Thursday, May 22, 2008

First Sale Victory in Vernor

On Tuesday, Judge Richard Jones of the U.S. District Court in Seattle handed down an opinion in Timothy Vernor v. Autodesk, Inc., handing Vernor victory in an important exposition of the first sale doctrine. (H.T. and congrats to Greg Beck). The case also illustrates why notice and notice is a better system for safe harbor regimes than the U.S. notice and take down approach USTR is trying to force on other countries.

The first sale doctrine (called "exhaustion" outside the U.S.) permits those who own a lawful copy of a work to sell or otherwise dispose of that copy by distribution. In the U.S., the doctrine was first developed by case law, then codified by statute in the 1909 Copyright Act, and is now found in Section 109 of title 17. While the first sale doctrine also applies to copies that are given away, what constitutes a sale is generally a question of state, not federal copyright law, and in recognition of this, many software companies have taken the position that they can convey the copy to the customer in an over-the-counter transaction for a one-time payment, but describe that transaction as a license; as a license, the first sale doctrine doesn't apply, meaning copyright owners can prevent further distribution of the copy. That is an absurd position to me, and in such cases, federal courts should take a common sense view of the transaction in order to avoid abolition of the first sale doctrine. Having made a sale at full value, there is no reason to let copyright owners preclude a rightful possessor of a copy from disposing of that copy, and no reason to force the rest of us to buy only new copies. Efforts to do so are yet another reason copyright has gotten a bad name.

The facts in Vernor are significant for safe harbor regimes too: Vernor makes his living selling lawfully purchased copies on eBay. In 2005, Vernor bought a copy of an AutoCAD package at a garage sale and put it up for sale on eBay. Autodesk sent a DMCA notice, and eBay suspended the auction. Vernor sent a counter-notice claiming his sale was lawful under Section 109. Autodesk failed to respond so the auction was reinstated by eBay. In 2007, Vernor bought 4 copies of an AutoCAD package from an architectural firm and sold three copies on eBay, but each time he put a package up for sale, Autodesk sent DMCA notices to eBay, which suspended the auction. Vernor promptly sent a counter-notice, and the auction was reinstated. When Vernor tried to sell the fourth package, Autodesk sent another DMCA notice, but this time eBay suspended Vernor's account for a month for alleged repeat infringement. Vernor then brought a declaratory judgment. If the first sale doctrine applied to the copies Vernor had purchased, then Vernor's actions were completely legal and he wasn't an infringer, much less a repeat infringer.

And Judge Jones found that the transactions were legal. To do so, he had to wade through a thicket of court of appeals' opinions, ultimately siding with a 1977 opinion, United States v. Wise, 550 F.2d 1180, over more recent opinions such as MAI Systems Corp. v. Peak Computer Inc., 991 F.2d 511 (9th Cir. 1993), which had touched on the issue briefly in a different context, the Section 117 archival and back-up copy privilege. I think Judge Roberts correct on all counts, and admire greatly his willingness to engage in a close reading of cases while keeping the commonsense nature of the issue foremost. This gets me back to the notice and notice versus notice and take down issue: the consumer won on the merits of his position, but went through hell and high water to vindicate his rights: he had repeated DMCA notices sent, auctions suspended, and then his account suspended. He had to obtain a lawyer (Public Citizen took the case on) and duke out the issue in court, and was blessed to have drawn an extremely thoughtful judge. Few consumers have the dedication to go through with a court case, and even fewer have the good luck to have dedicated consumer interest lawyers take up their cause; the vast majority of consumers, faced with similar notices, would have given up, and with that have been denied a rightful livelihood. Nor should eBay have been placed in the position of having to decide who was correct on an issue of law that has divided courts and commentator for well over a decade.

Under a notice and notice regime, eBay would not have to make judgments it has no ability to make, and Vernor's auctions would have gone forward because Autodesk was not, seemingly going to sue: recall that Vernor brought a declaratory relief action. Notice and take down, however, gave Autodesk the very relief it was denied by the court.

I conclude with a beautiful little post by Peter Brantley yesterday on first sale, which wasn't prompted by the Autodesk opinion (which I doubt he was aware of), but which shows why the principles of first sale are important to all of us. Thanks to Peter for letting me post it. Here it is:

On Owning Books


For various reasons, in the last month I have been filled with "life-nostalgia". My daughter recently turned 7, her celebration prompting like shadow puppets faint memories of my own childhood; my mother's birthday recently passed, but then, so had she a few years ago, so she was not around to enjoy it; and I've watched the news reports on Edward Kennedy's cancer with profound sadness; a loved family member had his own brush with a glioma a decade ago. It all makes one pause.

