• Sold! Or Just Licensed?

    by  • July 20, 2008 • copyright

    It’s perhaps a bit off-topic for this blog to post about ownership of tangible property, rather than the ownership of the IP itself. But the disagreement over when an object that contains copyrighted work is sold or merely licensed is heating up. There are three recent district court cases in the 9th Circuit that have considered it.

    In Vernor v. Autodesk, Inc., the articles transferred were packages of previously used Autodesk software, purchased from an architectural firm. The “Software License Agreement” signed by the architectural firm said that it was a grant of a “nonexclusive, nontransferable license to use the enclosed program . . . according to the terms and conditions herein,” and contained various restrictions, like regulating the number of computers and the number of users, prohibiting copying, use outside of the western hemisphere, modification or reverse-engineering of the software, removing labels, and the “rent, lease, or transfer [of] all or part of the Software, Documentation, or any rights granted hereunder to any other person without Autodesk’s prior written consent.”

    Following 9th Circuit precedent the court held it was a sale of the software, not a license. The 9th Circuit case the court relied on was United States v. Wise, 550 F.2d 1180 (9th Cir. 1977), a case about the transfer of ownership of film prints. Wise did an extensive survey of cases about whether film copies were sold and found that the copyright owner (the studio) retained title to the films where the contract reserved title to the studio and required return of the prints at the expiration of some term. There was a transfer of title, though, where a recipient paid a fee and didn’t have to return it, even though she could use the print only for her “personal use and enjoyment,” was required to retain possession of the print “at all times,” and could not sell, lease, license or loan the print to any other person. This, the Wise court found, was a “sale with restrictions on the use of the print.” The Vernor court decided that, based on Wise, the critical factor is whether the transferee was allowed to keep the copy. Therefore Autodesk’s transfer of the software to the architectural firm was a sale, possession of the software in exchange for a single up-front payment. Autodesk may have a remedy in contract against the architectural firm, but the tangible copies sold by Vernor were in Vernor’s lawful possession and his sale of them was not a copyright infringement.

    The second in our survey is UMG Recordings, Inc. v. Augusto, where “promotional” music CDs given to music industry insiders, without their prior consent, had the following language on them: “This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.” Augusto, not a music industry insider, had acquired the CDs from music shops and online auctions and resold them. Like Vernor, the UMG court looked at Wise and the right to perpetual possession. The promotional CDs sent to the insiders did not have to be returned, could be kept forever, and could be destroyed, all permitted acts that would be inconsistent if UMG was the true owner. Further, the “license” did not provide any recurring benefits to UMG, other than to restrain the transfer of the music. This was a transfer of ownership of the music CDs and Augusto in lawful possession of them.

    Most recent is MDY Industries v. Blizzard Entertainment, Inc. This case considered the use of a bot called “Glider” in the World of Warcraft multi-player game, which allows players to continue game play while they are away from their computers and thus advance more quickly in the game. World of Warcraft has both server end and user end software; users enter into both an End User License Agreement (EULA) and a Terms of Use Agreement (TOU) before being allowed to play the game. The EULA/TOU clearly forbade the use of bots to play the game. The case is notable for its squirrelly analysis of the contributory copyright infringement claim (discussed by Professor Patry here) premised on the theory that the user end software is licensed, not sold.

    Section 117 of the Copyright Act provides that

    Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided: (1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner.

    Note the key word “owner” here. The court decided that the end users are not owners but licensees; thus, when the licensee-user loads the game into RAM to play the game using the bot, the player is outside the scope of the license and therefore the RAM copy an unauthorized infringing copy. Section 117 is of no help to the end user, since s/he isn’t the owner of the software. (As an aside, I am curious that WoW couldn’t come up with a better infringement theory than this – Glider did nothing whatsoever to modify the end user software, therefore creating an unauthorized derivative work?)

    The court came to the conclusion that the end users are licensees based on prior cases in the 9th Circuit that set a low bar for finding a license relationship rather than a sale. Wall Data Inc. v. Los Angeles County Sheriff’s Department, 447 F.3d 769 (9th Cir. 2006) says there is a license if the copyright holder (1) makes clear that it is granting a license to the copy of the software and (2) imposes significant restrictions on the use or transfer of the copy. The first requirement was easy, that WoW claimed to be only granting a license was clearly stated in the EULA. The second prong, restrictions, was sufficient because the contracts included limitations on transfer of the copy (the original media and all documentation had to be transferred, the original owner had to delete the software, and the transferee had to accept the EULA) along with other restrictions, e.g., on the use of bots, modifying files, intercepting proprietary components of the game, etc. To me, the language in the EULA looks very much like an acknowledgment that the end user had a right to transfer the tangible copy under the first sale doctrine (making it a sale, not a license), but the court nevertheless held the users were only licensees and specifically rejected the reasoning in Vernor and Wise.

    And there’s a brand new case that may be exploring this same territory, Apple Inc. v. Psystar Corp. filed July 3. Apple has a limitation in its Software User Agreements that prohibits the installation of Apple software on computers that are not branded as Apple. Psystar began selling non-Apple computers running Apple’s Mac OS X operating system. In addition to copyright infringement claims, the third count of the complaint is for breach of contract, alleging that Psystar used authentic purchased software, opened the packaging (thus accepting the terms of the agreement), and installed the software on non-Apple computers. Presumably Psystar will be making a first sale argument for any purchased software it installed.

    This promises to be a hot area; to say there is disagreement is an understatement. Is the appropriate measure a requirement for return, as in Vernor? Recurring benefits to the licensor, as in UMG? Executory contract terms or mutual restrictions? The lower courts look like they are teeing it up for the 9th Circuit to clarify the enforceability of terms in EULAs and transfer of title in tangible goods.

    Vernor v. Autodesk, Inc., available here, blogged here and here.
    UMG Recordings, Inc. v. Augusto, available here, blogged here.
    MDY Indus., LLC v. Blizzard Entertainment, Inc., available here, blogged here.
    Apple Inc. v. Psystar Corp., complaint available here, blogged here.