by Deepak Gupta
Several weeks ago, my colleague Greg Beck blogged about a very significant and disturbing Ninth Circuit decision effectively holding that consumers don't own their own software.
In Vernor v. Autodesk, a panel of the Ninth Circuit (Judges Canby, Callahan, and Ikuta) ruled that Timothy Vernor, who purchased authentic, second-hand copies of Autodesk software at garage and office sales to sell on eBay, did not own that software and thus had no right to resell it. The court accepted Autodesk's argument that the resale amounted to copyright infringement because it violated the terms of Autodesk's "license agreement" with the original owner. The case raises fundamental questions about the future of copyright's first-sale doctrine and has big implications for consumer ownership of software, music, books, and other media.
Last week, Public Citizen, representing Vernor, filed a petition seeking rehearing of the case by the full Ninth Circuit. Although such petitions are rarely granted, this case is a particularly strong candidate for rehearing. The decision implicates direct conflicts between the Ninth Circuit and the Second and Federal Circuits (together, the three most important courts for intellectual property issues), is difficult to square with the most relevant Supreme Court precedent, and has enormous practical consequences. Condemnation of the decision has been swift and harsh. It has been criticized as a "triumph of legal formalism over reality," "logically flawed," and as "open[ing] the door to effectively killing off the entire concept of the first sale doctrine."
First, the legal background: More than a century ago, in a case called Bobbs-Merrill, the Supreme Court rejected a book publisher’s attempt to impose restrictions on resale with a limited “license.” Congress codified this limitation as the first-sale doctrine, providing that the “owner of a particular copy” of a copyrighted work is entitled to resell that copy “without the authority of the copyright owner.” The district court in this case held that the first-sale doctrine allowed Vernor to resell the software packages, but the the Ninth Circuit panel reversed, holding that the first-sale doctrine is inapplicable to copies of Autodesk software because the software is accompanied by a “license agreement” that purports to prohibit resale. The panel’s opinion adopts an artificial distinction between “licenses” and “sales” that flatly conflicts with decisions of the Second and Federal Circuits. The panel’s test for determining whether a transaction is a sale relies entirely on the copyright owner’s characterization of the transaction and formalistic reservation of rights, while ignoring the economic realities of the exchange—an approach that conflicts with decisions of the Supreme Court, the Ninth Circuit itself, and the Second Circuit.
Here's why this all matters in practical terms: The panel’s decision in Vernor is the first by any court to hold that a consumer is not the owner of an ordinary package of commercial software that is distributed with a “license agreement.” By holding that a relatively typical software license is sufficient to withhold ownership, the decision effectively abolishes the first-sale doctrine for the software industry and has the immediate effect of depriving almost all consumers of ownership of their software. The panel’s test provides a cost-free formula for the book, music, movie, and other copyright industries to follow software’s example, thus rendering Bobbs-Merrill a dead letter.
The panel's decision brings to the surface serious tensions in the Ninth Circuit's case law. Although the panel recognized the policy concerns discussed above, it did not reach them because it considered itself bound by a line of authority originating from a one-sentence footnote in MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 n.5 (9th Cir. 1993), an early software copyright decision later overruled by Congress. In a later case, the Ninth Circuit recognized the extensive criticism MAI has engendered and the Federal Circuit’s express rejection of its holding, but declined to revisit the decision because the case could be decided on other grounds. This time, because the panel held that the much-discredited MAI footnote controlled the result, there's no good reason for the Ninth Circuit to defer reconsideration.