Illinois Association of Defense Trial Counsel Springfield, Illinois | www.iadtc.org | 800-232-0169 IDC Quarterly | Volume 19, Number 1 (19.1.53)

Technology Law By: Christopher M. Garcia Boggs, Avellino, Lach & Boggs, LLC

A Remedy Without a Right? The Extent of Licenses in Copyright and the Digital World

Terms of Use, Licenses, Site Agreements, Privacy Notices: they have become ubiquitous on the Internet, from newspaper sites to Massive Multiplayer Online Games. Many of these contracts contain terms which attempt to restrict the user’s ability to sell, control, and operate the program or Web Page. Although licenses are a well established form of contract, they are creating turmoil in the courts when software licenses and copyright law conflict. Under the law, a copyright is granted to “original works of authorship fixed in any tangible medium of expression.” 17 U.S.C. § 102. A copyright grants the author a panoply of rights and controls over the work, including the right to control the work’s distribution, public performance, creation of derivative works, and of course, limitations on copying. See 17 U.S.C. § 106. A key limitation on the right of distribution is the “first sale” doctrine, codified at 17 U.S.C. § 109. The first sale doctrine allows a legal owner of a tangible copy of the work to “sell or otherwise dispose” of that copy without any approval from the copyright owner. Id. Used CD stores operate pursuant to this doctrine. The other rights still exist – when a consumer purchases a used copy of a CD, he cannot then make multiple copies of it for resale. The doctrine removes from the record company or other copyright holder the right of repossessing the CD, or controlling the further distribution of that one copy, by preventing the consumer from selling it, giving it away, or throwing it away. Without the first sale doctrine, a copyright holder could vitiate the secondary market for any legally purchased work, forcing all consumers to buy new copies. The hallmark of an effective license of a copy of a copyrighted work, on the other hand, is that it shows the copyright owner’s “intent to regain possession,” of the copy and “[t]he absence of this intent is strong evidence that the product was sold.” UMG Recordings, Inc. v. Augusto, 558 F. Supp. 2d 1055, 1061 (C.D. Cal. 2008). A license granted by a copyright owner to another party results in that owner retaining control, through the licensing agreement, over the licensee’s use of the licensed copy. The extent to which licenses control the use of software has become hotly debated in federal district court cases. These cases explore the manner in which copyright and contract law should interact. In May of 2008, Judge Richard A. Jones of the District Court for the Western District of Washington held that the transfer of a copy of software to a first recipient constituted a sale, even though it was ostensibly governed by a license. The first recipient became the subsequent holder of the copy, able to assert the “first sale” doctrine as a defense to the copyright holder’s infringement claim arising from an attempted sale in the secondary market. Vernor v. Autodesk, Inc., 555 F. Supp. 2d 1164, 1170 (W.D. Wash. 2008). In Vernor, Autodesk was the creator and copyright owner of a software program called AutoCAD. Id. at 1165. Mr. Vernor had, over the course of a few years, acquired legitimate copies of the software, and posted them for sale on eBay. Id. However, each time he began an auction, Autodesk would issue a Digital Millennium Copyright Act (“DMCA”) notice to eBay, insisting the auction would violate its copyright. Id.

