Tuesday, November 20, 2007

First Sale, Software, and eBay

The question whether a transaction in which a copy of software is transferred for a set price to end users is a sale or license is long-standing. It has been raised again in a suit brought by Timothy Vernor against Autodesk, in which he is now represented by Public Citizen. Here is a link to their press release about the suit (including a link to the amended complaint), and a short excerpt from that release:

The lawsuit ... was filed in federal court in Seattle and contends that the software company’s actions are abusive and lead to higher prices for consumers. ... eBay vendor Timothy Vernor picked up his first used copy of Autodesk’s “AutoCAD Release 14” at a tag sale. Autodesk sells this product new in a shrink-wrapped box that contains a “license agreement” that the company claims prohibits the purchaser from reselling the software. Public Citizen argues that this contract language is unlawful under the Copyright Act, which guarantees that the owner of a copyrighted product can resell that product without permission.

The complaint seeks declaratory relief that no infringement occurred and has a count for unfair and deceptive practices arising out of the DMCA take down notices sent to eBay. Within the Ninth Circuit, Adobe has made some law on the question, although the courts are split. In the first case, Adobe Sys. Inc. v. One Stop Micro, Inc., 84 F.Supp.2d 1086 (N.D. Cal. 2000), Adobe distributed software to the educational market through authorized distributors who in turn transferred copies to authorized resellers. Those authorized resellers had an agreement with Adobe limiting sale to end users in the educational market. Defendant, a company not an educational end-user, bought a copy in the "open market," as the court described it. While the court found some ambiguity in the agreement on the question whether the parties intended a sale or license, using extrinsic evidence, it held that a license was intended due to the presence of restrictions on the types of sales, and expert testimony that software is generally licensed, not sold. This testimony was of course conclusory in nature; that is, it stated an opinion on the law, masked as testimony about facts. The court dismissed the language "purchase and sale" in the agreement as "convenient and familiar," but meaningless in light of the custom of licensing it found. The custom was, however, in how the industry wants such agreements to be legally construed, and not how they may be factually. For example, Adobe did not, I believe, require return of a copy. Characterizing such transactions as sales does not leave Adobe and others high and dry; rather, they still have available a breach of contract action against the party who breached the resale agreement.

In the next case, Softman Products Co. LLC v. Adobe Sys., Inc., 171 F. Supp.2d 1075 (C.D. Cal. 2001), the court reached the opposite result, disagreeing with the earlier decision, and noting that the industry's preference for describing the transactions as licenses ""does not alter the Court's analysis that the substance of the transaction at issue here is a sale and not a license."

Finally, in Adobe Sys., Inc. v. Stargate Software, Inc., 216 F. Supp.2d 1051 (N.D. Cal. 2002), the court agreed with the One Stop Micro court and disagreed with Softman, which it lamely attempted to distinguish as involving the disaggregation of a compilation of products.

In many ways, the debate hearkens back to Judge Easterbrook's ProCD case and his concerns about arbitrage, the effort to develop a market that impedes the copyright owner's efforts to market the work in a discrete way. In the Adobe cases, Adobe was targeting the educational market and perhaps offering terms different (and hopefully more favorable) than those it offered to the commercial market. One would want to encourage such efforts; yet, the question is how, consistent with the statute and the actual facts of the transaction. If, as the Softman court held, the substance of the transaction is a sale, calling it a license shouldn't change matters and copyright owners should be left to pursue contract remedies. If the substance is a license as that term is used in other fields of law, then there is no first sale. The type of restrictions pointed to by some courts -- restrictions on whom copies may be sold to -- is no different than any agreement where a sale is commonly found: you can sell copies of a CD in the U.S., but not Canada for example. It is unthinkable that this last agreement would be deemed a license. So too an agreement that says you can sell the software to the educational market but not the general market.


Anonymous said...

I recently took a Kaplan prep course in which, for a single price, 14 classes and a bunch of prep books were provided. When the course commenced, they made us agree to the following:

"All course materials that you receive and to which you have access during your enrollment are protected by Federal Copyright law and are meant for your personal use only. By signing this agreement, you agree not to reproduce, redistribute, share, sell, auction, or give away any such materials either during or after your enrollment. "

As this agreement conflicts with the first-sale doctrine, is it valid? They give us books to keep and I can't even give them away?