The delights of growing old: taking enjoyment from many small things. For me, one tenacious root of happiness is a shared enjoyment of reading with my father. It is to him that I must give credit for a love of books; as a professor of contemporary American literature for years, his book suggestions turned to Barthelme, Barth, and Pynchon when I was still in middle school. And for my father now, reading is something for him to hold onto; a love that only failing eyesight might stand to disperse -- and then there will be audiobooks.

I speak with my father weekly, and we reserve time to compare what is being read, how we heard about it, how it relates to other things we have enjoyed. And no doubt in part as a result of growing up in house filled with books, we've discovered that the walls of our house now bridge whole sections of the continent, for we mail books to each other regularly.

My father will mail me a copy of Willie Morris' North Toward Home and a few Durrells; I will mail him the hilarious and poignant A Thousand Shall Fall, and an old edition of Grimble's We Chose the Islands. And we argue over whom first heard about Andy Adam's The Log of a Cowboy; then we realize we both have editions in our homes.

Here is the thing: it's hard to say who owns these books. They are ours, collectively; they fling back and forth between Texas and California, and either household is only a temporary resting place. These books are shared, because they are appreciated; loved, because they are enjoyed with others.

Ultimately, I do not much care whether these books are paper or made of some other less organic substance, whether substrates and electrons, or plastic polymers. Instead what matters is that we are able to share books with each other; in return for the gift of spreading delight, a wait of days and the cost of media rate shipping are very modest penalties.

Whatever digital (ebook) books look like in the future, if they do not embody the right to share, in an unrestricted and platform independent manner, they will be poorer things.

This is called the first sale doctrine. It's part of why people love books -- a love built from sharing. It's what makes libraries possible. A world where content is licensed, and sold with restrictions on use, is a world less full of enthusiastic readers; less full of love.

To any publisher who sees the wisdom of DRM: don't.

35 comments:

yftl said...

While the first sale doctrine also applies to copies that are given away, what constitutes a sale is generally a question of state, not federal copyright law, and in recognition of this, many software companies have taken the position that they can convey the copy to the customer in an over-the-counter transaction for a one-time payment, but describe that transaction as a license; as a license, the first sale doctrine doesn't apply, meaning copyright owners can prevent further distribution of the copy. That is an absurd position to me

I'm not sure it's absurd, and I guess this ruling somewhat troubles me for a bunch of reasons.

First, if software "sold" to consumers is treated without regard to certain license restrictions (like a limitation on transfer), why bother enforcing any other provision? A license frequently does more than restrict transfer.

Second, I'm also not sure that it's entirely pro-consumer. A number of pricey software packages like AutoCAD are frequently sold at steep discounts from the full retail price to educational institutions, students, etc. This practice will probably quickly end when people realize that they can buy the software at a discount and offer it up, unopened, on Ebay. You repeatedly state "at full value," but that doesn't seem to persuasive. Full value of what?

I think that this corner of copyright law is pretty troubling for software given its very nature. In this case, I disagree with you, and I hope the case is appealed and reversed.

William Patry said...

Thanks for your comments YFTL. I said absurd and full value for these reasons: if I walk into a store and buy a piece of software that has a shrinkwrapped license, I walk out of the store having paid whatever price the store decided to charge, discounted or not. There is no second shelf for copies of the work that are marked "sale" rather than "licensed." There is only one type of transaction and it is a type of transaction that is identical to buying an apple on the point of whether it is a sale or a license. The only reason software companies denominate the transaction is to avoid first sale. It is not to give me deal on price or to benefit me in the least.

I take your point about price discrimination for different markets, but I saw nothing in the opinion to indicate this was the case in Vernor.

BTW, The Vernor court called the transaction "a sale with contractual restrictions on use and transfer of the software." (Page 16, bottom). At some point such restrictions do though point toward something that doesn't seem like a sale either, so I agree it is a complex area, which is why folks like eBay shouldn't be placed in the position of having to sort things out.

Chris said...

