3-0 decision by the 9th u.s. circuit court of appeal -final ruling

8/8/2019 3-0 decision by the 9th U.S. Circuit Court of Appeal -Final Ruling

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FOR PUBLICATION

UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT

TIMOTHY S. VERNOR,No. 09-35969

Plaintiff-Appellee,D.C. No.

v. 2:07-cv-01189-RAJAUTODESK, INC.,

OPINIONDefendant-Appellant.

Appeal from the United States District Courtfor the Western District of Washington

Richard A. Jones, District Judge, Presiding

Argued and SubmittedJune 7, 2010Seattle, Washington

Filed September 10, 2010

Before: William C. Canby, Jr., Consuelo M. Callahan andSandra S. Ikuta, Circuit Judges.

Opinion by Judge Callahan

13861


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COUNSEL

Jerome B. Falk (argued), Clara J. Shin, and Blake J. Lawit ofHoward Rice Nemerovski Canady Falk & Rabkin P.C., andMichael A. Jacobs and George C. Harris of Morrison & Foer-ster LLP, for defendant-appellant Autodesk, Inc.

Gregory A. Beck (argued) and Deepak Gupta of the PublicCitizen Litigation Group, for plaintiff-appellee Timothy S.Vernor.

Randi W. Singer, Mark J. Fiore, and Lisa R. Eskow of Weil,Gotshal & Manges LLP, for amicus curiae eBay Inc.

Fred von Lohmann of the Electronic Frontier Foundation andSherwin Siy and John Bergmayer of Public Knowledge, foramicus curiae American Library Association, Association ofCollege and Research Libraries, Association of ResearchLibraries, Consumer Federation of America, Electronic Fron-tier Foundation, Public Knowledge, and U.S. PIRG.

13864 VERNOR v. AUTODESK, INC.


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Scott E. Bain, Keith Kupferschmid, and Mark Bohannon, foramicus curiae Software & Information Industry Association.

Robert H. Rotstein, Patricia H. Benson, and J. Matthew Wil-liams of Mitchell Silberberg & Knupp LLP, for amicus curiaeMotion Picture Association of America, Inc.

OPINION

CALLAHAN, Circuit Judge:

Timothy Vernor purchased several used copies ofAutodesk, Inc.s AutoCAD Release 14 software (Release14) from one of Autodesks direct customers, and he resoldthe Release 14 copies on eBay. Vernor brought this declara-tory judgment action against Autodesk to establish that theseresales did not infringe Autodesks copyright. The districtcourt issued the requested declaratory judgment, holding thatVernors sales were lawful because of two of the CopyrightActs affirmative defenses that apply to owners of copies of

copyrighted works, the first sale doctrine and the essentialstep defense.

Autodesk distributes Release 14 pursuant to a limitedlicense agreement in which it reserves title to the softwarecopies and imposes significant use and transfer restrictions onits customers. We determine that Autodesks direct customersare licensees of their copies of the software rather than own-ers, which has two ramifications. Because Vernor did not pur-chase the Release 14 copies from an owner, he may notinvoke the first sale doctrine, and he also may not assert an

essential step defense on behalf of his customers. For thesereasons, we vacate the district courts grant of summary judg-ment to Vernor and remand for further proceedings.

13865VERNOR v. AUTODESK, INC.


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I.

A. Autodesks Release 14 software and licensingpractices

The material facts are not in dispute. Autodesk makescomputer-aided design software used by architects, engineers,and manufacturers. It has more than nine million customers.It first released its AutoCAD software in 1982. It holds regis-tered copyrights in all versions of the software including thediscontinued Release 14 version, which is at issue in this case.It provided Release 14 to customers on CD-ROMs.

Since at least 1986, Autodesk has offered AutoCAD to cus-tomers pursuant to an accompanying software license agree-ment (SLA), which customers must accept before installingthe software. A customer who does not accept the SLA canreturn the software for a full refund. Autodesk offers SLAswith different terms for commercial, educational institution,and student users. The commercial license, which is the mostexpensive, imposes the fewest restrictions on users and allowsthem software upgrades at discounted prices.

The SLA for Release 14 first recites that Autodesk retainstitle to all copies. Second, it states that the customer has anonexclusive and nontransferable license to use Release 14.Third, it imposes transfer restrictions, prohibiting customersfrom renting, leasing, or transferring the software withoutAutodesks prior consent and from electronically or physi-cally transferring the software out of the Western Hemi-sphere. Fourth, it imposes significant use restrictions:

YOU MAY NOT: (1) modify, translate, reverse-engineer, decompile, or disassemble the Software. . . (3) remove any proprietary notices, labels, or

marks from the Software or Documentation; (4) use. . . the Software outside of the Western Hemisphere;(5) utilize any computer software or hardware



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designed to defeat any hardware copy-protectiondevice, should the software you have licensed beequipped with such protection; or (6) use the Soft-ware for commercial or other revenue-generatingpurposes if the Software has been licensed or labeledfor educational use only.

