Licence Agreements and Ownership: Second Hand Sales of Software

Alex Gloor is a JD Candidate at Osgoode Hall Law School.

At first glance, the century old doctrine of first-sale seems simple enough. However, as with many other IP doctrines, the digital world has thrown a wrench in this otherwise well-understood principle (see this post on a similar topic). In the case of Vernor v. Autodesk a Ninth Circuit District Court was confronted with the issue of whether first-sale applied upon the purchase of computer software that the seller termed to be subject to an end user licence agreement, and thus if Vernor had the right to re-sell the software.

The abbreviated facts are as follows. Autodesk is the undisputed copyright owner of the software and all printed materials contained in its “AutoCAD packages”. These printed materials explicitly state that the software is subject to the AutoCAD Software Licence Agreement that is both contained in the box and also appears during the installation of the software. Some of these packages were sold to CTA, an architectural firm who in turn sold them to Mr. Vernor. Without using or installing the software, Mr. Vernor sold the packages on eBay. The dispute turns on whether ownership was acquired by CTA on the initial sale, thus invoking the first-sale doctrine. If ownership was not transferred, the AutoCAD licence provisions forbidding transfer to others would be binding.

This issue has produced a long and contradictory line of case law. The  Ninth Circuit alone contains contradictory precedent. In United States v. Wise the court dealt with numerous transfer agreements. It was found that simply designating the agreement to be a “licence” is not determinative, nor are clauses in the agreement that reserve title to the copyright holder or that require the transferee to destroy transferred copies. There was only one common characteristic in all of the transfer agreements where ownership was deemed transferred; this was the right of the transferee to  indefinite possession. In the Vernor decision, Justice Jones explained this by stating that retaining title in a copy is meaningless without any means to regain possession of it.

Following Wise came three cases known as the MAI Trilogy. These cases hold that ownership is not transferred when there is a licence agreement that imposes significant redistribution restrictions on the transferee and also clearly stipulates that only a licence is granted to the copy of the software.

Jones J. found that both the Wise and MAI rulings applied in the context of Vernor. With respect to Wise, CTA has a right to retain possession. There is a clause in the agreement mandating that CTA destroy the original copy if it upgrades the software. However, it is not mandatory to upgrade the software in the first place and thus CTA has an ongoing right to possession of the original. Regarding the MAI rulings, the AutoCAD licence agreement forbids transfer without AutoCAD’s permission. The agreement also stipulates that AutoCAD retains title to the software and accompanying materials.

In a rather unsatisfactory fashion, Jones J. reached the decision that the Wise precedent should be followed over the three more recent rulings because “the court must follow the oldest precedent among conflicting opinions”. The policy considerations put forward by both parties were rejected, and, in what appears to be a plea to the legislature to clean up this muddied law, it was stated that Congress, not the courts, should deal with policy.

What will the impacts of this decision be? Reaction in the blogosphere is mixed. Most agree that it is too early to tell, as the ruling is likely to be appealed and there are multiple cases currently in the Ninth Circuit dealing with the same issue. Some herald the ruling as beneficial to consumers in the sense that it is a step towards software resales. However, it should be noted that this case does not mean that the consumer automatically gets ownership rights despite a licence agreement. Based on the reasons given by Justice Jones, a licensor simply needs to incorporate a clause denying perpetual possession to the licensee in order to avoid AutoCAD’s fate.