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Digital First Sale at Issue in Vernor v. Autodesk Appeal February 16, 2010

Posted by Bill Rosenblatt in Law, United States.
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The US copyright law has a provision called First Sale (17 USC 109), which says that if you acquire a copyrighted work — a book, CD, etc. — then you have the right to do whatever you want with it, and the publisher of the work has no ability to control what you do.  You can sell it to someone else, lend it, or use it to line your birdcage or as a Frisbee.  First Sale makes possible such things as lending libraries and used book/record/video stores.  Other copyright laws have similar principles, which are generally known as “exhaustion.”

What happens to software or other digital content that you acquire under an EULA (end user license agreement)?  Does First Sale apply?  It’s unclear.

This issue came up in the federal district court case Vernor v. Autodesk, a dispute between the CAD/CAM software vendor Autodesk and a man who offered used copies of the company’s Autocad software (which retails for thousands of dollars a copy) for sale on eBay.  The case was decided in 2008 and is now on appeal to the Ninth Circuit.

Autodesk argued that Timothy Vernor shouldn’t be allowed to sell the software.  Its rationale was that it doesn’t really sell its products; it just lets buyers use the software under terms of the EULA.  (Autodesk does offer limited-time usage options, such as a one-year license to Autocad for US $1995.)  The judge didn’t buy that argument; he said that the transaction is a transfer of ownership that constitutes a sale, so First Sale does apply, and therefore Vernor was within his rights to sell the software.

Last week several groups filed an amicus brief in the appeal, including representatives from the library community as well as “copyleft” advocacy groups such as Electronic Frontier Foundation and Public Knowledge.

If the Ninth Circuit were to overturn the lower court and say that an EULA trumps copyright, then the reach of the First Sale doctrine could change — depending on how broadly the opinion is worded.  If it’s narrow, it could just effect, say, software products delivered on physical media such as CDs or DVDs, as opposed to digitally downloaded software or any other type of copyrighted work.

The advocacy groups fear a broad overturn that affects all sorts of content in various formats, leading to effective elimination of First Sale.  As an extreme example, they fear that “magic words” on, say, a cellophane wrapper on a printed book could prevent the buyer from lending or reselling the book.

The latter outcome seems highly unlikely.  On the contrary, the advocacy groups may be hoping for an affirmation opinion from the Appeals Court that goes further than the lower court did to establish a First Sale doctrine for digital content.  The US Copyright Office issued a report in 2001 in which it declined to recommend extending First Sale to digitally transmitted products.

In this Vernor case, the lower court chose to uphold First Sale based on examination of the “economic realities” taking place in the transaction rather than the terms of the EULA: ownership of the content (the discs containing the software) was transfered from Autodesk to the user; therefore First Sale ought to apply.  To paraphrase an American colloquialism, the court decided that if it looks like a transfer of ownership, quacks like a transfer of ownership, and waddles like a transfer of ownership, then it must be a transfer of ownership.

Groups like the EFF and Public Knowledge would like the same rationale to apply to digitally downloaded content.  In the amicus brief, they provide a rationale for this that goes something like this: you own your hard drive, which is part of your PC.  If you buy a song on iTunes, Apple sends you some bits which are stored on your hard drive.  Apple doesn’t own a part of your hard drive after that; you clearly still own it.  Therefore you own the song (which occupies part of your hard drive), so First Sale ought to apply.

On the other hand, the major media companies would like to keep First Sale away from digital downloads, so that they can exert control over content once it reaches users’ devices (by law, just as they do technologically with DRM).  In fact, Fox Studios uses the term “Electronic Licensing” rather than the more common “Electronic Sell-Through” to describe what you get on sites like iTunes.

The amicus brief’s argument concerning users’ hard drives strikes me as specious.  Precedents need to be established regarding the content itself in ethereal form as opposed to manifestations on physical products such as books and DVDs.  The 2001 Copyright Office report provided reasons why First Sale ought not to apply to purely digital content, though it left open the possibility that new DRM technologies could lead them to revise that opinion — one such technology could be the “Lend to a Friend” feature of Barnes & Noble’s Nook e-book reader.  The report has not been updated.

