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EFF Urges Supreme Court to Hear Vernor v. AutoDesk First Sale Case
Thursday, June 23 2011 @ 01:46 AM EDT

EFF has filed an amicus brief [PDF], urging the US Supreme Court to grant certiorari to Timothy Vernor in Vernor v. AutoDesk. This is a first sale case, so I know many of you are interested in this latest development.

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.

In the amicus brief, EFF in the summary tells the court why this case matters:
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”).

And here's the text of the amicus, minus the header and index, which you can get from the PDF:

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

1

STATEMENT OF INTEREST

The Association of Research Libraries (ARL) is a nonprofit organization of 123 research libraries in North America, including university, public, governmental, and national libraries. The American Library Association (ALA) is a nonprofit professional organization of more than 67,000 librarians, library trustees, and other friends of libraries dedicated to providing and improving library services and promoting the public interest in a free and open information society. The Association of College and Research Libraries (ACRL), the largest division of the ALA, is a professional association of academic and research librarians and other interested individuals. Collectively, these three library associations represent over 139,000 libraries in the United States increasingly being called upon to serve the needs of their patrons in the digital age. As a result, the associations share a strong interest in the balanced application of copyright law to new digital dissemination technologies.

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

Public Knowledge (PK) is a Washington, D.C. based not-for-profit public interest advocacy and research organization. PK promotes balance in intellectual property law and technology policy to ensure that the public can benefit from access to knowledge and the ability to freely communicate and innovate in the digital age.

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

illegal practices. The PIRG federation has been active for 38 years. The federation is supported by hundreds of thousands of citizens via membership contributions and receives a significant portion of its funding from foundation grants.

SUMMARY OF ARGUMENT

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

4

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.

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

realities” test set forth in Krause v. Titleserv, Inc., 402 F.3d 119 (2d Cir. 2005), which looks beyond formalities to determine whether a license exists. In short, this case presents a crucial opportunity to clarify and affirm the viability of the first sale doctrine in the digital age, and Amici urge the Court to take it.

ARGUMENT

I. The Vernor Decision Raises Questions of Extraordinary Importance

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

Recent research confirms what many have long believed: few consumers read the EULAs that come attached to the products they buy and that purport to

6

bind them to all sorts of conditions, including effectively forfeiting traditional first sale rights. Yannis Bakos, Florencia Marotta-Wurgler, David R. Trossen, Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts, NYU Ctr. for Law, Econ. and Org. Law & Econ. Research Paper Series, Working Paper No. 09-40, Oct. 2009;2Florencia Marotta-Wurgler, Does Disclosure Matter? NYU Ctr. for Law, Econ. and Org. Law & Econ. Research Paper Series, Working Paper No. 10-54, Nov. 2010.3

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

In this context, it is essential to resist putting undue weight on the words of an agreement without considering the purchaser’s commonsense expectations. For example, in a typical “license” transaction, the licensee usually (1) pays a recurring fee (e.g. an annual license fee); (2) gets the software for a limited term (e.g. a number of years); and (3) must return all copies of the software when the term is up, or must destroy all copies. In a sale, by contrast, the transaction is usually for (1) a one-time fee; (2) permanent transfer of possession of the copy (i.e. no limited term); and (3) permanent possession by the buyer with no obligation to return the software to the seller. If a purchaser obtains software with the understanding that the latter three conditions apply, she is likely to assume the exchange is a sale. Should she violate the terms of an agreement she has not read — for example, by taking the software out of the United States — she would be shocked to learn that she might have thereby committed copyright infringement.

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

As courts and legislators have consistently recognized, copyright exhaustion and the first sale doctrine are essential parts of the copyright balance. Indeed, this Court recently confirmed the importance of intellectual property exhaustion by granting certiorari in two other cases where intellectual property owners sought to erode traditional exhaustion principles: Costco v. Omega, 130 S. Ct. 2089 (2010) and Quanta v. LG Elecs. Inc., 551 U.S. 1187 (2007).

8

Exhaustion allows the tangible property rights of consumers to coexist with the intangible property interests of copyright owners. Thus, the first sale doctrine is not merely an “important but idiosyncratic limit on the distribution right;” it represents a fundamental set of rights and privileges that flow from the ownership of an individual copy. See Aaron Perzanowski and Jason Schultz, Digital Exhaustion, 58 UCLA L. Rev. 889, 912 (2011). Recognizing these rights vindicates a number of important economic and democratic values, including:
(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.

Each of these values is furthered by the recognition that individual consumers have particular rights to use and control their chattels as they wish.