Anonymous said...

I guess I don't understand your point Prof. Patry.

Is your point that even if a court doesn't construe a contract as a license, the copyright owner still has remedies that sound in contract, but not copyright?

William Patry said...

YFTL, my point was the opposite: if a court construes the transaction as a sale, and therefore finds for defendant under the first sale doctrine, the copyright owner would still have a contract action against whoever sold the copy to defendant.

Neville said...

Contract law usually trumps IP:) My Contracts professor, Prof Warren Shattuck (deceased) worked with Witkin himself.
What intrigues me is the Second Claim: paragraphs 36-37 of the complaint appear to state that use of DMCA take down notices can be actionable under Cal Bus & Prof Code section 17200. Has this been established? (Sorry if I'm behind the times here.)

Anonymous said...

I'm not surprised that the manufacturer / original distributor would insist on limiting the buyer's right to share or redistribute their product. Applying a license to consumer goods allows the seller to capture the full value of the sale. I expect to see this concept applied to a much broader range of consumer products in the future. Soon, my new sweater will contain a user license prohibiting me from lending it to a friend or giving it away when it no longer fits me. This would be a boon for the makers of children's clothing, who suffer lost profits every time a winter coat is handed down to a younger sibling. Also, cinema owners could attach a user license to popcorn containers to ensure that each patron purchases his/her own instead of sharing a larger size. Automobile manufacturers could require seat-licenses as a condition of sale so that drivers would be restricted to carrying authorized passengers. Before giving a colleague a ride home from work, drivers would obtain a new passenger license, selecting a temporary license if the colleague's car is in the shop just for the day or perhaps a perpetual license if planning a regular carpool.

My mind boggles.

Anonymous said...

This area of copyright law just keeps getting more and more muddled, IMO.

Some basics:

(1) The "first sale" doctrine under the copyright act is a misnomer. The relevant inquiry isn't whether there's been a "sale" or not -- it's whether the copy was "lawfully made." See 17 USC 109(a); Patry secs 13:20 - 13:22.

(2) Ergo, for things like books, music LP's, etc., if particular copy was lawfully made (i.e., is not a pirated copy), further distribution of that copy can't be infringement. (It might well be a breach of contract, but there's a huge difference, especially as it pertains to the rights of third parties.)

(3) OTOH, if it's a pirated copy, the fact that it was previously sold or that the owner is a bona fide purchaser is irrelevant: if it's pirated, it cannot be legally distributed by anyone without the permission of the copyright owner, and any distribution is infringement.

(4) Even where a particular copy was "lawfully made," 109(a) only allows the further distribution of that particular copy -- the mere possession of a lawfully made copy neither creates nor implies any right to create additional copies, perform it publicly, create derivatives, etc. See 17 USC 202.

(5) Software presents the difficult case: the physical copy of the software may well have been "lawfully made," but in order to do anything with the software you typically have to make a copy of it onto your computer. And thus the rub . . . a "purchase" of software typically is both the acquisition of a physical copy of the software (e.g., a CD) *and* a license to make copies of it onto your computer -- and this license is almost always is restricted in some fashion (e.g., single user license, etc.).

Ergo, if we posit that a copyright owner can legally restrict the purchaser of a particular copy of software from making as many copies as he wants, it seems apparent that the copyright owner can similarly restrict the use of the software to the first purchaser of the copy. That may well be at odds with the spirit of 109(a), but it's well within the language of the statute.

LKB in Houston

Anonymous said...

Well, do remember section 117. The problem with 117, though, is that it's only useful for owners of a copy, rather than lawful possessors of a copy, which would be better.

Frankly, though, I'd like to see a simple solution for this: ban adhesive contracts between merchants and consumers concerning creative works, and revoke copyrights for works which copyright holders or their licensees apply DRM.

Anonymous said...

