Wednesday, September 15, 2010

Vernor vs. Autodesk: The Decision

Vernor has decided to take his talents to South Beach. Sorry, sports joke.

The Ninth Circuit Court of Appeals handed down their decision in the Vernor vs. Autodesk case last week. Let's take a look, and please note that any italicized excerpt comes from the text of the actual ruling (which you can read here.

First, the history as it relates to Autodesk's software licensing agreement:
Since at least 1986, Autodesk has offered AutoCAD to customers pursuant to an accompanying software license agreement (“SLA”), which customers must accept before installing the software. A customer who does not accept the SLA can return the software for a full refund.

The SLA for Release 14 first recites that Autodesk retains title to all copies. Second, it states that the customer has a nonexclusive and nontransferable license to use Release 14...Fifth, the SLA provides for license termination if the user copies the software without authorization or does not comply with the SLA’s restrictions. Finally, the SLA provides that if the software is an upgrade of a previous version:
[Y]ou must destroy the software previously licensed to you, including any copies resident on your hard disk drive . . . within sixty (60) days of the purchase of the license to use the upgrade or update . . . .Autodesk reserves the right to require you to show satisfactory proof that previous copies of the software have been destroyed.

Wow. I believe that's also known as the RPUL (Rectal Penetration Unit License).
Now, to the history of the case, which is quite interesting.
In March 1999, Autodesk reached a settlement agreement with its customer Cardwell/Thomas & Associates, Inc. (“CTA”), which Autodesk had accused of unauthorized use of its software. As part of the settlement, Autodesk licensed ten copies of Release 14 to CTA. CTA agreed to the SLA, which appeared (1) on each Release 14 package that Autodesk provided to CTA; (2) in the settlement agreement; and (3) onscreen, while the software is being installed.

CTA later upgraded to the newer, fifteenth version of the AutoCAD program, AutoCAD 2000. It paid $495 per upgrade license, compared to $3,750 for each new license. The SLA for AutoCAD 2000, like the SLA for Release 14, required destruction of copies of previous versions of the software, with proof to be furnished to Autodesk on request. However, rather than destroying its Release 14 copies, CTA sold them to Vernor at an office sale with the handwritten activation codes necessary to use the software.

Hmm. I worked for a computer company in the late 90s (fortunately now defunct) that employed several hundred people, and the entire company basically had one copy of Microsoft Excel. Everyone, and I mean everyone, installed that single copy. The settlement agreement here makes me suspect that CTA had ten people using a far fewer number of copies than ten.

So CTA upgraded to Release 15 for less than 15% of the cost of a new license, and, in a classy move, tried to resell the copies that made them eligible for the upgrade in the first place.

In legal terms, I think that would be technically described as "dumbassery."

So Vernor buys the copies, and the story continues:
Vernor has sold more than 10,000 items on eBay. In May 2005, he purchased an authentic used copy of Release 14 at a garage sale from an unspecified seller. He never agreed to the SLA’s terms, opened a sealed software packet, or installed the Release 14 software. Though he was aware of the SLA’s existence, he believed that he was not bound by its terms. He posted the software copy for sale on eBay.

In April 2007, Vernor purchased four authentic used copies of Release 14 at CTA’s office sale. The authorization codes were handwritten on the outside of the box. He listed the four copies on eBay sequentially, representing, “This software is not currently installed on any computer.”

On each of the first three occasions, the same DMCA process ensued. Autodesk filed a DMCA take-down notice with eBay, and eBay removed Vernor’s auction. Vernor submitted a counter-notice
to which Autodesk did not respond, and eBay reinstated the auction.

...Vernor also wrote to Autodesk, claiming that he was entitled to sell his Release 14 copies pursuant to the first sale doctrine, because he never installed the software or agreed to the SLA. 

To me, Vernor essentially conceded that the SLA would preclude resale, but that he wasn't bound by the SLA because he never installed the software.

Here's how the Court summarized the case:
This case requires us to decide whether Autodesk sold Release 14 copies to its customers or licensed the copies to its customers. If CTA owned its copies of Release 14, then both its sales to Vernor and Vernor’s subsequent sales were noninfringing under the first sale doctrine. However, if Autodesk only licensed CTA to use copies of Release 14, then CTA’s and Vernor’s sales of those copies are not protected by the first sale doctrine and would therefore infringe Autodesk’s exclusive distribution right.

Last week, I mentioned that I was very confident that Vernor would prevail, but I also didn't understand all the issues involved. Needless to say, I was wrong, because the Court found in favor of Autodesk, and here's the language of the ruling:
...We determine that Autodesk’s direct customers are licensees of their copies of the software rather than owners, which has two ramifications. Because Vernor did not purchase the Release 14 copies from an owner, he may not invoke the first sale doctrine, and he also may not assert an essential step defense on behalf of his customers.

...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.
What I think is most interesting about this decision is that the Court is asserting that this is not a new interpretation of existing law, but rather, the correct interpretation of existing law.

The first sale doctrine dates from a 1908 Supreme Court decision in the case of Bobbs-Merrill Co. v. Straus. However, even in that decision, note the exclusion:
The Supreme Court articulated the first sale doctrine in 1908, holding that a copyright owner’s exclusive distribution right is exhausted after the owner’s first sale of a particular copy of the copyrighted work. See Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350-51 (1908).

The Court noted that its decision solely applied to the rights of a copyright owner that distributed its work without a license agreement. Id. at 350 (“There is no claim in this case of contract limitation, nor license agreement controlling the subsequent sales of the book.”).

Here's more:
Congress codified the first sale doctrine the following year. See 17 U.S.C. § 41 (1909). In its current form, it allows the “owner of a particular copy” of a copyrighted work to sell or dispose of his copy without the copyright owner’s authorization. 7 Id. § 109(a) (enacted 1976). The first sale doctrine does not apply to a person who possesses a copy of the copyrighted work without owning it, such as a licensee.

Also, the Court looks at the legislative history:
The House Report for § 109 underscores Congress’ view that the first sale doctrine is available only to a person who has acquired a copy via an “outright sale”. H.R. Rep. No. 94-1476, at 79 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5693. The report also asserts that the first sale doctrine does not “apply to someone who merely possesses a copy or phonorecord without having acquired ownership of it.”

In essence, the Court says that when a software license specifically tells the user that they are not the owners of the software, but only licensees, then the right of first sale does not apply, because they aren't owners.

Okay, I think that covers the ruling. Tomorrow, we'll talk about what this might mean for the gaming industry, and what it might mean for us.

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