Here's Groklaw's coverage of the decision by the appeals court last year, and here's our coverage of the ruling at the district court in 2009, which had ruled in favor of Vernor, only to be reversed by the appeals court. Some background and resources on first sale cases may help you to follow along. Here's a list of important first sale cases on Groklaw's Legal Research page. If you recall, Michael A. Jacobs of Morrison & Foerster, who represented Novell against SCO successfully, represents AutoDesk.

Here is the EFF press release, followed by the amicus brief as text:

EFF Asks Supreme Court to Protect "First Sale" Rights

EFF asked [PDF] the Supreme Court yesterday to weigh in on Vernor v. Autodesk, a case that tests whether the "first sale doctrine" will survive in the digital age.

Under the first sale doctrine, once a copyright owner sells or gives you a copy of her work, she gives up control of that particular copy. You buy it, you own it. This principle is extraordinarily important for consumers, as it makes it legal for you to resell, lend, or give away the books, CDs, DVDs, and software that you purchase.

Many copyright owners don’t like these limits; they’d rather be able to completely control the market for their products, including any secondary markets. Thus, in an effort to duck the first sale doctrine, companies increasingly claim that they are "licensing" products to consumers, instead of selling them.

That's exactly what's happening in Vernor. Timothy Vernor, an online software reseller, tried to auction four packages of Autodesk's AutoCAD software on eBay, but Autodesk threatened Mr. Vernor with a copyright infringement lawsuit, claiming that its software is only “licensed,” never sold and pointing to the fine print on the agreement it had with the original purchaser from whom Mr. Vernor obtained the software.

The public interest litigators at Public Citizen pitched in to help Mr. Vernor, and they filed suit in Seattle, asking the court to clarify his right to resell the software. The district court agreed with Vernor in 2009, but Autodesk appealed to the 9th U.S. Circuit Court of Appeals. There, justices wrongly held that the first sale doctrine doesn't apply as long as the vendor writes a user agreement that includes restrictions transforming a sale into a license. In other words, if you use the right "magic words," you can turn buyers of your works into renters, who don't have the right to resell, lend, or give away property they thought they owned.

This decision was bad news for consumers. By undermining the crucial balance between copyright owners and users that supports used bookstores, libraries, DVD rentals, and so on, it hurt our ability to save a few dollars and our ability to retain, archive and access older, out-of-print materials. Libraries and second-hand sellers are often the only hope for these materials and the “long tail” community of researchers, historians and hobbyists that value them. And since software is embedded in an extraordinary array of content and devices, from videos to music to goods such as phones, picture frames, book readers, etc., all of which is made available subject to a EULA few consumers read, we worry that the decision may have an even broader impact.

This Ninth Circuit got this one wrong, which is why we asked the Supreme Court to hear this case. A coalition of public interest, consumer, and library groups joined EFF in the amicus brief, including several national library associations, Public Knowledge, the Consumer Federation of America, and U.S. PIRG. We hope that the Court agrees to review the case and treats it as an opportunity to put consumer rights and expectations ahead of the overreaching demands of software vendors.

Amici urge the Court to grant Mr. Vernor’s petition for certiorari because this case raises a question of extraordinary importance: will the first sale doctrine remain viable in an age when an increasing number of products are nominally licensed rather than sold?

For more than a century, the first sale doctrine has been a critical part of the statutory balance struck by courts and Congress between the interests of copyright owners and the public. On the one hand, copyright’s exclusive right of distribution gives copyright owners control over the first vending of their works. On the other hand, individuals have rights over the physical objects they have purchased and now own. After an individual copy has been sold, the first sale doctrine puts further dispositions of the copy beyond the reach of the copyright owner. The first sale doctrine thus ensures a “second life” for copyrighted works in libraries, archives, used bookstores, online auctions, and hand-to-hand exchanges. The Ninth Circuit’s decision in Vernor v. Autodesk, 621 F.3d 1102 (9th Cir. 2010) upends this historical balance, with potential ramifications far beyond this particular case. Software is embedded in an extraordinary array of content and devices, from video to music to goods such as phones, picture frames, book readers, etc. And much of this software is made available subject to an end-user license agreement, or “EULA” – an agreement that only an infinitesimal number of consumers will read. Given the ubiquity of EULAs, we should be doubly wary of allowing “magic words” to deprive a consumer of the ability to own a product she has legally purchased, including a particular copy of software embedded in that product. Contracts of adhesion should not be allowed to transform America from a nation of owners and tinkerers into a nation of sharecroppers....