Fifth, the SLA provides for license termination if the usercopies the software without authorization or does not complywith the SLAs restrictions. Finally, the SLA provides that ifthe software is an upgrade of a previous version:

[Y]ou must destroy the software previously licensedto you, including any copies resident on your harddisk drive . . . within sixty (60) days of the purchaseof the license to use the upgrade or update . . . .Autodesk reserves the right to require you to showsatisfactory proof that previous copies of the soft-ware have been destroyed.

Autodesk takes measures to enforce these license require-ments. It assigns a serial number to each copy of AutoCAD

and tracks registered licensees. It requires customers to inputactivation codes within one month after installation to con-tinue using the software.1 The customer obtains the code byproviding the products serial number to Autodesk. Autodeskissues the activation code after confirming that the serial num-ber is authentic, the copy is not registered to a different cus-tomer, and the product has not been upgraded. Once acustomer has an activation code, he or she may use it to acti-vate the software on additional computers without notifyingAutodesk.

1Prior to using activation codes, Autodesk required users to return one

disc of an earlier version of the software to upgrade to a later version.Autodesk has abandoned this return policy, deeming it slow and unwork-able.



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B. Autodesks provision of Release 14 software to CTA

In March 1999, Autodesk reached a settlement agreementwith its customer Cardwell/Thomas & Associates, Inc.(CTA), which Autodesk had accused of unauthorized use ofits software. As part of the settlement, Autodesk licensed tencopies of Release 14 to CTA. CTA agreed to the SLA, whichappeared (1) on each Release 14 package that Autodesk pro-vided to CTA; (2) in the settlement agreement; and (3) on-screen, while the software is being installed.

CTA later upgraded to the newer, fifteenth version of theAutoCAD program, AutoCAD 2000. It paid $495 per upgradelicense, compared to $3,750 for each new license. The SLAfor AutoCAD 2000, like the SLA for Release 14, requireddestruction of copies of previous versions of the software,with proof to be furnished to Autodesk on request. However,rather than destroying its Release 14 copies, CTA sold themto Vernor at an office sale with the handwritten activationcodes necessary to use the software.2

C. Vernors eBay business and sales of Release 14

Vernor has sold more than 10,000 items on eBay. In May2005, he purchased an authentic used copy of Release 14 ata garage sale from an unspecified seller. He never agreed tothe SLAs terms, opened a sealed software packet, or installedthe Release 14 software. Though he was aware of the SLAsexistence, he believed that he was not bound by its terms. Heposted the software copy for sale on eBay.

Autodesk filed a Digital Millennium Copyright Act(DMCA) take-down notice with eBay claiming that Ver-nors sale infringed its copyright, and eBay terminated Ver-

2Autodesk brought suit in federal district court against CTA for thesesales. The parties stipulated to entry of a permanent injunction againstCTA from directly or contributorily infringing Autodesks copyrights.



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nors auction.3

Autodesk advised Vernor that it conveyed itssoftware copies pursuant to non-transferable licenses, andresale of its software was copyright infringement. Vernorfiled a DMCA counter-notice with eBay contesting the valid-ity of Autodesks copyright claim.4 Autodesk did not respondto the counter-notice. eBay reinstated the auction, and Vernorsold the software to another eBay user.

In April 2007, Vernor purchased four authentic used copiesof Release 14 at CTAs office sale. The authorization codeswere handwritten on the outside of the box. He listed the fourcopies on eBay sequentially, representing, This software isnot currently installed on any computer.5 On each of the firstthree occasions, the same DMCA process ensued. Autodeskfiled a DMCA take-down notice with eBay, and eBayremoved Vernors auction. Vernor submitted a counter-noticeto which Autodesk did not respond, and eBay reinstated theauction.

When Vernor listed his fourth, final copy of Release 14,

3The DMCA provides that a service provider is not liable for infringinguser-posted material on its service if, inter alia, it responds expeditiouslyto remove or disable access to the material upon receipt of a take-downnotice claiming infringement. 17 U.S.C. 512(c)(1)(C).

4The DMCA also provides that a user whose material has been removedor disabled may provide a counter-notification to the service provider,including a sworn statement that the user has a good-faith belief that thematerial was mistakenly removed or disabled. 17 U.S.C. 512(g)(3)(C).After receiving a counter-notification, the service provider must do thefollowing to retain its liability exemption. It must promptly (1) provide theperson who filed the original take-down notice with a copy of the counter-notification and (2) advise that it will replace the removed material orcease disabling access to it in ten business days. 17 U.S.C. 512(g)(2)(B).It must also timely replace the removed material or cease disabling accessto it, unless the person who provided the take-down notice gives noticethat he or she has filed a court action to restrain the users infringement.

17 U.S.C. 512(g)(2)(C).5Vernor acknowledged at his deposition that he did not know whether

this was true.



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Autodesk again filed a DMCA take-down notice with eBay.This time, eBay suspended Vernors account because ofAutodesks repeated charges of infringement. Vernor alsowrote to Autodesk, claiming that he was entitled to sell hisRelease 14 copies pursuant to the first sale doctrine, becausehe never installed the software or agreed to the SLA. Inresponse, Autodesks counsel directed Vernor to stop sellingthe software. Vernor filed a final counter-notice with eBay.When Autodesk again did not respond to Vernors counter-notice, eBay reinstated Vernors account. At that point, Ver-nors eBay account had been suspended for one month, duringwhich he was unable to earn income on eBay.

