software agreement and, despite the agreement’s use of the term “license”, concluded that the agreement governed a sale of a physical copy, rather than a license.  Concluding that the transaction was a sale with contractual restrictions on use and transfer, the court in Vernor v Autodesk (W.D. Wash. May 20, 2008 ) held that an individual who acquired a physical copy of Autodesk’s copyrighted AutoCAD software could resell that copy on eBay. 

The court reached its conclusion despite contractual language stating that:  (1) the agreement granted a “nonexclusive, nontransferable license to use the enclosed program . . . according to the terms and conditions herein,” and (2) it imposed a “restriction” against the “rent, lease, or transfer [of] all or part of the Software.” 

The Court’s reasoning focused on a 1977 Ninth Circuit decision in United States v. Wise, which examined licenses between movie studios and recipients of film prints, and which focused on whether the applicable agreement expressly reserved title in the physical copy, such as by requiring the licensee to return the physical copy of the print to the movie studio.  In Wise, the Ninth Circuit conluded that contracts which allowed the recipient to keep the physical copy of the film were sales, not licenses, and that the first sale doctrine was available under such contracts.

Since Wise, the Ninth Circuit has examined several software agreements which did not expressly require return of physical copies, and the court concluded that (despite Wise) those agreements were licenses rather than sales.  However, in Vernor the district court declined to follow those later decisions, stating that it was bound by Wise as the earliest decision, despite the “unavoidable” conflict between Wise and the later decisions.

It remains to be seen whether the Vernor case will be appealed, or how the conflict in the Ninth Circuit will be resolved.  Until then, licensors who transfer physical copies of their software may wish to consider adding clauses that expressly retain title and require return of physical copies upon completion of the license term.

Update:  In 2010, the U.S. Court of Appeals for the Ninth Circuit vacated and remanded this district court decision.  For details, see https://ipspotlight.com/2010/09/19/ninth-circuit-licensee-of-off-the-shelf-software-may-not-resell-used-copies-of-the-software/

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