While the grant of exclusive rights helps drive the creation of expressive works, it is the first sale doctrine that has guaranteed the continued availability of those works. ...

Because the first sale doctrine prevents centralized control over copies of works, it also helps protect consumer privacy and inhibit censorship. With copies scattered among libraries, second-hand stores, and personal collections, citizens and researchers are able to access works without revealing their reading and viewing choices to copyright owners or other central authorities. See Liu, supra, at 1330 (first sale prevents a copyright owner from being able to “control or monitor by whom the work is read, how many times it is read, in what context it is read or used, or to whom it is subsequently transferred”).

*************************

1

STATEMENT OF INTEREST

The Electronic Frontier Foundation (EFF) is the nation’s leading nonprofit civil liberties organization working to protect consumer interests, innovation, and free expression in the digital world. EFF and its more than 14,000 dues-paying members have a strong interest in assisting the courts and policy-makers in striking the appropriate balance between copyright law and the public interest.

2

The Consumer Federation of America (CFA) is composed of over 280 state and local affiliates representing consumer, senior, citizen, low-income, labor, farm, public power and cooperative organizations, with more than 50 million individual members. CFA has a deep commitment to and history of ensuring that copyright laws protect consumer interests and ensure a fair marketplace.

U.S. PIRG (Public Interest Research Group) is a federation of twenty-five state-based, citizen-funded, non-profit, non-partisan organizations that advocate for the public interest. With its staffs of researchers, advocates, organizers and students, the PIRG federation supports citizen interest in opposition to commercial or governmental wrongdoing that threatens the health or safety of Americans, or violates fundamental principles of fairness and justice. Specifically, with respect to consumer rights, U.S. PIRG takes action on issues including consumer protection from unfair and deceptive practices, unconscionable fees and charges, product safety, warranties, monopolization, investor protection, utilities regulation, healthcare, and consumer privacy. U.S. PIRG conducts investigative research, publishes reports and exposés, and advocates for legislation and regulatory changes at the local, state and federal levels. It supports procedural rights that allow consumers to seek redress for violations of consumer protection laws and to enjoin

3

SUMMARY OF ARGUMENT

For more than a century, the first sale doctrine has been a critical part of the statutory balance struck by courts and Congress between the interests of copyright owners and the public. On the one hand, copyright’s exclusive right of distribution gives copyright owners control over the first vending of their works. On the other hand, individuals have rights over the physical objects they have purchased and now own. After an individual copy has been sold, the first sale doctrine puts further dispositions of the copy beyond the reach of the copyright owner. The first sale doctrine thus ensures a “second life” for copyrighted works in libraries, archives, used bookstores, online auctions, and hand-to-hand exchanges. The Ninth Circuit’s decision in Vernor v. Autodesk, 621 F.3d 1102 (9th Cir. 2010) upends this historical balance, with potential ramifications far beyond this particular case. Software is embedded in an extraordinary array of content and devices, from video to music to goods such as phones, picture frames, book readers, etc. And much

4

The case may also have unfortunate effects on other intellectual property jurisprudence, given that the first sale doctrine is motivated by many of the same principles that animate the doctrine of patent exhaustion. This Court’s unanimous 2008 decision in Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008) followed a line of patent exhaustion cases stretching back to at least Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917). These cases hold that an authorized first sale of a patented article exhausts the patent owner’s rights in that article and nullifies any “conditions” that the patent owner has tried to attach to its use or resale. While exhaustion principles may sometimes differ in the copyright and patent contexts, the Vernor decision could be read to approve a means of avoiding exhaustion that this Court has consistently denied to both copyright and patent holders.