In agreement with LKV the intrinsic difference between the sale/license of software and of physical goods such as a sweater is the intangibility of the valued artifact - the physical CD and packaging is not "the product", but the data upon it. As such the problem facing vendors is that resale by an end-user may well transfer the physical goods to the new owner without question, but it becomes impossible to prevent the original purchaser from retaining a copy of the data (either as an installed program or a backup disc). Programmatic methods to achieve some protection of the physical product (Sony et. al.) have been ruled unlawful, and IMO rightly so, as they block fair use. The difficulty for software is that the actions allowed under fair use are precisely the same actions that when performed in conjunction with a resale-by-end-user lead to infringement.

Whilst it's perfectly possible to impose security on installation copies (via serial numbers, online registration etc.) there are equally as many ways to defeat such measures, either maliciously or otherwise. As a software vendor I have no care *who* owns a particular copy, but do care that one copy could create a chain of historical duplicates in different hands, as irrespective of the copyright infringement this would create, it's often physically and financially impossible to prosecute. Users are aware of this, and with all due respect to the human race if they can see a hole they'll reach inside it.

Software seems, like music and video, to have a different social/moral position in terms of "ownership" than physical products - nobody would expect to buy a car and then be allowed to "duplicate it" for sharing with their friends, but not only is this common with data-based assets, it's seemingly acceptable practice for the majority of otherwise-law-abiding people. Because of this different attitude the presence of more restrictive contractual terms and the "license vs sale" doctrine seems to be the only way to level the playing field. It'd be great if there was another way, but there isn't.

Anonymous said...

As such the problem facing vendors is that resale by an end-user may well transfer the physical goods to the new owner without question, but it becomes impossible to prevent the original purchaser from retaining a copy of the data (either as an installed program or a backup disc).

In a word: tough.

The same is true of books, visual art, performance-based art (e.g. a friend telling you what happens in a movie that you aren't bothering to go to), etc. Yet from time immemorial, it has been customary for people to resell the media which bears a message, regardless of the impact on the author, because authors aren't really important enough to warrant doing otherwise. This means you too.

Either trust your users or quit. Frankly, if you don't trust your users, we're all probably better off without you.

nobody would expect to buy a car and then be allowed to "duplicate it" for sharing with their friends

Are you kidding?

It's all about convenience. Convenience is everything!

Frankly, I _do_ expect to buy cars and to then freely make duplicates for my friends. I just lack the tools to do so, the time, the materials, and so it's more convenient to buy pre-made cars.

200 years ago, you could copy a book by hand with quill pens, but it was more convenient, usually, to buy a printed copy.

And note as well, that the mass producers of things will always have the advantage. It is cheaper to print books than to copy them by hand. It is cheaper to press CDs in a factory than to burn them on computers. Modern publishers may be ignoring their advantages to their own detriment (there's no reason why movie studios can't put their movies on Bit Torrent instead of wasting time pressing DVDs, shipping them to stores, etc.) but that's pretty much irrelevant.

The world of creative works is, frankly, a practice run for the world to come. In the foreseeable future, we will probably have technology that is really good at cheaply and swiftly reproducing tangible goods. We already have rapid prototyping equipment that, while primitive, lets people 'print' machines out of their computers. Soon we'll probably have a nanotechnological solution, where you pour junk into a hopper, it gets broken down into its constituent molecules and elements, and then put back together again as something else.

And indeed, it seems like it would be great, if we can avoid killing ourselves with it. Some sort of replicator technology would be wonderful for helping to stop famine, for instance. All manner of transportation, shipping, and exploration, would be aided greatly.

So yes, give absolutely anyone a box of blank recordable cars, and a car burner, and I have no doubt whatsoever that they will start copying cars with the same glee that people do with music and movies.

The only reason that they wouldn't, is the same reason as now: convenience. Make purchasing an authorized copy more convenient, and people will do that instead, which is why people do still buy DVDs and CDs even today, even despite all the alternatives available, legitimate or not.

Remember: there is absolutely no moral component to copyrights, patents, etc. We only have them because the masses are greedy and want stuff, and they are a mechanism for doing that. Should they become superfluous, we'd better chuck them into the trash without hesitation.

Should we allow people to starve and be naked, if instant food or clothes from thin air would discomfort Monsanto or Calvin Klein? Ultimately, that is what it will come down to.

You might think that books or films are lower down on Maslow's, but ultimately it's the same issue, and how we deal with these issues now will be important for how we deal with what will inevitably come. I know where I stand. How about you?