Bill, you seem to be saying that because you cannot buy a "sold" version of the software for a higher price, that the "purchase of a license" transaction must, in reality be a sale. I disagree. Microsoft, for example, may determine that if it had to give up all of its EULA terms on Vista, it would have to charge thousands of dollars a copy to offset its potential liability, and that nobody would buy that. They should not have to offer both products, one which nobody buys, just to protect the enforceability of the license.

Note, however, that the opinion leaves open the question of whether the purchaser takes subject to the "license" or not. If the purchaser does take subject to that license, then all the other provisions of the license may still apply (things like disclaimers of warranty, restrictions on use, limitations of liability, dispute resolution, etc....) It may be that ProCD's logic still applies.

But, that brings up another question: if CTA was subject to the license's terms under contract law, then wouldn't Vernor's agreeing to buy the software, knowing that CTA's sale violates that contract, be tortuous interference?

William Patry said...

Hi Chris, I didn't mean to infer that "because you cannot buy a 'sold' version of the software for a higher price, that the 'purchase of a license' transaction must, in reality be a sale." I only intended to respond to the point made by YFTL regarding different pricing regimes. There is only one, the price on the box sold over the counter. Microsoft should count its blessings that anyone would buy Vista regardless of the price or the EULA terms.

It is true that the opinion leaves open, technically, the binding nature of contractual terms in a sale on downstream users, but the court wrote on page 1: "The court cannot be certain if Autodesk actually asserts that the License binds Mr. Vernor or his customers. Autodesk certainly contends that the License negates a sale beteween itself and CTA. That issue is not to be conflated, however, with whether Mr. Vernor or his customers are bound by the License." The court went on to state it wasn't going to decide that issue but it noted, tellingly, that Autodesk "fail[ed] to cite any authority for the proposition that the License binds downstream transferees... ."

Anonymous said...

I have a question regarding second sale of what is considered "shelfware" by many. Companies and consumers together spend millions of dollars each year on software which eventually becomes shelfware. In some cases, it may become shelfware almost immediately. There are many more reasons why software becomes shelfware, but I would imagine that there could be a secondary market for second sale software where consumers and companies alike could get at least something back for software and its corresponding license which now sits in a desk or shelf somewhere. What are your opinions on this and how worthwhile, based on the amount of legal issues to be addressed, would it be to actually begin a business selling second sale software under this premise? Thank you.

Chris said...

Anonymous --

I used to work for a large technology company that did this sort of thing internally. Basically, the IT organization was responsible for tracking all the licenses that were bought and reclaiming them when a project was canceled or just stopped using them. Then, when a new project wanted to buy that software, it would just take the version already licensed to the company off the shelf. (Previously, each project had managed its own software purchases.)

Even inside a single company, the IT department ended up with issues with licensing specifics (per-seat v. specified hardware v. site license v. specific user, etc...) and in keeping up support and maintenance plans.

planetmcd said...

It seems to me that a well thought out system of keys that prevented reuse would be all that is required.

Software makers could sell the software, but license the key.

That way the transfer of the software can happen no matter what, but the user would always need to go to the vendor for the key.

I'm not advocating that approach, in fact I would hate it as a consumer. It just seems that if the it would be a achieve the same end without treading on first sale. The key that came with the software wouldn't work for the second owner. The new owner would need to buy another key.

This has a host of other problems but they are consumer relations related not legal.

Mark said...

It seems odd to defend the practice of claiming sales are in reality licenses by the need to support price discrimination. While some specific people under some specific circumstances may benefit such as students getting special discounts the net effect of such schemes is damage to our society as a whole. Such practices reduce competition allowing a vendor with market power such as AutoCAD to undercut and block a competitor which might serve the student market or in general any portion of the market which is more price sensitive. Perfect market segmentation gives everything to the seller forcing buyers to all pay the full utility they derive from products. It is not so much students getting discounts as everyone else paying extra.

I can well see why the AutoCADs would like that but for our society as a whole it is a bad thing and no justification for burdening ordinary sales with greatly increased legal complexity.

rumpole said...

This is one of the hardest issues in copyright law. The practical problem in many cases will be that if a sale occurs, the recipient has certain privileges that flow with the copy. A software owner that sees its copy pirated (multiple copies of GTA IV from one original, for example) will still have remedies whether or not the license exists.