Finally, the decision below conflicts with both this Court’s first sale precedent, as first elaborated in Bobbs- Merrill Co. v. Straus, 210 U.S. 339 (1908), which firmly rejected label-based efforts to expand the distribution right, and the Second Circuit’s sensible “economic

5

ARGUMENT

The Ninth Circuit’s decision in Vernor reduced what should be an analysis of the economic realities of a given transaction to a three-factor test that looks only to one- sided terms purportedly imposed by the distributor. While simplicity has its appeal, it is dangerous to consumers given the fact that the decision may be cited in contexts that bear little resemblance to the market for high-end software such as AutoCAD. In a world where myriad products incorporate software and come laden with purported “end-user license agreements,” encouraging software vendors to seek to trump the first sale doctrine with the right “magic words” threatens significant harm to the public interest.

A. Close Attention to Economic Realities Is
Particularly Important Where the Purported
License Is A Contract of Adhesion

6

In addition, license agreements impose significant information costs, as conscientious buyers are forced to parse the terms of the agreement (as well as updates thereto). Cf. Aleecia M. McDonald & Lorrie Faith Cranor, The Cost of Reading Privacy Policies 4 I/S: J.L. & Pol’y for Info. Soc’y 543 (2008); Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 Yale L.J. 1, 3 (2000). By contrast, the first sale doctrine reduces such costs by providing consumers with a reliable, consistent and well- known rule. Herbert J. Hovenkamp, Post-Sale Restraints and Competitive Harm: The First Sale Doctrine in Perspective, NYU Annual Survey of Am. Law 25 (2011); Joseph P. Liu, Owning Digital Copies: Copyright Law and the Incidents of Copy Ownership, 42 Wm. & Mary L. Rev. 1254 (2001); Molly Shaffer Van Houweling, The New Servitudes, 96 Geo. L.J. 885, 897-98 (2008). Not surprisingly, most consumers don’t wish to pay those costs – which is why few do.

7

B. By Encouraging Software Vendors to Use
Contracts, Including Contracts of Adhesion, to
Curtail Traditional Expectations and Rights
of Ownership, the Vernor Decision Undermines
Critical Economic And Democratic Values

8

(1) Accommodating traditional property law polices against restraints of trade and restraints on alienation;

(2) Supporting vibrant secondary markets that lower prices for consumers; and

(3) Promoting access to knowledge, preservation of culture, and resistance to censorship.

However, like the copyright holders in Costco and the patent holders in Quanta, software copyright owners chafe at the limits first sale imposes, and struggle mightily to avoid them. The Ninth Circuit’s decision in Vernor supports their efforts to erode first sale rights by suggesting that software vendors (and thus, by implication, copyright owners generally) can trump tangible property rights and the first sale doctrine by simply including a few “magic words” in a license agreement.

9

1. The Vernor Decision Interferes with the
Operation of the First Sale Doctrine to
Reconcile Copyright Law With Property
Law Policies That Disfavor Restraints On Alienation

This limitation on a copyright owner’s distribution right is also a natural expression of the purposes behind the distribution right. Congress did not create the distribution right in order to empower copyright owners to control disposition of tangible property, but rather to buttress the reproduction right by giving copyright owners recourse against illegitimate distributors who had not themselves infringed the reproduction right and thus might otherwise escape punishment. See 2 Melville Nimmer & David Nimmer, Nimmer On Copyright § 8.12[A] (2011) (distribution right exists to protect copyright owners against sellers of stolen inventory or

10

In such circumstances, continued control over the distribution of copies is not so much a supplement to the intangible copyright, but is rather primarily a device for controlling the disposition of the tangible personal property that embodies the copyrighted work. Therefore, at this point, the policy favoring a copyright monopoly for authors gives way to the policy opposing restraints of trade and restraints on alienation.