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eBay would then suspend the auction, Vernor would respond, and eBay would reinstate the auction. Id. at 1165-1166. After the fifth copy was posted, eBay suspended Vernor’s account for one month. Id. Vernor had contacted Autodesk on two occasions, informing it that he had acquired the software legally. Id. at 1166. On the first occasion, Vernor was told Autodesk did not allow resale of its products and that such a sale would infringe its copyright. Id. On the second occasion, an attorney for Autodesk told Vernor he would advise Autodesk “to take further action” if Vernor continued to post copies on eBay. Id. Vernor brought a declaratory judgment action against Autodesk, claiming he had two legal copies he wanted to auction on eBay. Id. at 1165. The copies in question were legally transferred from Autodesk to a Seattle-based architecture firm as a settlement for an unrelated dispute, and the firm later sold them at an office sale to Vernor. Id. at 1165-1166. In the settlement agreement between the Seattle firm and Autodesk, the firm agreed to abide by the license terms of the software. Id. at 1166. The license prohibited the transfer or sale of the software to another person without Autodesk’s consent, and identified itself as a “nonexclusive, nontransferable license.” Id. Without the license, the transfer from Autodesk to the architecture firm would have allowed that firm, and Vernor subsequently, to sell the copies without consent from Autodesk, under the auspices of the first sale doctrine of 17 U.S.C. § 109(a). Id. However, possession of the copy is not sufficient to invoke Section 109(a). Instead, the possessor of the copy must have acquired ownership of the copy. Id. Vernor could only be an owner if the transfer from Autodesk to the architecture firm was a sale, in which case, any violation of the license would give rise to a breach of contract claim, and not an infringement claim. Id. To determine whether the transaction at issue was a license or a sale, the court followed the Ninth Circuit precedent of United States v. Wise, 550 F.2d 1180 (9th Cir. 1977). Vernor, 555 F. Supp. 2d at 1169. Wise involved a series of contracts between movie studios and various recipients of film prints. While most of these contracts were held to be licenses, loans, or other non-sale transactions, there were some that were determined to be sales. Id. at 1169-1170. The “critical factor” in Wise was whether the film print had to be returned – reacquisition by the studios after a time constituted a license, while retention by the recipients, even in cases of contractual prohibition of further transfer or mandatory destruction of the print by the recipients, was interpreted as a sale. Id. at 1170. Relying upon Wise, the Vernor court held the AutoCAD transfer to the architecture firm was a sale. Id. The court would not simply allow the label placed on the transaction by Autodesk to be determinative of the actual nature of the transaction – it required that one examine the realities of the transaction itself. Id. at 1169. The Autodesk transfer involved permanent retention of the copy by the firm, for an up-front, one-time-only price, even though it had restrictions on further sales, and mandated destruction of the software if upgrades were purchased. Id. at 1170. The Vernor court noted that under Wise the transaction was a sale and Autodesk’s ability to control the further transfer of the copy to Vernor was extinguished by the first sale doctrine. Id. at 1170-1171. Autodesk may still possess breach of contract claims against the architecture firm, but those claims do not affect Vernor. Id. at 1170 n. 5. This did not end the analysis though, as the court recognized a lingering conflict between Wise and a “trio of decisions” out of the Ninth Circuit. Those cases, Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t., 447 F.3d 769 (9th Cir. 2006), MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), and Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995), were principally concerned with the application of 17 U.S.C. § 117. That statute permits an “owner of a copy of a computer program” to make copies of the software when such copying is an “essential step in the utilization of the computer program in conjunction with a machine.” 17 U.S.C. § 117(a). A computer’s random access memory (“RAM”) provides one example of this principle. Computer programs often require that multiple copies of portions of the program be made in the computer’s RAM in order to run properly. Congress implemented Section 117 to protect this essential copying for the computer software to work, clarifying that such copies are not infringing copies when used by the owner of a legitimate copy. Id. The “MAI trio,” as the Vernor court refers to those earlier Ninth Circuit decisions, all held the respective infringers were not owners of the software in question, so they could not be protected by Section 117 when their infringing use made copies of the software. See MAI, 991 F.2d at 519 n.5; Triad, 64 F.3d at 1335; Wall

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Data, 447 F.3d at 786. Each of those cases involved licenses, yet not one of the cases cited Wise, nor did MAI or Triad analyze the license terms at issue. Wall Data concluded the restrictions contained in the license were “sufficient to classify the transaction as a grant of license,” and not a sale. Vernor, 555 F. Supp. 2d at 1172 (quoting Wall Data, 447 F.3d at 785). The Wall Data license, however, placed no restrictions on resale. Id. The Vernor court, finding the conflict of precedent to be irreconcilable, followed the earliest opinion, Wise, as it was required to do under Ninth Circuit law. Vernor, 555 F. Supp. 2d at 1172. Shortly after Vernor, the District Court of Arizona was faced with a similar situation, and chose instead to follow the MAI trio. MDY Industries, LLC v. , Inc., Doc. No. 06-2555, 2008 WL 2757357 (D. Ariz. July 14, 2008). In MDY Industries, MDY brought a declaratory judgment action against Blizzard, due to Blizzard’s threats to file a lawsuit against MDY over its “Glider” software. Blizzard publishes the popular “World of ” (“WoW”) online game. Id. at *1. In the game, players geographically separated can interact within a virtual universe, where they engage in quests, fight monsters, and, importantly in the context of the lawsuit, gain experience and power within the game itself. Id. In order to gain levels, one must actually play the game – a character does not increase in experience or power while the user is away at work or asleep. Id. WoW’s software involves two components: the client and the server. Id. The server is run by WoW, while users access the server by using the client component on their home machine, which they purchase either digitally online or physically at stores. Id. MDY created the “Glider” program, which basically plays the game for a user while he or she does other things. Id. This allows the character to progress through the game, typically by performing mundane tasks, so the user can return as a more powerful and experienced character, without having to do all the work herself. Id. Blizzard contended the use of Glider diminished the value of WoW, and caused Blizzard to lose customers and revenue, since those customers not using Glider may decide the game has become unfair and tilted in favor of those who utilize Glider to build up their characters, akin to baseball players who feel they cannot compete with other players on performance-enhancing drugs. Id. MDY argued its product actually enhanced the game- playing experience and could assist disabled users in playing WoW. Id. at *2. WoW’s End User License Agreement (EULA) and Terms of Use (TOU) clearly prohibit users from utilizing programs like Glider. Id. at *6. The court held that by acting outside of the scope of the agreements, the copies made by the game in the RAM while the user was also running Glider were not permitted by the license, and therefore were violations of Blizzard’s copyright. Id. Section 117 would protect the users from a copyright infringement claim (although not a breach of contract claim) if the user was an owner of the software at the time it made these prohibited RAM copies. Id. The court, however, following the MAI trio, found the transaction at issue was a licensing arrangement. Id. at *8. The court first noted that Blizzard made it clear it was granting a license, not selling the copy. Id. In the EULA, it retained title to the copy and all ownership rights. Id. Moreover, the license restricted the user’s control over the copy, by allowing transfer to another individual, but only if the user deletes any copies she has, transfers all original containers, documentation, and software, and only if the transferee agrees to the EULA. Id. at *9. Even though a person who purchases the game at a store would probably believe he or she has the right to use, transfer, or dispose of the copy as she sees fit, the court held notice of the license on the box and notices during installation should inform the purchaser that she has purchased a license, not ownership of the copy. Id. The court lamented that “[o]ne wonders what more could be done to make it clear that the purchaser is a licensee, not an owner, of the software.” Id. The court looked at Vernor, but did not find it persuasive. Id. at *10. The MDY court felt obliged to follow the MAI trio, because the case before it was bound to Section 117, not Section 109. Id. Even though the Vernor court recognized both statutes used the same terms, and even though the Wise decision was older, the MDY court still followed the precedent from Wall Data. Without Section 117 forming a defense, MDY was liable to Blizzard for vicarious and contributory copyright infringement. Id. Vernor and MDY pose an interesting question for policy and the law. Is the standard transaction involving an end user’s acquisition of software, for a one-time fee, a sale or a license? Although it may seem benign, the application of the first sale doctrine to software “sales” drastically changes the balance in litigation between the copyright owner, and the alleged infringer, even assuming there is still an enforceable license outstanding.