In contrast, the PRO CD fact pattern involved a compilation for which market failure would occur int the absence of a contractual restriction. If the copy were "sold," then the buyer is in a position to eviscerate the compilation's market by extracting and re-arranging the information contained therein.

Nimmer has several pages of screed on ProCD, and I'm curious as to how your treatise addresses it. (We are too cheap to have two, though the beefs with Nimmer the younger continue to mount).

sb said...

The author several times asks the court to take a "common sense" view of copyright law and, apparently, rule that licenses are not sales. I don't see how this is common sense. If I rent a car, I haven't bought it. If a rent a movie, I haven't bought it. I could go on. What about the Constitution's protection of 2 parties to enter into an agreement together? The 1st sale doctrine should not be made to apply to licenses by an activist court -- if it is to apply, let the laws be changed.

William Patry said...

Dear SB, I would have thought that when you rented a car for one day $50, commonsense would have told you you didn't own it, especially when you had to return it the next day for fear that your credit card would be charged for every day you didn't. I would have thought too that when you walked into a store paid $50 for a software program, and walked out knowing you never had to return it and that you had no further financial obligations to the store or the software program author that common sense would tell you you had bought a copy.

William Patry said...

Rumpole, I look forward to the day when you jump ship; you'll be much happier.

Peter Hirtle said...

It is great to see common sense winning in court. I have never been able to understand why if I bought a book and a software package, both of which were published by Microsoft, the first was a sale and the second was a license.

But does this decision make any difference to the consumer? So Autodesk shouldn't have sued Verner for copyright infringement for distributing the software, but instead sued Verner for breach of the sales contract that contained restrictions on further redistribution. Sure, the penalties for copyright infringement may be horrendous - but Verner ends up in court either way. Does it really matter if he is maimed by a knife rather than a gun?

Anonymous said...

Well, I'm sure that someone at Google sees no reason why there should be any restriction on reselling works. Google's main business depends entirely on selling ads and letting everyone else do the work of creating the content.

As a content creator, I see things a bit more abstractly. The old notion that a copy was a real thing was just an approximation that worked well when books needed to be printed and movies needed to be fixed on film. It was a nice compromise that worked when creating copies cost real money.

But the digital age is different. We can dream all we want about being able to share books with friends without evil DRM getting in the way, but that's not going to help the content creator stay in business.

The real goal is to make it possible for everyone who uses a work to pay a fair share to the creator so we can spread out the development costs to all who willingly consume it.

I love being able to go to the movies and spend $10 bucks to see $200m worth of entertainment. That only works when everyone pitches in and pays their fair share. If the techno-savvy jerks building out their P2P networks have their way, though, they'll bankrupt Hollywood. No more big movies. No more Indiana Jones. No more Star Wars.

I used to think that file sharing was stealing from the man. Now I just think it steals from me by putting content creators I like out of business and raising the costs for those of us who like to pay their fair share.

Once digital copies become common, it will be easy for some smart fellow with an webserver to "share" single copies with hundreds of thousands of people. If the first sale doctrine is extended to situations like this, well, I'm going to have to charge $100,000 for each book I sell digitally. Why? I don't have any google stock options to pay the rent.

Anonymous said...

As a software developer, I can understand why the AutoCads out there feel the need to offer lower prices for students. They want to allow the future architects/whatever to learn on the industry standard. However, there is absolutely nothing keeping them from offering a feature limited version to certain markets, at a reduced price point. Even Microsoft, the behemoth, does this, and it turns out to save them a bit on their army of lawyers.

Deadstick said...

Regarding the car rental analogy: When you rent a car, you have to sign a contract stating that you will return the car and under what conditions you will return it, etc. If software companies want to restrict buyers from re-selling their product, I suggest that they have buyers sign a contract at the time of sale that prohibits them from re-selling. Otherwise, as the author stated, it is implied that the buyer owns the software and the right to re-sell.

Anonymous said...

peter, Verner wasn't party to the sales contract, CTA was. He is a purchaser from CTA.

As far as CTA, they would be in the clear.
Because I thought the point was if it is a sale transaction then any restrictions on resell are unenforceable because they conflict with 17 U.S.C. § 109(a).

Any additional use restrictions may or may not be binding on subsequent owners like Verner. The court declined to address the issue but it didn't look good for Autodesk.

I enjoyed when the court noted that Autodesk hadn't explained how a "nontransferable license" can be binding on subsequent transferees.

