June 2010

The End of the Shrink-wrap License?

5 min

Who owns the software running on your computer?  Vernor v. Autodesk, Inc., argued on June 7, 2010, before the United States Court of Appeals for the Ninth Circuit, addresses a question at the core of the software industry’s business model – whether the current shrink-wrap licenses maintains software ownership of the software copies with the software company or transfers ownership to the purchaser.

This issue arose when Autodesk, Inc. used the “take-down” provisions of the Digital Millennium Copyright Act (DMCA) to remove Timothy Vernor’s eBay auction of AutoCAD software, which is made by Autodesk.  Vernor, who earns a living selling items through online websites such as eBay, filed for a declaratory judgment on the right to resell the software after his eBay account was suspended. 

Vernor acquired possession of copies of the AutoCAD software from an architectural firm at an office sale.  The architectural firm originally received the software from Autodesk pursuant to a software licensing agreement (SLA) that, like most SLAs, reserved ownership in the copies of the software to Autodesk and prohibited transfer of the software. 

The First Sale Doctrine

In his complaint, Vernor argued that the “resale of authentic, used copies of AutoCAD software is lawful, protected by 17 U.S.C. § 109, and does not infringe Autodesk’s copyright or other rights.”  17 U.S.C. § 109(a), often referred to as the “first-sale doctrine,” allows the lawful owner of a copy of a copyrighted work to transfer the work to another without the permission from the copyright holder.  For example, if you lawfully purchase a piece of fine art you may dispose of the piece of art however you wish, for example by lending the art to a museum or even destroying the art, without needing permission from the artist. 

Autodesk argues that the first sale doctrine only applies if the architectural firm actually owned the software.  Autodesk maintains that the architectural firm is a mere licensee and not a true owner of the software and, therefore, Autodesk retains the exclusive right to distribute or transfer the software. 

In a 2008 decision, the district court found in favor of Vernor holding that despite the SLA reserving certain rights, the transfer from Autodesk to the architectural firm was indeed a sale.  Thus, according to the district court, the first sale doctrine allowed the architectural firm to re-sell the software and, therefore, Vernor was legally allowed to sell the used copies of AutoCAD without infringing Autodesk’s copyright.  The district court’s decision may change what was previously the standard business model for software companies. 

License Agreements

During oral arguments on appeal of the district court decision, Autodesk’s counsel was queried if the suggested licensing model could be applied to other copyright holders and if software is distinguishable.  In particular, one judge postulated, “books could be sold with a license and put the libraries out of business?”  Autodesk answered that software is likely not distinguishable from other forms of copyright.  Although books could be shrink-wrapped and sold with a license, “there are commercial reasons why they don’t do it.”

The court also expressed concern with the issue of what makes a license a license.  Autodesk argued that transfer of copies of the software coupled with significant restrictions on how the software may be used, creates a license.  Counsel for Autodesk was questioned on why the SLA does not require the transferee to return the software media to Autodesk.  “If you own something, why wouldn’t you want it back,” asked one of the judges.  Autodesk answered that the media itself is a “worthless piece of plastic” and has no value to the company if returned.  For example, because of frequent software upgrades, the software would likely be obsolete by the time it would be returned.  The true value with the media, Autodesk argued, is in the control of its use.  Autodesk further insisted that the requirement of return is not required by any case law.

The court noted that all copyright holders could, though a similar license to Autodesk’s, now circumvent the first sale doctrine and extend copyright protection further than what was intended by Congress.  Autodesk answered that, in this country, people can sell or not sell things as they want with certain restrictions being placed on the sale.  Congress has decided that if enough of the rights in the bundle of rights are also transferred, then the first sale doctrine will apply.  Autodesk contends that the prohibition against software licensing should be made by Congress and not by the courts. 

What Now?

A win for Vernor would have serious implications for current software licenses.  The secondary market for software would likely grow as companies legitimately re-sell their current software.  However, such expansion in the secondary market would likely be short-lived as the software industry adapts to the new rule.  Current technical restrictions already exist to prevent transfer of software copies.  However, such restrictions add yet another layer of complexity to the development, deployment, and maintenance of software.  A rule restricting software licensing would ultimately raise the cost of software for all consumers.  Further, such a restriction may limit innovation of certain types of software and may discourage already cost sensitive startups from entering the market.  Companies selling software should consider revising their software licenses to further limit the rights transferred to the licensee.