Vernor currently has two additional copies of Release 14that he wishes to sell on eBay. Although the record is notclear, it appears that Vernor sold two of the software packagesthat he purchased from CTA, for roughly $600 each, but didnot sell the final two to avoid risking further suspension of hiseBay account.

II.

In August 2007, Vernor brought a declaratory action

against Autodesk to establish that his resales of used Release14 software are protected by the first sale doctrine and do notinfringe Autodesks copyright. He also sought damages andinjunctive relief. On January 15, 2008, Autodesk moved todismiss Vernors complaint, or in the alternative, for summary judgment. The district court denied the motion, holding thatVernors sales were non-infringing under the first sale doc-trine and the essential step defense. See Vernor v. Autodesk,Inc., 555 F. Supp. 2d 1164, 1170-71, 1175 (W.D. Wash.2008).

Following discovery, the parties filed cross-motions for

summary judgment. The district court granted summary judg-ment to Vernor as to copyright infringement in an unpub-lished decision. However, the district court declined to resolve



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Vernors affirmative defense that Autodesk had misused itscopyright, reasoning that a misuse defense would not benefitVernor since he had prevailed on copyright infringement. InOctober 2009, the district court entered judgment for Vernor,and Autodesk timely appealed.

III.

[1] Copyright is a federal law protection provided to theauthors of original works of authorship, including softwareprograms. 17 U.S.C. 101-103. The Copyright Act confersseveral exclusive rights on copyright owners, including the

exclusive rights to reproduce their works and to distributetheir works by sale or rental. Id. 106(1), (3). The exclusivedistribution right is limited by the first sale doctrine, an affir-mative defense to copyright infringement that allows ownersof copies of copyrighted works to resell those copies. Theexclusive reproduction right is limited within the softwarecontext by the essential step defense, another affirmativedefense to copyright infringement that is discussed furtherinfra. Both of these affirmative defenses are unavailable tothose who are only licensed to use their copies of copyrightedworks.

This case requires us to decide whether Autodesk soldRelease 14 copies to its customers or licensed the copies to itscustomers. If CTA owned its copies of Release 14, then bothits sales to Vernor and Vernors subsequent sales were non-infringing under the first sale doctrine.6 However, if Autodeskonly licensed CTA to use copies of Release 14, then CTAsand Vernors sales of those copies are not protected by the

6If Autodesks transfer of Release 14 copies to CTA was a first sale,then CTAs resale of the software in violation of the SLAs terms wouldbe a breach of contract, but would not result in copyright liability. SeeUnited States v. Wise, 550 F.2d 1180, 1187 (9th Cir. 1977) ([T]he exclu-sive right to vend the transferred copy rests with the vendee, who is notrestricted by statute from further transfers of that copy, even though inbreach of an agreement restricting its sale.).



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first sale doctrine and would therefore infringe Autodesksexclusive distribution right.

A. The first sale doctrine

The Supreme Court articulated the first sale doctrine in1908, holding that a copyright owners exclusive distributionright is exhausted after the owners first sale of a particularcopy of the copyrighted work. See Bobbs-Merrill Co. v.Straus, 210 U.S. 339, 350-51 (1908). In Bobbs-Merrill, theplaintiff-copyright owner sold its book with a printed noticeannouncing that any retailer who sold the book for less thanone dollar was responsible for copyright infringement. Id. at341. Plaintiff sought injunctive relief against defendants-booksellers who failed to comply with the price restriction.Id.at 341-42. The Supreme Court rejected the plaintiffs claim,holding that its exclusive distribution right applied only tofirst sales of copies of the work. Id. at 350-51. The distribu-tion right did not permit plaintiff to dictate that subsequentsales of the work below a particular price were infringing. Id.The Court noted that its decision solely applied to the rightsof a copyright owner that distributed its work without alicense agreement.Id. at 350 (There is no claim in this case

of contract limitation, nor license agreement controlling thesubsequent sales of the book.).

[2] Congress codified the first sale doctrine the followingyear. See 17 U.S.C. 41 (1909). In its current form, it allowsthe owner of a particular copy of a copyrighted work to sellor dispose of his copy without the copyright owners authoriza-tion.7Id. 109(a) (enacted 1976). The first sale doctrine doesnot apply to a person who possesses a copy of the copyrightedwork without owning it, such as a licensee. See id. 109(d);

7The parties dispute who bears the burden to prove the first sale or theabsence thereof in a civil case, a question we have not yet resolved. Sincethe facts in this case are undisputed, including the chain of software trans-fers, we need not decide the issue.



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cf. Quality King Distribs., Inc. v. LAnza Research Intl Inc. ,523 U.S. 135, 146-47 (1998) ([T]he first sale doctrine wouldnot provide a defense to . . . any non-owner such as a bailee,a licensee, a consignee, or one whose possession of the copywas unlawful.).