Anonymous said...

Here is the way I see it. The current 'licenses' are not..they are contracts of adhesion. If they were true licenses, you would have to actually sign a license. The judges ruling was completely correct. We only have the valuable consideration part of the contract, not the signature and probably not the meeting of the minds either. Just Clicking 'OK' if you accept just doesn't cut it (and I hope it never does).

Anonymous said...

Understanding software licensing scam

1. The whole software licensing scam is about companies misusing "work on hire" and "copyright" laws.

2. Companies hire people to write software on work on hire basis and then sell the software on copyright basis.

3. The reality is "work on hire" is for internal use of the company only, work on hire does not automatically grant copyright of work produced on hire.

4. Copyright can be obtained only by paying the original author of the work "royalty" for each copy of the work.

5. To overturn software licensing all that someone has to do is prove that software publisher is not paying royalty for each copy to the software authors.

6. Where there is huge profits there is always a "scam" behind it!

A said...

I just posted a fairly lengthy discussion of the decision on my own blog and I'm going to take a break for a bit, but I wanted to respond to what planetmcd just said about keys (i.e., DRM):

This has a host of other problems but they are consumer relations related not legal.

There are some PR problems here (as Microsoft's finding out in its attempt to turn off its MSN Music DRM), but in the case of AutoCAD there are, in fact, probably a few legal issues as well.

Most notably, there's a problem which Judge Roberts alludes to directly, which is that if Vernor is in fact bound by the license, then he has a copyright misuse defense that's gotten a lot of traction in recent years. The courts in Lexmark and a number of other cases have held pretty consistently (much more consistently than they have with regards to, e.g., first-sale questions) that combining licenses, copyright protection, DRM, and the anticircumvention rules monopolistically is a very good way to get your license invalidated and your copyright claims tossed out.

In the case of Autodesk -- and, one would think, Windows, etc. -- where a powerful market player is baldly claiming the right to abrogate first sale protections for a retailer, many courts applying (this admittedly new permutation of) the copyright misuse doctrine probably wouldn't hesitate (and haven't hesitated) in finding the "License" overreaching.

There's a great deal more to be said on this topic going both directions, but it seems to me that the moral in the end is that the doctrinal mess doesn't do any favors for developers trying to set initial prices, retailers trying to sell products without getting hammered with takedown notices, or consumers who can't know how much the software they buy is actually worth. The present state of affairs serves no one's interest.

A better way of framing this -- I think -- isn't in terms of "consumer-friendliness" or "business-friendliness," but rather in terms of whether the legal regime is sound enough to support a stable market with predictable pricing and valuation. Currently, that's clearly not the case.

Anonymous said...

An EULA on software is no more and no less valid than an EULA on a book. U.S. copyright law (and the copyright law of probably every other country) explicitly states that it is not copyright infringement to install and run software. You do NOT require any special license to install and run software.

The situation really is no different than a book. If someone can attach a shrinkwrap or other "license" to software, they can equally do so with a copyrighted book.

I'd seriously like to see someone try it. Sell a book and attach the exact same sort of EULA you typically find on software with appropriate modifications to address a book instead of software. Do a full blown legal case fighting to enforce it. Cite every argument and every precedent that has been used to support software EULA cases. Force the courts to face the fact that either these arguments and tactics are valid, or they are not. That if the legalities are that physical copyrighted works can be "licensed" rather than "sold", then they can and will be. That books and audio-cds and video cassettes and dvds can and WILL come with EULAs too.

-- Alsee

Anonymous said...

@sb:
" If I rent a car, I haven't bought it. If a rent a movie, I haven't bought it. I could go on."

Yes you could and still you'd be wrong.

"Rent" is something you pay once a month, not once. And it's not called "selling software", like companies do (esp. Autodesk), it's called "renting" or "leasing". Or "service".

Autodesk themselves calls it selling, so what's the problem?

When you sell something, it's sold and none of your business anymore (except some copyright issues, but that's another can of worms).

William Patry said...

Bravo A, for excellent comments.

William Patry said...

Dear Anonymous who began with: "Well, I'm sure that someone at Google sees no reason why there should be any restriction on reselling works."

