On May 13th, in Pearson Education v. Liao, the U.S. District Court for the Southern District of New York held defendants liable for copyright infringement for their sale of 166 copyrighted educational textbooks that were manufactured and purchased by defendants outside the United States and then resold by them in the United States. Defendants sold the foreign editions of books on Internet bookselling sites without plaintiffs' permission. The foreign editions were manufactured and intended for sale outside the United States by the plaintiff publishers (SIIA members Pearson and McGraw-Hill, joined by Cengage and John Wiley & Sons). Because of this, the foreign editions were substantially identical to the U.S. editions, but were produced using inferior ink, paper and binding material. Defendant argued that reselling of the books was permitted by the first sale defense in section 109 of the Copyright Act. The court disagreed, explaining that "the first sale doctrine does not necessarily protect persons who purchase copies of copyrighted works outside the United States and then import them in to the United States for resale." To hold otherwise "would vitiate section 602(a)" of the Copyright Act, which provides that "[i]mportation into the United States … of copies of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies…" Accordingly, the court concluded that the first sale defense does not allow resale in the United States of copies manufactured outside the United States and awarded plaintiffs $124,500 in statutory damages.
On May 20th, in Vernor v. Autodesk Inc., Judge Jones of the U.S. District Court for the Western District of Washington concluded that selling used copies of Autodesk software on eBay was permitted by the first sale defense in the copyright law - notwithstanding Autodesk's claim that it software was licensed, not sold, and such licenses prohibit transfer of the software. From 2005 through 2007, Vernor had purchased small numbers of used copies of Autodesk AutoCAD™ software at garage sales and office sales and put them up for sale on eBay. In each instance Autodesk, sent a notice to eBay claiming the sale infringed its copyright in the software and requested that the auctions be terminated. eBay terminated the auctions but then reinstated them once Vernor filed a DMCA counternotice and Autodesk did not respond by suing Vernor (as would have been required by the DMCA in order to keep the keep the material down). Last year, Vernor acquired additional used Autodesk software that he wanted to sell on eBay and, fearing a lawsuit by Autodesk, sued Autodesk seeking a declaration from the court that he was permit to do so.
Because the first sale defense under section 109 of the Copyright Act only applies to an "owner of a particular copy" of the software and not to one who merely possesses a copy of the software, the issue in the case is whether Autodesk's transfer of its software "was a sale or a mere transfer of possession pursuant to a license." If the court found that the software was licensed, the first sale defense would not apply and Vernor would be prohibited from reselling the software under the copyright law (on the basis that he would be infringing Autodesk's distribution rights under section 106 of the Copyright Act) and also possibly by the Autodesk license itself (which expressly prohibits any transfer of the software). If the court found that Autodesk's initial distribution of the software was a "sale," the first sale doctrine applies to subsequent attempts to redistribute or resell the software and Vernor's sales would not constitute copyright infringement (although the sale could still potentially be a breach of the license agreement if the court were to find the license agreement was binding on Vernor). The court stated that the mere fact that Autodesk labeled its transactions as licenses rather than sales was not dispositive as to whether the software was sold or licensed. Instead, the court looked at the circumstances surrounding the transaction. These observations were not novel to software cases. The court's conclusion, however, was.
To help decide whether the transfer was a sale or a license, Judge Jones considered four cases previously decided by the Ninth Circuit: (1) United States v. Wise, a 1977 case which involved film prints and was decided under the 1909 Copyright Act; (2) Wall Data Inc. v. Los Angeles County Sheriff's Dept, (3) MAI Sys. Corp v. Peak Computer, Inc., and (4) Triad Sys. Corp. v. Southeastern Express Co.. The latter three cases held that under the 1976 Copyright Act (the Act in force today) the restrictions imposed in the software licenses were sufficient to classify the transaction as a license. In weighing these four cases, Judge Jones appeared to ignore or downplay the important facts that:
- the three software cases involved software licenses, whereas the Wise case involved film prints;
- the three software cases were decided under the 1976 Copyright Act, whereas the Wise case was decided under the 1909 Copyright Act;
- the Ninth Circuit clearly stated that software license must be treated differently then prints, noting that "[s]oftware fundamentally differs from more traditional forms of medium, such as print …";
- the three software cases were civil cases, while the Wise case was a criminal case, and
- the "terms of the Autodesk license are either indistinguishably similar to or more restrictive than the licenses found not to be sale in" the three software cases.
Instead, Judge Jones chose to follow the Wise case and hold the transfer was a sale, not a license. Judge Jones' rationale was that there was an "irreconcilable conflict" between the three software cases and the Wise case and "[w]here opinions of three-judge Ninth Circuit panels conflict, the court must rely on the earliest opinion," namely Wise. The Judge acknowledged that Wise was decided before the first sale defense was even codified into section 109 of the 1976 Copyright Act and that the first sale defense in the 1909 Copyright Act used very different terminology (the 1909 Act refers to mere "possession," while the 1976 Act refers explicitly to the terms "owner of a …copy" which are at issue in this case), but shockingly he found that these facts had "no substantive impact."
So what does this mean for the resale of software on eBay and other venues? While this case is not good news, the fact remains that it is only one judge's opinion in one district, and not binding on any other court. And in SIIA's view, the logic of this case is flawed on so many levels that it will most certainly be overturned when either a motion to reconsider is filed or this case is appealed. This case is most certainly an anomaly, as there is ample case law - including in cases where the facts were not as strong as in this case - to establish that the courts will acknowledge software licenses as just that (i.e., licenses, not sales) and thus the first sale defense does not apply. (see "see April 10, 2007 Confidential SIIA Memorandum regarding first sale defense" for more information on these prior cases). Until all appeals are exhausted in this case, SIIA will continue to pursue its present cause of action to remove pirated, counterfeit and contraband (e.g., unauthorized grey market goods such as OEM, academic software etc.) software auctions.