It’s a question the courts have been grappling with for more than century: How much control can copyright owners exercise over copies of their works?

Back in 1908, the Supreme Court rejected a book publisher’s attempt to control the resale of its books. But just a few months ago, the 9th Circuit distinguished that decision and upheld a software publisher’s attempt to control the resale of its software.

The 9th Circuit panel held, in Vernor v. Autodesk, Inc., that simply by adopting the right legal terminology, copyright owners can license their works instead of sell them–and the resulting licenses can limit what anyone, even third parties, may do with the works.

The ruling thus upholds the clickwrap and shrinkwrap licenses that software companies routinely require users to accept. “What this ruling means to software companies is that they can continue business as usual,” says Suzanne Bell, a partner at Wilson Sonsini Goodrich & Rosati.

But the ruling may do far more than that. It may enable all copyright owners to impose tough new restrictions on customers’ use of the works they have paid for.

“This case could potentially have profound implications,” says Eric Goldman, associate professor at Santa Clara University School of Law. “Copyright owners could use it to control the resale of books, movies, music and other copyrighted works. They could eliminate the resale market altogether.” He adds, “This [ruling] could create all kinds of opportunities for copyright owner mischief. I couldn’t even begin to imagine all the things copyright owners could do because they are pretty crafty.”

A Sale Isn’t a Sale

When it comes to copyrighted works, a sale isn’t simply a sale. When someone purchases a book, a music CD or a videogame cartridge, the purchaser’s right to use this item is limited; the copyright owner can still prevent unlawful copying of the underlying copyrighted work.

The sale, however, does curtail some of the copyright owner’s rights in the purchased item. For instance, the copyright owner loses the right to control further distribution of that particular item.

This limit on copyright was first enunciated in the Supreme Court’s 1908 ruling in Bobbs-Merrill Co. v. Straus. The copyright owner in that case, Bobbs-Merrill, tried to set a minimum sale price for its copyrighted novel. It placed a notice on the book’s copyright page stating that dealers were authorized to sell the book for $1 per copy, and “a sale at a less price will be treated as an infringement of the copyright.”

R.H. Macy & Co. purchased some of these books from a wholesaler and resold them for 89 cents each. Bobbs-Merrill sued the store
for infringement.

The Supreme Court found for R.H. Macy, ruling that copyright law did not give a copyright owner the right “to qualify the title of a future purchaser.” This was the birth of the “first sale doctrine,” which is now codified in Section 109 of the Copyright Act.

But according to the 9th Circuit, Autodesk Inc. has found a way around the first sale doctrine–by avoiding any sales.

Lease Loophole

Autodesk makes AutoCAD software, a popular computer-aided design program. Each copy of AutoCAD comes with a license agreement, which customers must accept in order to install the software. This agreement specifies that Autodesk retains title to all copies and that the customer has only a nonexclusive and nontransferable license to use the software. The agreement also restricts what users can do with the software. It forbids them, for instance, from transferring the software without Autodesk’s prior consent or using the software outside the Western Hemisphere. If a customer violates any of the restrictions, the license is terminated.

Despite this, two AutoCAD customers resold their copies of the software to Timothy Vernor. Vernor, who makes his living by selling used items on eBay, in turn resold some of these copies online.

Autodesk objected to Vernor’s online sales, asserting they constituted copyright infringement. Vernor, who had never opened the boxes of software or agreed to the license terms, claimed his actions were protected under the first sale doctrine–once Autodesk sold its software to a customer, the company couldn’t control any resales. Vernor went to court, seeking a declaratory judgment that he was legally allowed to resell the software.

The district court ruled in Vernor’s favor, holding, among other things, that his sales were non-infringing under the first sale doctrine.

The 9th Circuit reversed. The key issue before the court was whether the software was sold or leased–because if it was leased, the first sale doctrine did not apply.

Put to the Test

Prior to Vernor, the 9th Circuit had used two conflicting tests to determine when software is leased. MAI Sys. Corp. v. Peak Computer, Inc. and its progeny basically hold that if a contract stated software was leased, it was leased. An older case, United States v. Wise, holds that in order to determine whether software was sold or leased, a court must examine the transaction holistically. The court must consider factors such as whether the party acquiring the software makes a single payment, the extent of contractual use restrictions, and most importantly, whether the software maker has the ability to regain possession of the copy.

Vernor created a new three-part test rather than adopt either of the two earlier lines of cases,” Bell says. The panel stated 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.”

In the wake of this ruling, software companies “will take a pretty close look at their licenses to make sure they fall within this three-part test,” says Bell. Other copyright owners, too, may seek to profit from this ruling and to license their works instead of sell them (see “No Limits”).

The panel’s ruling may not last, however. On Oct. 1, Vernor requested the decision be reviewed en banc.

Moreover, other 9th Circuit panels are handling two more cases that address the same basic issue as Vernor–when can a copyright owner use a license to impose restrictions on use of a work? “We’ll have to see all three rulings to see the net effect,” Goldman says. “Ninth Circuit panels really struggle about how much deference to give to other panel rulings. Especially on Internet issues, 9th Circuit panels tend to flip-flop pretty quickly.”