Leaving aside your gratuitous comment about my employer - the blog is a personal blog and the first sale question has nothing to do with my employer's business (please note too I don't censor criticism, even stupid criticism), the issue on Vernor has to do with hard copies that were lawfully made and sold, not unauthorized digital copies, or P2P, or a single issue raised in your wholly irrelevant remarks, which are essentially this: "I am a content creator, hear me roar. I am the only one who is creative."

Since you are a content creator maybe you can figure out a way to submit comments that have something to do with the question being discussed, and that don't sound like whining.

planetmcd said...

A,
Thanks for the response. I see your point about Autocad. And I agree with it.

I was thinking in the abstract, if I were a software company, and I wanted to get around this ruling, I would do the limited term/use key thing as Microsoft sort of does with their OS (I'm been mainly a linux user for a while so I don't know what Vista does).

With a controlled key, the software and even the key can be sold, however the key won't activate the product a second time rendering it and the software useless. To get around this would require a new key from the vendor which the vendor could charge for or not at its discretion.

This brings ton's of headaches as people upgrade computers, mis-install, etc. But seems it would be permissible even after this first sale ruling. It seems under this scenario that it is immaterial whether Vernon is bound by the initial sale license as the software is useless without a new agreement to obtain a new activation key. I'm neither a lawyer nor a copyright expert, but it seems it would be hard to argue that AutoCad or anyone else would be legally compelled to give away activation keys.

This may tick off your customers and dare them to go elsewhere, but that hasn't stopped some companies from making billions.

I'll check out your post as well.

Anonymous said...

@planetmcd,

If the first sale applies to both the product as well as the activation key and if the activation key only works once then the activation key is defective and therefore we can get a new re-activation key that works.

But, If the company does not provide re-activation keys then the company would have to clearly state that fact, and let the buyer accept, before the user buys the product.

However, I am sure a company would try to write the license such that they would provide re-activation keys to the 'first purchaser of the product only', and then state in the license that the 'first purchaser of the product', could not give/sell the re-activation key. However again, this license would have to be clearly stated and let the buyer accept before the buyer purchases the product.

The point is, these 'licenses' are shrink-wrapped (the buyer can only choose to accept/decline _after_ buying the product) and since the buyer has already paid for the product without agreeing to anything then 'first sale doctrine' applies; the judge appears to agree to this point.

A said...

Alsee,

The situation really is no different than a book. If someone can attach a shrinkwrap or other "license" to software, they can equally do so with a copyrighted book.

I'd seriously like to see someone try it. Sell a book and attach the exact same sort of EULA you typically find on software with appropriate modifications to address a book instead of software.


The Maryland State Bar does precisely this with their member directory. You probably know that the state of Oregon is attempting to do something similar with their legal codes. Monsanto has made millions of dollars litigating "licenses" regulating the use of their seeds.

This book example is frequently used in the literature as a reductio ad absurdum intended to demonstrate that shrinkwrap licensing is illegitimate, but the reality is that there are many, many examples of just these sorts of practices becoming increasingly common w/r/t other goods, and courts have not been at all reluctant to uphold many of those "licenses." Disagree with it or no, ProCD is probably the law here for the foreseeable future (in most cases).

Again, the caselaw here is a mess, but I don't think that the distinction between physical and information goods is a particular weak point.

William, thank you for the compliment and for the engaging post.

William Patry said...

Thank you A for providing so many excellent comments.

planetmcd said...

Anonymous,

I see your point, but it seems that just as downstream buyers would not be bound by any agreements entered into between the seller and initial purchaser (express or implied), the initial seller would not be bound to downstream purchasers to provide them anything.

Again, I'm not a lawyer, but the notion that an activation key is defective if it works once seems to be false. It worked once, as it was designed to do. Defective is different than annoying, foolish, or technically difficult (e.g. users with no network connection).

I'm not suggesting this is a good way to treat customers, and I'm a staunch supporter of open source software. Most programmers I know make their money on services, not moving units.

It seems like in this wired age, its an easy hurdle to surmount. Software vendor should say, you can have that copy of software, someone can sell it to you. It just won't work as you want it to until you pay for a software key and accept the terms that go with purchasing that key.

That might open the can of worms of acknowledging that shrink wrap software is sold and not liscensed. That may be bad for the MS and Adobes, but smaller software makers...?

A said...

I see your point, but it seems that just as downstream buyers would not be bound by any agreements entered into between the seller and initial purchaser (express or implied), the initial seller would not be bound to downstream purchasers to provide them anything.