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
From its inception, the first sale doctrine has served to reconcile the limited statutory monopoly granted to copyright owners with traditional property law policies that favor free alienability. See Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 349-50 (1908); Brilliance Audio, Inc. v. Haight Cross Commc’ns, Inc., 474 F.3d 365, 374 (6th Cir. 2007) (“The first sale doctrine ensures that the copyright monopoly does not intrude on the personal property rights of the individual owner, given that the law generally disfavors restraints of trade and restraints on alienation.”); Liu, supra, at 1291 (“Historically, the source of the first sale doctrine appears to have been the common law reluctance to enforce restraints on the alienation of physical property.”).

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

counterfeit copies). In the words of Professor Nimmer,4 this gap-filling rationale has no application where resales of genuine, legitimately produced copies are concerned:
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.
Id.

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

The effects of this kind of confusion will be immediate and dangerous. For example, CDs, DVDs, books, games and other cultural works that buyers expect to be able to use, transfer and manipulate may be “sold” subject to new legal restrictions – often without the buyer’s knowledge. Thus, for example, a consumer might be forbidden by contract from giving away her lawfully purchased DVD or CD, or taking it to another country. Libraries might be restricted from lending cultural works they legally obtain, to the detriment of the public interest in preserving the cultural commons.

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

Thus, the Ninth Circuit’s decision opens the door to dangerous results. Copyright owners will argue that nothing about Vernor is limited to high-end software, and items that consumers now routinely resell or give away will become the subject of licensing agreements that purport to forbid such transfers. The recording industry has already made a first effort in this direction with respect to promotional CDs. See UMG Recordings, Inc. v. Augusto, 628 F.3d 1175 (9th Cir. 2011). Despite the Ninth Circuit’s rebuff of that effort in Augusto, Vernor provides a roadmap for efforts to circumvent the first sale doctrine in the future. We should expect the motion picture industry to attempt to apply Vernor to their sales of DVDs.5 Console game manufacturers will argue similarly in the context of their video game cartridges and, given the ubiquity of software in nearly every manufactured good, we may see such efforts in every category from baby toys to cars to refrigerators. The Vernor decision provides the manufacturers of goods containing any software with a trivial three-step method of purporting to forbid such transfers, permitting the copyright owner of such embedded software to extend the reach of its copyright monopoly to the control of the manufactured goods themselves. This is precisely the sort of restriction on the alienability of chattels that this Court has consistently forbidden over the last century.

13

Granting certiorari will give the Court a much- needed opportunity to dispel the confusion created by the Ninth Circuit’s decision. An implied right to distribute by “license” contradicts the terms of the statute (which gives copyright owners only the right to distribute “by sale or other transfer of ownership, or by rental, lease, or lending”), and cannot be squared with traditional principles of property. Simply put, there is no statutory exclusive right to the distribution of tangible goods by “license,” neither in the Copyright Act, nor in any other area of commerce. One licenses exclusive rights, not tangible things.

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
Libraries, second-hand bookstores, and the sale of copies by individuals are established and accepted features of our cultural landscape. In fact, it is difficult to conceptualize the life cycle of most copyrighted works without imagining the work being lent or resold. Without

14

a robust first sale doctrine, however, these activities would be imperiled by a copyright owner’s distribution right. Thus, if copyright owners are able to trump the first sale doctrine using self-serving language tucked into a license agreement, these established institutions could be put in jeopardy.

a. Access

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. See R. Anthony Reese, The First Sale Doctrine in the Era of Digital Networks, 44 B.C. L. Rev. 577, 583- 610 (2003) (discussing the salutary impact of first sale on availability and preservation of copyrighted works). An average book today goes out of print within 12 months after initial release. See Lawrence Lessig, Free Culture 225 (2004). Most software has an even shorter shelf life. Pamela Brannon, Reforming Copyright to Foster Innovation: Providing Access to Orphaned Works, 14 J. Intell. Prop. L. 145, 145-55 (2006). The majority of recorded music remains out of print today. See Reese, supra, at 593 (citing estimates that 60% of sound recordings are out of print). Most films also go out of print after a short commercial lifespan. Anthony Kaufman, The Vanishing: The Demise of VHS, and the Movies Disappearing Along With It, Moving Image Source (Feb. 26, 2009).6

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

15

continue to make these works available and accessible. See Lessig, supra, at 112-13 (describing the “two lives” of the typical book, first as a commercial object, then in libraries and used bookstores). And in light of the growing problem of out-of-print “orphan works” whose copyright owners cannot be located, many works may never be able to be legally reproduced, leaving few alternatives other than to borrow or purchase an existing copy. Libraries, archives, and secondary markets help ensure not only that copyright serves its principal purpose of nurturing a vibrant cultural commons, but also that it does not interfere with the First Amendment right to receive information. Thus, the first sale doctrine is one of copyright law’s essential “First Amendment accommodations.” Cf. Eldred v. Ashcroft, 537 U.S. 186, 219-20 (2003).