The district court’s opinion in this Vernor case is limited to physical products.  The question of whether a digital download ought to be treated within the domain of First Sale — perhaps using the same economic arguments that have informed previous cases — remains unsettled.

Comments»

1. JP - February 16, 2010

Hi,

The first sale is a intersection between the intellectual property and the competence law, is one limit to the distribution right for the owner of the copyright for the free circulation of goods. In the cloud computing and the digital on-line information, we no buy goods, buy access and services. In Colombia, the situation is more complex, the first sale or the exhaustion over the distribution right doesnt exist for physical products, the resale of books, lps, cds, etc.. is illegal. We need a legislative change.

About vernor vs autodesk, i write a review in spanish, available:

http://portal.uexternado.edu.co/irj/go/km/docs/documents/UExternado/pdf/2_propiedadIntelectual/noticias/noticiasJuridicas/QueEsUnaVentaDeSoftware.pdf

and other review in spanish around first sale, UMG Recordings, INC. vs Troy Augusto, et al.

http://portal.uexternado.edu.co/irj/go/km/docs/documents/UExternado/pdf/2_propiedadIntelectual/noticias/noticiasJuridicas/ElAlcanceDelAgotamientoDelDerechoDeDistribución.pdf

I want know your position about the first sale in the digital contents, are you agree?

Thanks, Jhonny Pabón.

Bill Rosenblatt - February 17, 2010

Jhonny,

Thanks for writing. I was able to read parts of your opinion on the Vernor case — my Spanish is not that great.

I had a conversation yesterday with someone from the US Copyright Office who gave me some insights about its 2001 report on (among other things) digital first sale. The Copyright Office produced the report in response to an inquiry from Congress; the report hasn’t been updated because Congress hasn’t asked for an update.

Do I believe that there ought to be a digital first sale right? In principle it seems like a good idea. But (as the Copyright Office report mentions) it depends on a user deleting her copy of content when transmitting it to another user — an action that doesn’t happen automatically as it does with physical content items (you give it to someone; then you don’t have it anymore). The transfer of digital content from one user to another inevitably requires making digital copies of the content. It requires an affirmative action on the first user’s part to delete her own copy or otherwise agree not to access it after it has been “sold” or “given away” or “lent” to another user.

The solution would be to require technology to be used that imposes the above behavior. But I am very leery of technology mandates in law, because technologies become obsolete or irrelevant, or significant loopholes can be found that either defeat the purpose of the law or abuse it. Even DMCA 1201(a), the law that criminalizes DRM hacking yet avoids technological mandates, was abused by various parties so that it applied where it wasn’t intended to apply (see cases like Lexmark and Skylink).

The problem with Digital first sale is that requires DRM-like technology to enforce deletion of the first “owner’s” copy. This forces the makers of music players, e-book readers, etc. to implement DRM (or something approximating it). In other words, requiring digital First Sale leads to a major technology mandate with all kinds of consequences. The problem I have with all DRM mandates, leaving aside their effects on Fair Use and so on, is that the economic incentives are all wrong: such a mandate would require makers of media players, e-book readers, etc., to implement technology that doesn’t really benefit them but instead benefits copyright owners. This would just exacerbate the current situation, in which we get bad DRM (DRM that’s neither very secure nor very consumer-friendly) because the implementers have no incentive to do any better.

Approximations of digital first sale are just now coming onto the market, such as Barnes & Noble’s “Lend to a Friend” feature in its Nook e-book reader. My preference would be to wait and see if the market can take care of itself with regard to pseudo-First-Sale rights for digital content. If there is a market failure, perhaps because there’s evidence of high consumer demand to lend e-books but the technology is just too clunky and limiting, then maybe it’s time for the legal system to help. But I don’t think we’ve reached the point yet where the benefits of legal intervention outweigh the very real risks.


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