I can think of a few reasons why they might be -- privity issues aside, the simplest way to resolve the problem is probably through implied-warranty guarantees. A manufacturer can't sell a car to a retailer and sell the key separately (this seems to be the best analogy to your hypothetical) and then tell the next person who buys the car, "Ha ha! You don't have a key, but since you didn't buy from me you don't have a case."

Even if the person didn't buy a key, if the car won't start, then it's not really useful for anything and state law under the UCC generally provides for an implied warranty of fitness here. There's also probably a cause of action against the reseller of the car, and the reseller then has a cause of action against the manufacturer.

There's a hidden issue here in that the UCC's implied warranty guarantees might not apply to a good being "licensed" as opposed to "sold," but if anything that seems to me to be part of the reason why the whole current "licensing" regime is kind of a canard anyway: yes, it potentially does let licensors contract out things like implied warranties, first sale, fair use, etc. -- all things that generally enjoy strong statutory protections that consumers expect.

You probably can sell software that's protected by a single-user key, just like you can probably sell a car for $10 and "lease" the key separately. The question is whether you can enforce it. I'm doubtful that a court would see either case as anything but legal smoke-n-mirrors, because that's really all that it is. The value is in the software, not the key that's used to protect it. If anything, the courts have frowned on using DRM methods to do precisely this -- again, as in Lexmark (you've probably read about this; that was the case where Lexmark was trying to use DRM to protect its "proprietary" printer cartridges and claiming that reverse engineering violated the DMCA -- the court was not sympathetic).

Again, you may be able to contract to do some of this, but it seems increasingly unlikely that there's a copyright action here. And as pointed out previously, why should there be? There's been no piracy, and the copyright action would still lie if there was. Most markets don't let producers eliminate the secondary market by private legal fiat, and I personally don't see why software should function differently.

Marc B. said...

Just a small thought from another legal system: The first sale doctrine has been applied to software in Germany for more then a decade now. There is well established judicature and though Microsoft is still trying to challenge the doctrine in one ongoing high profile case, there can't be much doubt that the "license model" is dead here and in the EU. This didn't of course stop any global software company to sell their products here. We do have some piracy, but not more then other developed countries, and the first sale doctrine has nothing to do with it.

William Patry said...

Thanks Marc, what a great bit of info. There is nothing like facts to puncture bad theory

Eric said...

Mr. Patry, thanks for a genuinely inspiring post. Browsing through the discussion on licensing versus sale in the comments, however, makes it sound like first sale will be relegated to a vestigal doctrine that is applicable only where a physical copy is involved. Boo.

Dan said...

@eric: The only kind of copy *is* a physical copy. There is no other kind. Check out 17 USC Sec 101 for the definition of a "copy" under copyright law. You will find that a copy is by definition a "material object".

Whoever owns the material object that the copy is "fixed" in is the owner of the copy. If you own the hard disk upon which a copy of software is fixed, then you own, in your words, a "physical copy" of the software, even if you originally downloaded the software from the Internet.

Whether there is a first sale in such a case will hinge upon whether a) the act of creating your copy was legal [i.e. it was authorized]; and b) whether the transaction you obtained it in fits the definition of a sale. If you pay a one-time fee for software that is yours to keep and use as long as you like, and you are not required to return it or destroy it after some pre-determined amount of time, then it most likely is a sale. It doesn't matter how the copy was transferred to you, whether on a CD or via the Internet. Either way it fits the court's interpretation of a first sale.

Tony Tanzillo said...

A person who feels that this judgement was wrong and should be overturned, seems to be ignoring some very basic realities.

The first and foremost reality is that Autodesk rose to the position it is now in, because of widespread piracy of its products, rather than as a result of their technical superiority.

Hence, Autodesk has benefited immensely from piracy of its products. So, if the argument is about the implications on software piracy, it's a bit silly to suggest that encouraging more of what made Autodesk the industry leader is a bad thing for Autodesk.

The more imporant reality is that computer software is subject to competition.

Competition is supressed if a person purchases a license for software and has no legal means of disposing of it for fair value, if after purchasing it, they so determine the software is unsuitable for their purpose and subsequently determines that a competing product is more suitable.

In my opinion, the anti-competitive implications of the decision far outweigh any implications on piracy.