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Ninth Circuit Overturns Vernor v. Autodesk Decision September 14, 2010

Posted by Bill Rosenblatt in Law, United States.
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Last week, the US Ninth Circuit appeals court overturned a district court decision in a case that could have broad ramifications for the rights that consumers get when they purchase digital content.

The lower court had decided, in Vernor v. Autodesk, that the sale of used software on CD-ROMs ought to be treated as the sale of any other used copyrighted work, such as a book or videotape, with respect to consumers’ rights to redistribute the content after the original sale. The decision cited the “economic reality” of the transaction, which the court found was similar to that of physical analog media.  The plaintiff in the case, Timothy Vernor, had asked the court for a declaratory judgment against computer aided design software maker Autodesk to allow him to sell used copies of the vendor’s AutoCAD software on eBay.

The question of whether sale of digital content ought to be covered under First Sale (section 109 of the Copyright Act) has not been settled law.  First Sale (known as “exhaustion” outside of the US) states that the publisher of a work has no further control over it after it’s sold — which means, for example, that libraries can buy books and lend them to the public, or a music store can sell used CDs or vinyl LPs.

In 2001, the US Copyright Office was asked to provide an opinion on digital First Sale; it stated in a report that digital First Sale may be possible to enforce via mandated technological measures (i.e., DRM), but that it was not reasonable to introduce such a mandate because the technology was too impractical to implement.

Libraries and advocacy groups have been hoping for a result along the lines of the lower court ruling in Vernor, which is sometimes known as the “duck test“: the “looks like a duck, swims like a duck, and quacks like a duck, therefore it must be a duck” theory.  In other words, if the sale of a digital content product resembles the sale of an analog physical content product, then it ought to be subject to First Sale.

The lower court opinion didn’t quite affirm the duck test for digital First Sale, but it went in that direction.  Yet in overturning the lower court, the Ninth Circuit didn’t quite do the opposite.  It offered a test for end-user license agreements (EULAs, a/k/a clickwrap agreements) that cover digital content: if the content is covered by a EULA, and the EULA contains usage conditions that are more restrictive than those granted under a normal sale of a copyrighted work, then it’s a license, not a sale, and therefore it’s not subject to First Sale.

For you logicians out there, the Ninth Circuit’s decision was the contrapositive of the duck test: “if it doesn’t walk like a duck, swim like a duck, or quack like a duck, then it can’t be a duck.”

In one sense, all the Ninth Circuit decided was that EULA terms are enforceable, which is fairly settled law — despite frequent attempts to characterize EULAs as “contracts of adhesion” that are legally unenforceable.

But on the other hand, this decision could lead to EULAs on all sorts of digital content imposed by copyright owners and retailers that might now have the guts to impose restrictions that relate to redistribution of content.  In fact, Ars Technica’s Nate Anderson points out that Amazon.com’s paid MP3 download service (just as one example) already imposes such restrictions.  Yet Anderson does not distinguish license restrictions on redistribution from restrictions on personal use.  For example, the Amazon.com EULA includes “modify, adapt, edit” as prohibited actions on MP3s sold on the site; these are personal usage restrictions that may relate to Fair Use but not First Sale.  The Vernor opinion does not affect any duck-quacking theories about Fair Use.

Otherwise, Anderson echoes the loud alarm bells sounded by the American Library Association and others about the Ninth Circuit’s decision, saying that it could well give content owners the encouragement they need to impose all sorts of distribution restrictions on unprotected content.   To put it another way: if you don’t like technology-based DRM, you’re gonna really hate what can only be called verbal DRM.

As Anderson points out, this court decision might embolden copyright owners and service providers to write distribution restrictions into their EULAs that could theoretically lead to the end of used music or video stores.

But let’s look at this realistically: if you think that DRM doesn’t do much to prevent copyright infringement, how are mere words in a clickwrap agreement going to do any better?  They aren’t, of course.  No one reads EULAs, and not much is generally done to enforce their terms.  The software industry knows this very well; otherwise they would not use elaborate “product activation” and other antipiracy technologies — as Autodesk certainly does.

It’s really more about consumer expectations — as it always has been.  Consumers are comfortable in their expectations about what they can do with unprotected content.  In some cases (such as pay TV, music subscription services, and library e-book lending) they also have largely made peace with technological restrictions on usage.

Consumer expectations arise out of actual functionality, not legalese — as anyone of the millions of people who drive above the speed limit will attest.  As a consumer, given the choice between verbal and technological DRM that impose similar restrictions — and all else being equal — I’d pick the latter any day.  I’d rather bump up against technologically imposed usage restrictions than have to slog through a pile of legal language or just hope I don’t do something wrong with the content I purchased — oops, I mean licensed.  (Ideally I’d rather have the technological restrictions and a clear, accurate, non-legalese explanation of those restrictions.)

So while I can see why the ALA and its fellow amici are concerned about the Ninth Circuit’s decision in Vernor, I don’t see much immediate practical impact.  But in the longer term, I am concerned about what I have called the trap door into the legal system, where lawyers and courts take time and expense to decide issues that could be decided immediately and automatically by technology.