B. Owners vs. licensees

We turn to our precedents governing whether a transfereeof a copy of a copyrighted work is an owner or licensee ofthat copy. We then apply those precedents to CTAs and Ver-nors possession of Release 14 copies.

1. United States v. Wise, 550 F.2d 1180 (9th Cir. 1977)

In Wise, a criminal copyright infringement case, we consid-ered whether copyright owners who transferred copies of theirmotion pictures pursuant to written distribution agreementshad executed first sales.Id. at 1187. The defendant was foundguilty of copyright infringement based on his for-profit salesof motion picture prints. See id. at 1183. The copyright own-ers distributed their films to third parties pursuant to writtenagreements that restricted their use and transfer. Id. at 1183-

84. On appeal, the defendant argued that the governmentfailed to prove the absence of a first sale for each film.8 If thecopyright owners initial transfers of the films were first sales,then the defendants resales were protected by the first saledoctrine and thus were not copyright infringement.

To determine whether a first sale occurred, we consideredmultiple factors pertaining to each film distribution agree-ment. Specifically, we considered whether the agreement (a)was labeled a license, (b) provided that the copyright ownerretained title to the prints, (c) required the return or destruc-

8In Wise, we construed former 17 U.S.C. 27, since replaced by 17U.S.C. 109(a), the current codification of the first sale doctrine. The pro-visions are materially similar.



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tion of the prints, (d) forbade duplication of prints, or (e)required the transferee to maintain possession of the prints forthe agreements duration. Id. at 1190-92. Our use of theseseveral considerations, none dispositive, may be seen in ourtreatment of each film print.

For example, we reversed the defendants conviction withrespect to Camelot. Id. at 1194. It was unclear whether theCamelotprint sold by the defendant had been subject to a firstsale. Copyright owner Warner Brothers distributed Camelotprints pursuant to multiple agreements, and the governmentdid not prove the absence of a first sale with respect to eachagreement.Id. at 1191-92, 1194. We noted that, in one agree-ment, Warner Brothers had retained title to the prints,required possessor National Broadcasting Company (NBC)to return the prints if the parties could select a mutual agree-able price,9 and if not, required NBCs certification that theprints were destroyed. Id. at 1191. We held that these factorscreated a license rather than a first sale. Id.

We further noted, however, that Warner Brothers had alsofurnished another Camelotprint to actress Vanessa Redgrave.Id. at 1192. The print was provided to Redgrave at cost, and

her use of the print was subject to several restrictions. She hadto retain possession of the print and was not allowed to sell,license, reproduce, or publicly exhibit the print. Id. She hadno obligation to return the print to Warner Brothers. Id. Weconcluded, While the provision for payment for the cost ofthe film, standing alone, does not establish a sale, when takenwith the rest of the language of the agreement, it reveals atransaction strongly resembling a sale with restrictions on theuse of the print. Id. There was no evidence of the printswhereabouts, and we held that [i]n the absence of such

9Although the Wise defendant contended that this repurchase provisioncreated a first sale, we held that it merely allowed Warner Brothers tocompensate NBC for its out-of-pocket cost in producing additional prints.Id.



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proof, the government failed to prove the absence of a firstsale with respect to this Redgrave print.Id. at 1191-92. Sinceit was unclear which copy the defendant had obtained andresold, his conviction for sale ofCamelothad to be reversed.Id.

Thus, under Wise, where a transferee receives a particularcopy of a copyrighted work pursuant to a written agreement,we consider all of the provisions of the agreement to deter-mine whether the transferee became an owner of the copy orreceived a license. We may consider (1) whether the agree-

ment was labeled a license and (2) whether the copyrightowner retained title to the copy, required its return or destruc-tion, forbade its duplication, or required the transferee tomaintain possession of the copy for the agreements duration.Id. at 1190-92. We did not find any one factor dispositive inWise: we did not hold that the copyright owners retention oftitle itself established the absence of a first sale or that a trans-ferees right to indefinite possession itself established a firstsale.10

2. The MAI trio of cases

Over fifteen years after Wise, we again considered the dis-tinction between owners and licensees of copies of copy-righted works in three software copyright cases, the MAItrio. See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d511 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64F.3d 1330 (9th Cir. 1995); Wall Data, Inc. v. Los AngelesCounty Sheriffs Dept, 447 F.3d 769 (9th Cir. 2006). In theMAI trio, we considered which software purchasers were

10Cf. Hampton v. Paramount Pictures Corp., 279 F.2d 100, 103 (9thCir. 1960) (holding in non-first sale doctrine case that the transferee of amovie print was a licensee because the parties designated their agreement

as a perpetual license, even though their agreement provided for a one-time lump sum payment and imposed no requirement that the transfereewould return the outstanding prints and negatives).



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owners of copies of copyrighted works for purposes of a sec-ond affirmative defense to infringement, the essential stepdefense.