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

2010).7 Many copyright owners would doubtless prefer that library patrons purchase or rent the materials rather than obtaining them from libraries, and would like to use license agreements to make that possible. By encouraging the proliferation of such agreements, the Vernor decision undermines efforts to ensure that copyright serves the public interest in access to our cultural heritage.

b. Censorship Resistance

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”). Moreover, this decentralization makes it much more difficult for a copyright owner to censor or suppress particular works after their commercial release. See Reese, supra, at 595- 602 (collecting examples of copyright owners attempting to withdraw or suppress works after initial publication).

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

readers. It was purportedly allowed to do so pursuant to the Kindle license agreement. See Brad Stone, Amazon Faces a Fight over Its E-Books, N.Y. Times, July 26, 2009, at B3.8

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.

Vibrant secondary markets for copyrighted works also save consumers money, as any student who has ever purchased used textbooks can attest. See Reese, supra, at 625-27 (concluding that first sale tends to reduce the price of copyrighted works for consumers). In recent years, the Internet has vastly increased the reach and efficiency of secondary markets, increasing the dividends that the first sale doctrine has paid to the public, both in the form of money saved on purchases and money earned on sales. Millions of customers can both buy and sell

18

their unwanted books, CDs, DVDs, videocassettes, and software thanks to online services like eBay, craigslist, and Amazon.com. In addition, websites like BookMooch9 and SwapTree10 facilitate person-to-person “swapping,” rather than selling, of used books and CDs between community members. The rise of these efficient secondary markets has unlocked new value in the personal libraries that consumers have amassed—unwanted books, CDs, DVDs, and software need not be consigned to the trash or recycling. It has also helped mitigate the problem of platform lock-in; consumers who wish to switch to a new game system, for example, are more likely to do so knowing that they can recoup some of their investment in their old system. See Perzanowski and Schultz, supra, at 14.

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

II. The Panel’s Decision Conflicts with the Court’s
Decision in Bobbs-Merrill Co. v. Straus

The foundational first sale case of Bobbs-Merrill Co. v. Straus is directly applicable. There, the copyright owner attempted to use a notice attached to a work to control post-sale distribution of copies of that work. 210 U.S. at 341. The Court held that such terms should not give the copyright holder “a right not included in the terms of the statute, and . . . extend its operation, by construction, beyond its meaning.” Id. at 351.

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.
210 U.S. at 349-50.

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

copyright owners with traditional property law policies in favor of free alienability. See id.; see also Brilliance Audio, Inc. at 374; Liu, supra, at 1291. Software vendors should not be able to bypass these fundamental principles with “magic words.”

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

The Ninth Circuit’s decision conflicts with the Second Circuit’s rule for determining ownership of copies of software in Krause v. Titleserv, Inc., 402 F.3d 119 (2d Cir. 2005). In that case, Krause wrote computer programs for Titleserv, his former employer. Krause had retained ownership of the copyright of his programs, and the issue was whether Titleserv could make derivative works of the copies of the programs it still possessed, as permitted by 17 U.S.C. § 117. That statute, which employs language parallel to § 109, permits the owner of a physical copy of a computer program to make copies or adaptations of it under certain circumstances, when they are necessary for its use or preservation.13 Krause contended that Titleserv wasn’t an “owner” of the software copies, and therefore could not rely on the § 117 defense. As here, the Second Circuit therefore had to decide when someone was an owner of physical copies of software.

22

The Second Circuit affirmed the district court’s summary judgment that Titleserv was an owner of its copies. The court adopted the following rule:
[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.
Krause, 402 F.3d at 124.

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

In Krause, all three elements of the Vernor test were present: the agreement was called a license in that the software recipient orally agreed “to possess the copies as a mere licensee”; transfer restrictions existed (the recipient apparently conceded it did not have the right to transfer the copies of the software; and Krause apparently imposed notable use restrictions: he asserted that Titleserv had no right to modify the source code of the programs, and “locked” the executable versions of the software to prevent the executable versions from being converted back into source code. 402 F.3d at 121-24. Thus, applying the Ninth Circuit’s Vernor rule to the facts of Krause would likely result in the opposite outcome: Titleserv would not be an owner of its copies and Krause would win, rather than Titleserv.

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

Krause also listed a number of non-exclusive factors that suggested that Titleserv was an owner of the copies. 402 F.3d at 124. Almost all of those factors are also present in Vernor. For example, both recipients paid substantial consideration, both stored the software they received on their own machines, both were free to destroy or discard the software and neither was required to return the software. Compare Krause, 402 F.3d at 121-24 with Vernor, 621 F.3d at 1105.

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

The Ninth Circuit’s decision in this case raises issues of extraordinary importance and conflicts with both this Court’s precedent and established case law in the Second Circuit. Amici urge the Court to grant the petition.

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

Of counsel:

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.


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