Unfortunately, the Ninth Circuit’s decision departs from the statutory framework, stating that copyright owners may distribute copies of their copyrighted works by “license.” Vernor, 621 F.3d at 1111. Software distributors have embraced a novel construct and chosen a word to describe it —“license” — that had a pre-existing use within copyright, leading the court below to conflate copyrights with rights in copies. But when software distributors use the word “license” here, they are not speaking of licensing copyrights, but of some bizarre variant on a lease or a rental—a new notion of permanently transferring a good while purporting to retain title to the transferred good.

11

What is worse, the problem could extend to other consumer goods that simply contain software. For example, in its opposition to a proposed DMCA exemption allowing iPhone purchasers to “jailbreak” their phones without fear of anti-circumvention liability, Apple, Inc. argued vigorously that iPhone purchasers are mere licensees, due to the restrictions in the iPhone Software License Agreement. Amicus Electronic Frontier Foundation, which proposed the exemption, explained that iPhone users are owners of the particular copy of the software embedded in their iPhone. Citing to the Vernor district court opinion, as well as other Ninth Circuit opinions and the Second Circuit’s opinion in Mu, 402 F.3d 119 (2d Cir. 2005), the Register of Copyrights concluded that the matter was “in a state of flux.” 75 Fed. Reg. 43,825, 43,829 (Jul. 27, 2010). Software vendors – including vendors of devices in which software is embedded – will doubtless argue that the matter is no longer “in a state of flux,” but rather resolved in favor of device purchasers being treated as mere licensees.

12

13

Indeed, in any other context, if one purported to give a tangible good to someone else and told him that he was free to keep it forever, destroy it, or throw it away, the recipient would rightly assume (as buyers of mass- distributed software do now) that he was the owner of that good. That assumption is reflected, for example, in the fact that the Uniform Commercial Code’s “Passing of Title” rules also limit sellers to the reservation of at most a security interest—reservation of title after sale and delivery is simply not possible. U.C.C. § 2-401(1)-(3) (2011); see also id. § 1-201(35).

2. The Vernor Decision Interferes with
Access to Knowledge and Resistance to
Censorship

14

a. Access

After their in-print lives end, it is libraries, archives, video rental establishments, and second-hand markets that

15

Purported license agreements that seek to override first sale principles can be a serious impediment to this crucial work. For example, as of 2009, the collections of American public libraries, public school media centers, and academic libraries, taken together, contained 244.8 million phonorecords and audiovisual materials, including millions of CDs and DVDs. See Institute of Museum and Library Services, Public Libraries Survey Fiscal Year 2007 10 (2009); National Center for Education Statistics, U.S. Department of Education, Characteristics of Public and Bureau of Indian Education Elementary and Secondary School Library Media Centers in the United States: Results from the 2007-08 Schools and Staffing Survey 9 (2009); National Center for Education Statistics, U.S. Department of Education, Academic Libraries: 2008 8 (2009). Public libraries alone lend out at least 2.1 million DVDs a day. See Libraries Top Netflix, Redbox When It Comes to Loaning DVDs, Yahoo! News (Jul. 28,

16

b. Censorship Resistance

In the digital context this benefit is already under siege. In 2009, for example, Amazon responded to a copyright complaint by remotely deleting copies of George Orwell’s 1984 from its customers’ Kindle electronic book

17

Again, the Vernor decision is likely to exacerbate the problem. Content and device vendors will read it as carte blanche to reserve for themselves a range of rights fundamentally at odds with individual ownership, including a right to monitor and interfere with reading activity. Users will have less ability to challenge those agreements even where the economic realities of the arrangement do not reflect a “license,” e.g., where the vendor’s marketing materials refer to the arrangement as a sale or where no recurring licensing fees are charged.