[3] The enforcement of copyright owners exclusive rightto reproduce their work under the Copyright Act, 17 U.S.C. 106(1), has posed special challenges in the software context.In order to use a software program, a users computer willautomatically copy the software into the computers randomaccess memory (RAM), which is a form of computer datastorage. See MAI, 991 F.2d at 513. Congress enacted theessential step defense to codify that a software user who isthe owner of a copy of a copyrighted software programdoes not infringe by making a copy of the computer program,if the new copy is created as an essential step in the utiliza-tion of the computer program in conjunction with a machineand . . . is used in no other manner. 17 U.S.C. 117(a)(1).

The Copyright Act provides that an owner of a copy ofcopyrighted software may claim the essential step defense,and the owner of a particular copy of copyrighted softwaremay claim the first sale doctrine. 17 U.S.C. 109(a),117(a)(1). The MAI trio construed the phrase owner of a

copy for essential step defense purposes. Neither Vernor norAutodesk contends that the first sale doctrines inclusion ofthe word particular alters the phrases meaning, and wepresume that words used more than once in the same statutehave the same meaning throughout. Moldo v. Matsco, Inc.(In re Cybernetic Servs., Inc.), 252 F.3d 1039, 1051 (9th Cir.2002). Accordingly, we consider the MAI trios constructionof owner of a copy controlling in our analysis of whetherCTA and Vernor became owner[s] of a particular copy ofRelease 14 software.

In MAI and Triad, the defendants maintained computers

that ran the plaintiffs operating system software. MAI, 991F.2d at 513; Triad, 64 F.3d at 1333. When the defendants ranthe computers, the computers automatically loaded plaintiffs



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software into RAM.MAI, 991 F.2d at 517-18; Triad, 64 F.3dat 1333, 1335-36. The plaintiffs in both cases sold their soft-ware pursuant to restrictive license agreements, and we heldthat their customers were licensees who were therefore notentitled to claim the essential step defense. We found that thedefendants infringed plaintiffs software copyrights by theirunauthorized loading of copyrighted software into RAM.MAI, 991 F.2d at 517-18 & n.5; Triad, 64 F.3d at 1333, 1335-36. In Triad, the plaintiff had earlier sold software outright tosome customers. 64 F.3d at 1333 n.2. We noted that thesecustomers were owners who were entitled to the essential step

defense, and the defendant did not infringe by making RAMcopies in servicing their computers. Id.

In Wall Data, plaintiff sold 3,663 software licenses to thedefendant. Wall Data, 447 F.3d at 773. The licenses (1) werenon-exclusive; (2) permitted use of the software on a singlecomputer; and (3) permitted transfer of the software once permonth, if the software was removed from the original com-puter.Id. at 775 n.5, 781. The defendant installed the softwareonto 6,007 computers via hard drive imaging, which saved itfrom installing the software manually on each computer. Itmade an unverified claim that only 3,663 users could simulta-neously access the software. Id. at 776.

[4] The plaintiff sued for copyright infringement, contend-ing that the defendant violated the license by over-installingthe software.Id. at 775. The defendant raised an essential stepdefense, contending that its hard drive imaging was a neces-sary step of installation. Id. at 776. On appeal, we held thatthe district court did not abuse its discretion in denying thedefendants request for a jury instruction on the essential stepdefense.Id. at 784. CitingMAI, we held that the essential stepdefense does not apply where the copyright owner grants the

user a license and significantly restricts the users ability totransfer the software. Id. at 784-85. Since the plaintiffslicense imposed significant restrictions on the defendants



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software rights, the defendant was a licensee and was not enti-tled to the essential step defense. Id. at 785.

In Wall Data, we acknowledged that MAIhad been criti-cized in a Federal Circuit decision, but declined to revisit itsholding, noting that the facts ofWall Data led to the conclu-sion that any error in the district courts failure to instruct washarmless. Even if the defendant owned its copies of the soft-ware, its installation of the software on a number of comput-ers in excess of its license was not an essential step in thesoftwares use. Id. at 786 n.9 (citing Nimmer on Copyright

8.08[B][1][c] at 8-136; DSC Commcns Corp. v. PulseCommcns, Inc., 170 F.3d 1354, 1360 (Fed. Cir. 1999) (criti-cizing MAI)).

We read Wise and theMAItrio to prescribe three consider-ations that we may use to determine whether a software useris a licensee, rather than an owner of a copy. First, we con-sider whether the copyright owner specifies that a user isgranted a license. Second, we consider whether the copyrightowner significantly restricts the users ability to transfer thesoftware. Finally, we consider whether the copyright owner

imposes notable use restrictions.11 Our holding reconciles theMAI trio and Wise, even though the MAI trio did not citeWise. See Cisneros-Perez v. Gonzales, 451 F.3d 1053, 1058(9th Cir. 2006) ([W]e are required to reconcile prior prece-dents if we can do so.)

11Although use restrictions were not dispositive in theMAItrio, we con-sidered them in each case. See MAI, 991 F.2d at 517 n.3 (license limiteduser to making one working and one backup copy of the software, and for-bade examination, disclosure, copying, modification, adaptation, andvisual display of the software); Triad, 64 F.3d at 1333 (license prohibitedsoftware duplication and third-party use); Wall Data, 447 F.3d at 775 n.5

(license permitted software use on single computer, prohibited multi-computer and multi-user arrangements, and permitted transfer to anothercomputer no more than once every thirty days).



