close

For more than four decades, Fenwick & West LLP has helped some of the world’s most recognized companies become, and remain, market leaders. From emerging enterprises to large public corporations, our clients are leaders in the technology, life sciences and cleantech sectors and are fundamentally changing the world through rapid innovation.  MORE >

Fenwick & West was founded in 1972 in the heart of Silicon Valley—before “Silicon Valley” existed—by four visionary lawyers who left a top-tier New York law firm to pursue their shared belief that technology would revolutionize the business world and to pioneer the legal work for those technological innovations. In order to be most effective, they decided they needed to move to a location close to primary research and technology development. These four attorneys opened their first office in downtown Palo Alto, and Fenwick became one of the first technology law firms in the world.  MORE >

From our founding in 1972, Fenwick has been committed to promoting diversity and inclusion both within our firm and throughout the legal profession. For almost four decades, the firm has actively promoted an open and inclusive work environment and committed significant resources towards improving our diversity efforts at every level.  MORE >

At Fenwick, we are proud of our commitment to the community and to our culture of making a difference in the lives of individuals and organizations in the communities where we live and work. We recognize that providing legal services is not only an essential part of our professional responsibility, but also an excellent opportunity for our attorneys to gain valuable practical experience, learn new areas of the law and contribute to the community.  MORE >

Year after year, Fenwick & West is honored for excellence in the legal profession. Many of our attorneys are recognized as leaders in their respective fields, and our Corporate, Tax, Litigation and Intellectual Property Practice Groups consistently receive top national and international rankings, including:

  • Named Technology Group of the Year by Law360
  • Ranked #1 in the Americas for number of technology deals in 2015 by Mergermarket
  • Nearly 20 percent of Fenwick partners are ranked by Chambers
  • Consistently ranked among the top 10 law firms in the U.S. for diversity
  • Recognized as having top mentoring and pro bono programs by Euromoney

MORE >

We take sustainability very seriously at Fenwick. Like many of our clients, we are adopting policies that reduce consumption and waste, and improve efficiency. By using technologies developed by a number of our cleantech clients, we are at the forefront of implementing sustainable policies and practices that minimize environmental impact. In fact, Fenwick has earned recognition in several areas as one of the top US law firms for implementing sustainable business practices.  MORE >

At Fenwick, we have a passion for excellence and innovation that mirrors our client base. Our firm is making revolutionary changes to the practice of law through substantial investments in proprietary technology tools and processes—allowing us to deliver best-in-class legal services more effectively.   MORE >

Mountain View Office
Silicon Valley Center
801 California Street
Mountain View, CA 94041
650.988.8500

San Francisco Office
555 California Street
13th Floor
San Francisco, CA 94104
415.875.2300

Seattle Office
1191 Second Avenue
10th Floor
Seattle, WA 98101
206.389.4510

New York Office
1211 Avenue of the Americas
32nd Floor
New York, NY 10036
212.921.2001

Shanghai Office
Unit 908, 9/F, Kerry Parkside Office
No. 1155 Fang Dian Road
Pudong New Area, Shanghai 201204
P.R. China
+86 21 8017 1200


Ninth Circuit Rules on Software Transfers

On September 10, 2010, the Ninth Circuit issued a much-awaited ruling on appeal in Vernor v. Autodesk, addressing whether software purchasers are owners or licensees of the copies of the software in their possession. (9th Cir. No. 09-35969.) The court held that "a software user is a licensee rather than an owner of a copy of the software where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restrictions."

The distinction between owner and licensee can be critical to software publishers because owners have rights under the first sale doctrine (17 U.S.C. § 109(a)) and the "essential step defense" (§ 117(a)), whereas licensees and their transferees can be precluded from re-selling software or engaging in other conduct a publisher may want to control.

The first two requirements of Vernor's three-prong test – calling the agreement a license and imposing transfer limitations – will be satisfied whenever the issue is posed, so the critical question under the Ninth Circuit's ruling will always be whether the agreement imposes "notable use restrictions." Vernor holds that it is sufficient, for a software agreement to be deemed a license, that the agreement bars use outside the Western Hemisphere and prohibits a transferee from modifying, translating or reverse-engineering the software, from removing any proprietary marks, and from defeating any copy protection device.

The ruling is important not only for its resolution of the distinction between owners and licensees but also for the circumstances surrounding the decision. This summer, the same panel of the Ninth Circuit, Judges Canby, Callahan and Ikuta, had not one, but three, lower court cases before it, all on the first sale issue and pending determination of whether contractual terms can deem a transfer that looks like a sale a license. The others are UMG Recordings, Inc. v. Augusto, 558 F. Supp.2d 1055 (C.D. Cal. 2008), in which a reseller of promotional CDs was sued by Universal Music Group and the lower court concluded that promotional CDs were not licensed but "sold" for the purposes of the first sale doctrine; and MDY Industries v. Blizzard Entertainment, Inc., 89 U.S.P.Q.2d 1015 (D. Ariz. July 14, 2008), in which the lower court held that the transfer of computer software represented a license. At the time of this writing, Augusto and Blizzard had not been decided. Stay tuned!