C. The Vernor Decision Undermines Vibrant
Secondary Markets That Increase Competition,
Yield Lower Prices and Increased Access For
Consumers, and Inhibit Consumer Lock-In.

18

Artificially limiting first sale rights for software based solely on three arbitrary criteria (one of which – whether the conveyance agreement is simply called “a license” – should surely be irrelevant) will inhibit the growth of secondary markets for software and the myriad devices that contain software. Users will suffer as a result, forced to pay higher prices for new software and devices, and/or financially “locked in” to technology they may no longer prefer. And competition will be chilled, as potential competitors are increasingly unable to overcome platform lock-in.

19

The Ninth Circuit, however, held that Autodesk may do exactly what Bobbs-Merrill could not, as long as it calls the text a “license” and restricts usage and transfer. Vernor, 621 F.3d at 1111. On this logic, if only Bobbs- Merrill had drafted its in-book notice differently, the first sale doctrine need not have existed in the first place.¹¹

Put another way, the decision below allows the wording of an agreement between two parties to create a servitude that runs with a tangible good — a covenant running with a chattel that restricts even those not party to any original agreement. Allowing boilerplate text to create a perpetual restraint on alienation creates precisely the situation that the Court sought to prevent in Bobbs-Merrill:

20

Was [the statute] intended to create a right which would permit the holder of the copyright to fasten, by notice in a book . . . a restriction upon the subsequent alienation of the subject- matter of copyright after the owner had parted with the title to one who had acquired full dominion over it and had given a satisfactory price for it? . . . [o]ne who has sold a copyrighted article, without restriction, has parted with all right to control the sale of it.

The Ninth Circuit attempted to distinguish Bobbs- Merrill by noting that this Court itself observed that there was no claim in that case regarding license agreements. Id. at 350. However, that cannot mean that the Court intended to turn its decision upon a publisher’s failure to recite that the notice in the book was a license. Taken in context, the Court was stating that its holding depended upon statutory construction, and not the interpretation of either a contract or license agreement.12 In making this distinction, the Court actually highlights the need to recognize when remedies would lie in contract law (as when a lessee fails to abide by the terms of the lease), as opposed to copyright law.

From its inception, the first sale doctrine has helped reconcile the limited statutory monopoly granted to

21

III. The Vernor Decision Conflicts with the Second
Circuit’s Decision in Krause v. Titleserv, Inc.

22

[F]ormal title in a program copy is not an absolute prerequisite to qualifying for § 117(a)’s affirmative defense. Instead, courts should inquire into whether the party exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a). The presence or absence of formal title may of course be a factor in this inquiry, but the absence of formal title may be outweighed by evidence that the possessor of the copy enjoys sufficiently broad rights over it to be sensibly considered its owner.

The Ninth Circuit rejected this approach in at least two ways. First, the Ninth Circuit greatly emphasized that Autodesk had retained “title” to the software copies. Vernor, 621 F.3d at 1111. Second, the Ninth Circuit held that the “economic realities” of the transaction were irrelevant to the ownership issue. Id. at 1114. The Second Circuit’s rule – “sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy” is another way to state the “economic realities” test the Ninth Circuit rejected.

Further, applying the Ninth Circuit rule to the facts of Krause would result in the opposite outcome in Krause, and vice versa, making the conflict in decisions apparent.

23

At the same time, if the Second Circuit’s rule is applied to the facts of Vernor, the opposite outcome again results. Krause’s basic rule is that “courts should inquire into whether the party exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy for purposes of § 117(a).” 402 F.3d at 124. Under the facts of that case, Titleserv was an owner of its copies and won the case, since Titleserv owed no further consideration to Krause after he left his employment, and could possess the software forever. 402 F.3d at 120-121. Applying that Krause rule to the facts of Vernor would result in Vernor being an owner and winning the case, not Autodesk: similar to the facts in Krause, purchasers of the Autodesk software paid a one-time fee and could keep possession of their copies of the software forever. 621 F.3d at 1105-06, 1111.