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In response to MAI, Congress amended 117 to permit acomputer owner to copy software for maintenance or repairpurposes. See 17 U.S.C. 117(c); see also H.R. Rep. No.105-551, pt. 1, at 27 (1998). However, Congress did not dis-turbMAIs holding that licensees are not entitled to the essen-tial step defense.

IV.

A. The district courts decision

The district court interpreted Wise to hold that a first sale

occurs whenever the transferee is entitled to keep the copy ofthe work. Since Autodesk does not require its customers toreturn their copies of Release 14, the district court found thatAutodesk had sold Release 14 to CTA. It reasoned that thus,CTA and Vernor were successive owner[s] of a copy of thesoftware and were entitled to resell it under the first sale doc-trine. The district court also found that Vernors customerscopying of software during installation was protected by theessential step defense.

The district court acknowledged that were it to follow theMAI trio, it would conclude that Autodesk had licensed

Release 14 copies to CTA, rather than sold them. However,it viewed Wise and the MAItrio as irreconcilable, and it fol-lowed Wise as the first-decided case. See United States v.Rodriguez-Lara, 421 F.3d 932, 943 (9th Cir. 2005).

B. Analysis

[5] We hold today that a software user is a licensee ratherthan an owner of a copy where the copyright owner (1) speci-fies that the user is granted a license; (2) significantly restrictsthe users ability to transfer the software; and (3) imposesnotable use restrictions.12 Applying our holding to Autodesks

12We review the district courts grant of summary judgment to Vernorde novo. Padfield v. AIG Life Ins. Co., 290 F.3d 1121, 1124 (9th Cir.2002).



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SLA, we conclude that CTA was a licensee rather than anowner of copies of Release 14 and thus was not entitled toinvoke the first sale doctrine or the essential step defense.

[6] Autodesk retained title to the software and imposedsignificant transfer restrictions: it stated that the license isnontransferable, the software could not be transferred orleased without Autodesks written consent, and the softwarecould not be transferred outside the Western Hemisphere. TheSLA also imposed use restrictions against the use of the soft-ware outside the Western Hemisphere and against modifying,translating, or reverse-engineering the software, removing any

proprietary marks from the software or documentation, ordefeating any copy protection device. Furthermore, the SLAprovided for termination of the license upon the licenseesunauthorized copying or failure to comply with other licenserestrictions. Thus, because Autodesk reserved title to Release14 copies and imposed significant transfer and use restric-tions, we conclude that its customers are licensees of theircopies of Release 14 rather than owners.

[7] CTA was a licensee rather than an owner of a particu-lar copy of Release 14, and it was not entitled to resell itsRelease 14 copies to Vernor under the first sale doctrine. 17U.S.C. 109(a). Therefore, Vernor did not receive title to thecopies from CTA and accordingly could not pass ownershipon to others. Both CTAs and Vernors sales infringedAutodesks exclusive right to distribute copies of its work. Id. 106(3).

[8] Because Vernor was not an owner, his customers arealso not owners of Release 14 copies. Therefore, when theyinstall Release 14 on their computers, the copies of the soft-ware that they make during installation infringe Autodesksexclusive reproduction right because they too are not entitledto the benefit of the essential step defense.13 17 U.S.C. 106(1), 117(a)(1).

13It may seem intuitive that every lawful user of a copyrighted softwareprogram, whether they own their copies or are merely licensed to use



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[9] Although unnecessary to our resolution of the case, weaddress the legislative history in order to address the argu-ments raised by the parties and amici. That legislative historysupports our conclusion that licensees such as CTA are notentitled to claim the first sale doctrine. The House Report for 109 underscores Congress view that the first sale doctrineis available only to a person who has acquired a copy via anoutright sale. H.R. Rep. No. 94-1476, at 79 (1976),reprinted in 1976 U.S.C.C.A.N. 5659, 5693. The report alsoasserts that the first sale doctrine does not apply to someonewho merely possesses a copy or phonorecord without having

acquired ownership of it. Id.

[10] Our conclusion that those who rightfully possess, butdo not own, a copy of copyrighted software are not entitledto claim the essential step defense is also supported by thelegislative history. Congress enacted 117 following a reportfrom the National Commission on New Technological Usesof Copyrighted Works (CONTU) proposing Copyright Actamendments.DSC Commcns Corp. v. Pulse Commcns, Inc.,170 F.3d 1354, 1360 (Fed. Cir. 1999) (citing Final Report ofthe National Commission on New Technological Uses of

Copyrighted Works, U.S. Dept. of Commerce, PB-282141, at

30 (July 31, 1978)). CONTUs proposed version of 117 wasidentical to the version that Congress enacted with one excep-tion. Id. CONTUs version provided, [I]t is not an infringe-ment for the rightful possessor of a copy of a computerprogram to make or authorize the making of another copy oradaptation of that program . . . . Id. Without explanation,Congress substituted owner for rightful possessor. Id.This modification suggests that more than rightful possession

them, should be entitled to an essential step defense that provides thatthey do not infringe simply by using a computer program that they law-fully acquired. However, the Copyright Act confers this defense only on

owners of software copies. See 17 U.S.C. 117. In contrast, a licenseesright to use the software, including the right to copy the software intoRAM, is conferred by the terms of its license agreement.