Autodesk claims that its usage and distribution restrictions are necessary to enable it to offer different products for different markets, including free software for students.  It relies on technological means to differentiate those products, which sell for thousands of dollars.  Autodesk is hardly likely to take this court decision so much to heart that it jettisons its product activation scheme in favor of a series of EULAs, even though doing so would save development and support costs.  Nor are the producers of audiovisual content likely to do the same.

My hope is that this court decision does not end up encouraging copyright owners to rely on “verbal DRM,” because it just won’t work.

Comments»

1. Dan - September 14, 2010

Great article, and great analysis of Vernor without all the fearmongering. I’d like to contact the author by email if possible and discuss an upcoming post that I’ll be making on the topic at GamePolitics. Thanks!

2. Rob Shaver - September 17, 2010

So does this ruling mean that if I buy a used computer the installed software does not convey even though I received the original disks for all software? Does this mean if I buy a used TV with a microprocessor in it that I don’t own the firmware that is installed to run that microprocessor?

Oh and I notice you haven’t commented on the leaked HDCP master key which you thought didn’t exist.

http://news.cnet.com/8301-27080_3-20016756-245.html%3Fpart%3Drss%26amp;subj%3Dnews%26amp;tag%3D2547-1_3-0-20

It takes a big person to admit when they’re wrong.

Care to comment?

Peace,

Rob:-]

Bill Rosenblatt - September 17, 2010

Rob,

To answer your first question: according to the ninth circuit, it depends on what the EULA says. Specifically about two things: first, whether the software is transferable to another user or not; second, whether the installation is tied to a machine or a user identity. If machine, then there is no issue; if user, there might be an issue. The dichotomy between user and machine in product activation schemes is an issue that has come up in patent litigations I’ve been involved with, mainly in the form of lawyers trying to convince judges and juries that one is or isn’t the same thing as the other. But if there is a legal dispute over this issue with regard to EULA terms and first sale, I think the difference is pretty clear.

But my point is that in the vast majority of cases, no one would be able to monitor and police a situation such as you describe. For that you need technology — such as product activation.

Regarding TVs and microprocessors, if there is a license agreement at all, it would be between the manufacturer of the TV (or a subcomponent thereof) and the firmware publisher, and the license would most certainly be tied to a device, not the purchaser of the TV. So there’s no issue in that case.

I am working on a piece on the HDCP hack. It will appear in a few days once I have gotten the facts together. There have been lots of less-than-fact-based posts about it. Yes, I was wrong, there is a master key. I found it hard to believe that such a thing would exist after the DVD CSS debacle, but there it is.

And I am not as big as I used to be, thanks mainly to taking up cycling as a hobby.

3. RobShaver - September 20, 2010

Thanks for your detailed answers. (I need to become smaller too. :)

All this legal wrangling is becoming quite confusing to keep track of. As I’m sure you know (you may have even written about it) copyright is being used to limit speech and control goods after the first sale. The issue between Costco and Seiko comes to mind.

I also recall a case 6 or 8 years ago where Microsoft delayed the acquisition of K-Mart over software licensing issues. (I think it was K-Mart. I couldn’t find any evidence of it on the Internet.)

Anyway, I’m just saying …

Bill Rosenblatt - September 20, 2010

Thanks. I am not familiar with the Costco/Seiko reference and would appreciate a pointer. But just bear in mind that “goods” other than copyrighted works are not subject to copyright law. They may be subject to the branch of antitrust law that covers manufacturers’ control over the retail channel. I am not, not, not an expert on that.

4. Rob Shaver - September 20, 2010

It was Omega, not Seiko. Here’s a reference:

“It’s an unconventional use of copyright law. But if Omega SA wins its case before the US Supreme Court, the famous Swiss watch company will have established a powerful new weapon against grey market goods in that country.

“Consider the method used by Omega SA. The watchmaker inscribed a tiny, 0.5 cm globe design on the underside of its watches. This design is invisible when the watches are worn, so individuals are unlikely to purchase Omega’s high end watches in order to obtain copies of this inconspicuous design. Because this design is copyrighted, however, it may enable Omega to stop the import of grey market watches into the US.”

http://www.ip-watch.org/weblog/2009/12/23/us-weighs-copyright-as-barrier-to-grey-market-imports/

5. Is This Legal or Not? · GamerPocket Blog - January 3, 2011

[...] Finally, this article from the Copyright and Technology blog is apparently authored by legal [...]

6. La Rivière de Commerce Flows On: The First Sale Doctrine Goes Big in Europe | Aaron Sanders Law - December 12, 2012

[...] or whatever.  This regime of contracting around the first sale doctrine is what prevented Mr. Vernor from reselling on Ebay the copy of Autodesk that he had purchased at a garage sale.  (Under the licensing regime, the garage sale wasn’t an authorized transfer of the software [...]


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