Background and Lower Court Ruling

To recap the facts of the Vernor case, which we wrote about in the Summer 2008 edition of Fenwick & West's IP Bulletin, Timothy Vernor is an individual who sells goods on eBay. When he offered lawfully made packages of Autodesk's AutoCAD software for sale, Autodesk sent eBay a DMCA take-down notice, claiming Vernor's sale would infringe its copyright, and eBay ended the auction. Vernor lodged a DMCA counter-notice, to which Autodesk did not respond. eBay reinstated the auction, and Vernor sold the Autodesk software. After this happened four more times in 2007, eBay suspended Vernor's eBay account for repeat infringement, and Autodesk threatened to "take further action" should Vernor attempt to continue to sell copies of AutoCAD. Vernor possessed two further copies of AutoCAD which he wished to sell. He sued for declaratory relief of non-infringement and for unfair competition.

The copies at issue were originally produced by Autodesk and transferred to an architectural firm, Cardwell/Thomas Associates ("CTA"), as part of the settlement of an unrelated dispute. The Settlement Agreement provided that CTA would adhere to an Autodesk software license agreement, which included restrictions on the transfer of the Autodesk software. Since the copies at issue were lawfully made, if CTA (then Vernor) were deemed "owners" of the copies, they would plainly be allowed — pursuant to the first sale doctrine — to sell their copies to others without violating Autodesk's distribution right. 17 U.S.C. § 109(a). But if Autodesk had merely licensed the software, as licensees they would not have the right to re-sell the software. The lower court held that the initial transfer of the software from Autodesk to CTA was a sale, not a license.

Three-Prong Test – Software: a License or a Sale

The United States Court of Appeals for the Ninth Circuit overturned the lower court's decision, siding with Autodesk and concluding that the first sale doctrine did not apply because Vernor was not an owner of the copies of the software he possessed – he had not bought it from a legitimate owner because CTA had merely licensed the software from Autodesk.

Purporting to reconcile a group of earlier Ninth Circuit decisions which suggested varying tests, the Vernor court adopted a three-pronged test to determine whether software is licensed or sold:

"First, we consider whether the copyright owner specifies that a user is granted a license. Second, we consider whether the copyright owner significantly restricts the user's ability to transfer the software. Finally, we consider whether the copyright owner imposes notable use restrictions."

The Autodesk software license agreement described itself as a license and the agreement specifically included limitations on the transfer of the software and the software use restrictions described above. The court therefore concluded that "Autodesk's direct customers are licensees of their copies of the software rather than owners," which, the court said, had two ramifications: "Because Vernor did not purchase the AutoCAD copies from an owner, he may not invoke the first sale doctrine, and he also may not assert an essential step defense on behalf of his customers."

The court affirmed that Congress had enacted the essential step defense "to codify that a software user who is the "owner of a copy" of a copyrighted software program does not infringe by making a copy of the computer program, if the new copy is "created as an essential step in the utilization of the computer program in conjunction with a machine and . . . is used in no other manner." 17 U.S.C. § 117(a)(1)." However, the court held, this defense was not applicable to Vernor because he was not the owner of the copy of the Autodesk software.

Policy Arguments

The court acknowledged the policy considerations raised by the parties and their amici, the Software & Information Industry Association and the Motion Picture Association of America supporting Autodesk, and eBay and the American Library Association supporting Vernor. But the Ninth Circuit declined even to comment on these arguments. There were "serious contentions on both sides," the court observed, "but they do not alter our conclusion that our precedent... requires the result we reach. Congress is free, of course, to modify the first sale doctrine and the essential step defense if it deems these or other policy considerations to require a different approach."

Implications of Vernor

Vernor provides a template for software licensors who wish to make sure that their software is licensed with certain restrictions (and not deemed to have been "sold") – assuming the Ninth Circuit ruling stands and governs the transaction, or that other circuits agree with its reconciliation of the cases on this issue. But Vernor does not make entirely clear what use restrictions are necessary to satisfy its third prong, other than that those restrictions set forth in Autodesk's Software License Agreement are sufficient. Possibly, the forthcoming decisions in Augusto and Blizzard, which arise in different contexts, will help clarify this issue.

Importantly, the Vernor three-prong test is not necessarily limited to software licensing. Under Vernor, owners of any kind of content or material may be in a position to try prohibition of certain actions in their agreements. Certainly, the terms held sufficient in Vernor for license status – bars on reverse engineering, removal of trademarks, and trying to thwart copy protection – are common in the software industry, and we would expect those whose agreements do not contain all of these elements to consider whether their own use restrictions (present or to be adopted) may qualify as "notable." It will be interesting to see how other industries outside of the software industry react to this decision and if any of their practices will change as a result.

Vernor's counsel has indicated that he intends to ask a full panel of eleven judges in the Ninth Circuit to review the September 10 decision en banc before considering a possible appeal to the US Supreme Court.


For more information about this article, please contact:

Jennifer Stanley (jstanley@fenwick.com)
Mitchell Zimmerman (mzimmerman@fenwick.com)


The views expressed in this publication are solely those of the author, and do not necessarily reflect the views of Fenwick & West LLP or its clients. The content of the publication ("content") is not offered as legal should not be regarded as advertising, solicitation, legal advice or any other advice on any particular matter. The publication of any content is not intended to create and does not constitute an attorney-client relationship between you and Fenwick & West LLP. You should not act or refrain from acting on the basis of any content included in the publication without seeking the appropriate legal or professional advice on the particular facts and circumstances at issue.

©2010 Fenwick & West LLP. All Rights Reserved.​