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is required for 117 to apply i.e., that Congress did notintend licensees subject to significant transfer and use restric-tions to receive the benefit of the essential step defense.

C. Vernors four counterarguments are not persuasive

1. The district courts decision concerning indefinitepossession

Vernor contends that the district court correctly concludedthat (1) Wise is the controlling precedent and (2) under Wise,the key factor is whether transferees are entitled to indefinite

possession of their copy of a copyrighted work. As explainedsupra, we disagree. In Wise, we utilized a multi-factor balanc-ing test to distinguish between a first sale and a license of acopyrighted film print. United States v. Wise, 550 F.2d 1180,1190-92 (9th Cir. 1977). We considered a transferees abilityto possess a print indefinitely as one factor in our analysis, butwe did not treat it as dispositive. If we had, we would nothave needed to consider other contractual provisions, such asretention of title, copying prohibitions, and lending restric-tions. Id. Moreover, we held in Wise that two agreementswere licenses rather than first sales, even though those agree-ments did not describe any provision requiring the transfereeto return the prints to the copyright owners. Id. at 1192 (ana-lyzing VIP agreements for The Sting and Funny Girl).14

14We also note that for some of the Wise films, there was a lack of evi-dence whether transferees who had the option to purchase copies of theprints had done so. Without evidence concerning these options, the gov-ernment could not sustain its criminal burden of proof to demonstrate theabsence of a first sale. See, e.g., 550 F.2d at 1191-92 (No evidence wasadduced at trial as to whether [transferee] exercised its election [to pur-chase a copy of the print], or, if it did, whether it resold that print. In theabsence of such proof, the Government has failed in its burden of provingthe absence of first sale of the photoplay Funny Girl.) Here, in contrast,the undisputed evidence includes the SLA between Autodesk and CTA,which reflects the absence of a first sale. The SLA evidences both the par-ties intent to create a license and CTAs acquiescence to substantiverestrictions that distinguish the transfer from an outright first sale.



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2. Circuit split with the Federal and Second Circuits

Vernor contends that reversing the district court will createa circuit split with the Federal and Second Circuits. See DSCCommcns Corp. v. Pulse Commcns, Inc., 170 F.3d 1354(Fed. Cir. 1999); Krause v. Titleserv, Inc., 402 F.3d 119 (2ndCir. 2005). We disagree.

In DSC, the Federal Circuit considered the essential stepdefense in a case in which the plaintiff and defendant soldcompeting telephone systems hardware cards. 170 F.3d at1358. Rather than develop its own software, the defendant

used its hardware to download plaintiffs software into RAMupon installation.Id. The plaintiff argued that this constitutedcopyright infringement, and the defendant countered that therelevant customers owned plaintiffs software, entitling themto an essential step defense.Id. at 1359-60. The court rejectedthe defendants essential step defense, holding that plaintifflicensed its customers use of their copies of the software inthe relevant license agreements transfer and use restrictions.Id. at 1360-61. Although the Federal Circuit rejected MAIscharacterization of all licensees as non-owners, it deemedMAIinstructive and determined that the agreements there in

issue were licenses. Id. at 1360. Although DSC is thus nar-rower than MAI, it does not conflict with our holding todaythat a software customer bound by a restrictive license agree-ment may be a licensee of a copy not entitled to the first saledoctrine or the essential step defense.

The Second Circuits decision in Krause is distinguishable.In Krause, the plaintiff-copyright owner was a softwaredeveloper who sued his former employer for making allegedlyinfringing modifications to his software program. Krause, 402F.3d at 120-21. The Second Circuit considered the totality ofthe parties agreement to determine that the defendant was

entitled to an essential step defense. Id. at 124. In Krause,unlike here, the parties did not have a written license agree-ment, the defendant-employer had paid the plaintiff-employee



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significant consideration to develop the programs for its solebenefit, and the plaintiff had agreed to allow the defendant touse the programs forever, regardless of whether the partiesrelationship terminated. Id. at 124-25. Thus, the Second Cir-cuit found that the defendant-employer owned its copies ofthe work.Id. The facts and the analysis in Krause are not con-trary to our determination that CTA is a licensee rather thanan owner.

3. The Supreme Courts holding in Bobbs-Merrill

Vernor contends that Bobbs-Merrill establishes his entitle-ment to a first sale defense. See Bobbs-Merrill Co. v. Straus,210 U.S. 339 (1908). However,Bobbs-Merrill stands only forthe proposition that a copyright owners exclusive distributionright does not allow it to control sales of copies of its workafter the first sale.Id. at 350. Decided in 1908,Bobbs-Merrilldid not and could not address the question of whether theright to use software is distinct from the ownership of copiesof software. Moreover, the Supreme Court in Bobbs-Merrillmade explicit that its decision did not address the use ofrestrictions to create a license. Id. (There is no claim in thiscase of contract limitation, nor license agreement controlling

the subsequent sales of the book.)