24

The two decisions plainly are in conflict, notwithstanding the Ninth Circuit’s attempt to distinguish Krause on its facts. See 621 F.3d at 1114. At a minimum, the two decisions, taken together, leave the lower courts with conflicting guidance on how to resolve copy ownership issues.

25

CONCLUSION

Respectfully submitted,

CORYNNE MCSHERRY
Counsel of Record ELECTRONIC FRONTIER FOUNDATION
SHERWIN SIY
PUBLIC KNOWLEDGE
[address, phone]

BRIAN W. CARVER
U.C. BERKELEY SCHOOL
OF INFORMATION
[address, phone]

Counsel for Amici Curiae
Additional Counsel Listed on Next Page

Dated June 20, 2011

26

JONATHAN BAND
AMERICAN LIBRARY ASSOCIATION,
ASSOCIATION OF RESEARCH LIBRARIES,
ASSOCIATION OF COLLEGE AND RESEARCH
LIBRARIES
JONATHAN BAND PLLC
[address, phone]

MARK COOPER
CONSUMER FEDERATION OF AMERICA
[address, phone]

JEFFREY R. BERNSTEIN
U.S. PUBLIC INTEREST
RESEARCH GROUP
[address, phone]

____________________

¹ No counsel for a party authored this brief in whole or in part, and no person other than the amici curiae, or their counsel, made a monetary contribution intended to fund its preparation or submission. Amici curiae provided at least ten days’ notice of their intent to file this brief to counsel of record for all parties. The parties have consented to the filing and such consents are being submitted herewith.

² Available at: http://ssrn.com/abstract=1443256.

³ Available at: http://ssrn.com/abstract=1713860.

⁴ All citations to “Nimmer” in this brief refer to Prof. David Nimmer, author of the leading copyright treatise, Nimmer on Copyright, no relation to Prof. Raymond T. Nimmer, the expert witness retained by Autodesk in the proceedings below.

⁵ Olga Kharif, Wal-Mart, Target Put Squeeze on Redbox, Bloomberg Businessweek, Feb. 2, 2010, available at http://www. businessweek.com/technology/content/feb2010/tc2010022_125668. htm (noting litigation between Redbox, a DVD rental service, and three major movie studios). In its complaints, Redbox alleged that the movie studios directed wholesale distributors not to fill Redbox’s orders because Redbox would not agree to post-sale restrictions on the DVDs, restrictions that the Vernor opinion will embolden studios to continue to pursue.

⁶ Available at http://www.movingimagesource.us/articles/ the-vanishing-20090226.

⁷ Available at http://news.yahoo.com/s/ytech_ gadg/20100728/tc_ytech_gadg/ ytech_gadg_tc3273.

⁸ Available at http://www.nytimes.com/2009/07/27/ technology/companies/27amazon.html

⁹ See BookMooch, http://bookmooch.com (last visited June 15, 2011).

¹⁰ See SwapTree, http://www.swaptree.com (last visited June 15, 2011).

¹¹ Notably, Bobbs-Merrill also used the term “license” in its purported agreement attached to the book at issue. See Bobbs-Merrill, 210 U.S. at 341. Nevertheless, the Court refused to analyze the case as though a license agreement existed between parties. The Ninth Circuit, on the other hand, considers the terminology used by the document itself as one of its three prongs of determining ownership.

¹² “We do not think the statute can be given such a construction, and it is to be remembered that this is purely a question of statutory construction. There is no claim in this case of contract limitation, nor license agreement controlling the subsequent sales of the book.” 210 U.S. at 350.

¹³ In permitting owners of copies to use computer programs and preserve them despite the operation of copyright, § 117 also represents a manifestation of copyright exhaustion, making the copyright owner’s rights subject to the copy owner’s right to make certain necessary reproductions and adaptations.