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By | OUT-LAW.COM 13th September 2010 15:16

Software re-sale restricted by US Court of Appeals

You bought it from someone who didn't own it, chummy

Software company Autodesk can stop a man from re-selling second-hand copies of its software because the programs are licensed to users, not owned by them, a US appeals court has ruled.

Software producers who clearly impose restrictions on buyers and make it clear that buyers are only licensing material rather than buying it outright do have the right to restrict second hand sales of the material, the US Court of Appeals for the Ninth Circuit has said.

Autodesk is involved in a long-running legal dispute with Timothy Vernor, who sells goods on auction site eBay. He bought second hand versions of Autodesk's architectural drawing software from a company and made them available for sale on eBay, but Autodesk made repeated claims that this infringed its copyright.

Vernor's eBay account was eventually suspended, leading him to take a case to the courts, asking a judge to declare his activity lawful.

A US District Court agreed with Vernor, saying that a previous case involving film prints lent to actress Vanessa Redgrave, the Wise case, set a precedent that transferred material could be owned by the person to whom it was given.

The Court of Appeals disagreed, and said that the Wise case did not mean, as the lower court had said, that any agreement which allows a person to keep a copy of copyrighted material was a sale rather than a transfer of a licence.

"We disagree. In Wise, we utilized a multi-factor balancing test to distinguish between a first sale and a license of a copyrighted film print," said the ruling. "We considered a transferee’s ability to possess a print indefinitely as one factor in our analysis, but we did not treat it as dispositive. If we had, we would not have needed to consider other contractual provisions, such as retention of title, copying prohibitions, and lending restrictions."

Vernor had argued that the software was bought and owned by Autodesk's customers, and that the first sale doctrine meant that it was theirs to dispose of however they saw fit. This doctrine is the law that a seller of goods can only control their distribution the first time they are sold. After that they have no right to decide how, when or for how much that material is subsequently sold.

The Court said that CTA, the company from which Vernor bought the software, was a licensee, not an owner, of the software and that the first sale doctrine therefore did not apply.

"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," said the ruling. "[Original owner] CTA was a licensee rather than an owner of copies of [the software] and thus was not entitled to invoke the first sale doctrine or the essential step defense."

"Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is nontransferable, the software could not be transferred or leased without Autodesk’s written consent, and the software could not be transferred outside the Western Hemisphere," said the ruling. "Because Autodesk reserved title to [the software] and imposed significant transfer and use restrictions, we conclude that its customers are licensees of their copies of [the software] rather than owners."

"CTA was a licensee rather than an 'owner of a particular copy' of [the software], and it was not entitled to resell [it] to Vernor under the first sale doctrine." said the ruling.

The Court said that it had heard policy- based arguments on both sides, including from the American Library Association, claiming that there were sound fundamental reasons which supported both sides of the argument.

Judge Callaghan said, though, that the Court's role was to apply existing law and precedents, not to formulate policy.

"These are serious contentions on both sides, but they do not alter our conclusion that our precedent from Wise through the MAI trio requires the result we reach," said the ruling. "Congress is free, of course, to modify the first sale doctrine and the essential step defense if it deems these or other policy considerations to require a different approach."

See: The ruling (25-page / 115KB PDF)

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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