4. Economic realities of the transaction

Finally, Vernor contends that economic realities demon-strate that Autodesk makes first sales to its customers,because Autodesk allows its customers to possess their copiesof the software indefinitely and does not require recurringlicense payments. We held supra that neither of these factorsis dispositive. Vernor cites no first sale doctrine case in sup-port of this proposition. Rather, he citesIn re DAK Indus., 66F.3d 1091, 1095 (9th Cir. 1995), a case in which we inter-

preted the Bankruptcy Code to decide whether a particulartransaction should be considered a pre-petition sale. We com-mented that [w]hen applying the bankruptcy code to this



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transaction, we must look through its form to the economicrealities of the particular arrangement. Id. Nothing inDAKis contrary to our reconciliation ofWise and the MAI trio.

V.

Although our holding today is controlled by our precedent,we recognize the significant policy considerations raised bythe parties and amici on both sides of this appeal.

Autodesk, the Software & Information Industry Associa-tion (SIIA), and the Motion Picture Association of America

(MPAA) have presented policy arguments that favor ourresult. For instance, Autodesk argues in favor of judicialenforcement of software license agreements that restrict trans-fers of copies of the work. Autodesk contends that this (1)allows for tiered pricing for different software markets, suchas reduced pricing for students or educational institutions; (2)increases software companies sales; (3) lowers prices for allconsumers by spreading costs among a large number of pur-chasers; and (4) reduces the incidence of piracy by allowingcopyright owners to bring infringement actions against unau-thorized resellers. SIIA argues that a license can exist even

where a customer (1) receives his copy of the work after mak-ing a single payment and (2) can indefinitely possess a soft-ware copy, because it is the software code and associatedrights that are valuable rather than the inexpensive discs onwhich the code may be stored. Also, the MPAA argues thata customers ability to possess a copyrighted work indefi-nitely should not compel a finding of a first sale, becausethere is often no practically feasible way for a consumer toreturn a copy to the copyright owner.

Vernor, eBay, and the American Library Association(ALA) have presented policy arguments against our deci-

sion. Vernor contends that our decision (1) does not vindicatethe laws aversion to restraints on alienation of personal prop-erty; (2) may force everyone purchasing copyrighted property



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to trace the chain of title to ensure that a first sale occurred;and (3) ignores the economic realities of the relevant transac-tions, in which the copyright owner permanently releasedsoftware copies into the stream of commerce without expecta-tion of return in exchange for upfront payment of the full soft-ware price. eBay contends that a broad view of the first saledoctrine is necessary to facilitate the creation of secondarymarkets for copyrighted works, which contributes to the pub-lic good by (1) giving consumers additional opportunities topurchase and sell copyrighted works, often at below-retailprices; (2) allowing consumers to obtain copies of works aftera copyright owner has ceased distribution; and (3) allowingthe proliferation of businesses.

The ALA contends that the first sale doctrine facilitates theavailability of copyrighted works after their commercial life-span, by inter alia enabling the existence of libraries, usedbookstores, and hand-to-hand exchanges of copyrighted mate-rials. The ALA further contends that judicial enforcement ofsoftware license agreements, which are often contracts ofadhesion, could eliminate the software resale market, requireused computer sellers to delete legitimate software prior tosale, and increase prices for consumers by reducing price

competition for software vendors. It contends that Autodesksposition (1) undermines 17 U.S.C. 109(b)(2), which permitsnon-profit libraries to lend software for non-commercial pur-poses, and (2) would hamper efforts by non-profits to collectand preserve out-of-print software. The ALA fears that thesoftware industrys licensing practices could be adopted byother copyright owners, including book publishers, recordlabels, and movie studios.

These are serious contentions on both sides, but they do notalter our conclusion that our precedent from Wise through theMAI trio requires the result we reach. Congress is free, of

course, to modify the first sale doctrine and the essential stepdefense if it deems these or other policy considerations torequire a different approach.



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VI.

The district court did not consider Vernors claim thatAutodesk misused its copyright. Copyright misuse is an equi-table defense to copyright infringement which precludes thecopyright holders enforcement of its copyright during themisuse period. See Practice Mgmt. Info. Corp. v. Am. Med.Assn, 121 F.3d 516, 520 n.9 (9th Cir. 1997). The districtcourt reasoned that a misuse defense would not benefit Ver-nor since he prevailed on copyright infringement below. Sincewe reverse the district courts grant of summary judgment inVernors favor on copyright infringement, we remand for thedistrict court to consider Vernors copyright misuse defensein the first instance.

VII.

[11] We vacate the district courts grant of summary judg-ment in Vernors favor and remand. We hold that becauseCTA is a licensee, not an owner, the sale of its Release 14copies to Vernor did not convey ownership. Vernor is accord-ingly not entitled to invoke the first sale doctrine or the essen-tial step defense, on behalf of his customers. We remand for

further proceedings consistent with this opinion, includingconsideration of Vernors copyright misuse defense.

VACATED AND REMANDED.


3-0 decision by the 9th u.s. circuit court of appeal -final ruling

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