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A copyright infringement claim is relatively easy to prove, and statutory damages, per infringement, start at $750 and can go up to a maximum of $150,000 for willful infringement. See 17 U.S.C. § 504. If instead, the first sale doctrine applies, the copyright owner is limited to contractual and common law actions, where only actual damages would be recoverable. In MDY, without copyright infringement, Blizzard’s only action against MDY probably would have been for tortious interference with contract (or something related), and breach of contract against the users who utilized Glider in violation of the EULA. Even assuming Blizzard could prove liability and damages under those theories, it is very likely the damages value would have been significantly less than the statutory damages under copyright. On one hand, a copyright owner has a vested interest in its creation, and for products like WoW, an ongoing business interest in assuring the use of its work complies with the license it has created. Not only does the use of Glider potentially hurt Blizzard’s bottom line, but also may diminish other users’ enjoyment of the game. In Autodesk’s case, it loses control of property it licensed to a party, when that party, in violation of its contractual duties, sells the product to a third party. If the copyright owner did not intend to allow its legal copy to be used in a certain manner, should a third party be able to circumvent Autodesk’s limitations through another’s breach, leaving Autodesk with a remedy only against the middle man? Yet, there may be something to be said about the purchaser’s reasonable expectations and reliance on his or her understanding of the transaction. Blizzard’s license allows a user to transfer his or her copy to another, so long as the user complies with certain terms. But in reality, copyright already assures compliance, as it would be a clear violation of copyright for the transferor to retain extra copies by failing to delete them off of her computer or by not transferring all the original copies. Further, Blizzard’s terms controlled use of the game in conjunction with the server software and were not necessarily applicable to the client standing alone. (The use of Glider, without being connected to the online WoW service, would not accomplish anything, since the user’s character could not be advanced without the connection to the server). If licenses were attached to books, the publisher could prevent a reader from reselling it or even loaning it to a friend. Suffice to say, consumers would be surprised to find out they could not dispose of or loan out an already read book – is there a logical reason to treat software differently? Whether the first sale doctrine applies or not, the copyright holder still maintains numerous rights in the copy. Even if the transaction resulting in the user’s possession of the copy is a sale, the user is still not free to make additional copies and sell them, or to create derivative works from the copy, or to publicly display or perform the work, without the author’s permission. The first sale doctrine simply permits a purchaser to transfer his legal copy to another, without the author having an effective veto power. Allowing an author to have veto power over a copy owner’s ability to transfer the copy permits a copyright owner to control both the primary market for a work and the secondary market. Using licenses as a back door for copyright infringement creates an imbalance that favors the copyright holder too greatly. Although software vendors have no intention of regaining possession of their copies, they will seek to prevent a transaction from being labeled a sale, to control the user’s disposition of the copy indefinitely, thus suppressing a secondary, used market. It is doubtful that any normal consumer would believe the copy he or she purchases it not her property or that the software company could demand return of the copy at any time. The use of the software is still governed by the licensing agreement, which could be enforced as a contract against those who use the software in a manner inconsistent with its terms. However, breaching a contract does not a copyright violation make. The sale of the AutoCAD software and the use of Glider did not, in any way, infringe on the traditional rights of copyright. Both situations involve perfectly legal use of copyrighted work, in contravention of the terms of a contract. By granting copyright remedies for contractual breaches, MDY has put a thumb on the scales of justice, and given copyright holders a disproportionate amount of leverage to use against their opponents, who typically are already resource strapped. If balance is not restored, it may not be long until we are all licensees of everything and owners of nothing.

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About the Author

Christopher M. Garcia is an associate at Boggs, Avellino, Lach & Boggs, LLC in St. Louis, Missouri. He earned a Bachelor of Science in Mathematics from the Ohio State University, and a J.D. from Tulane University’s School of Law. In law school, he received the CALI award in Copyright, was a student attorney in the Environmental Law Clinic, and earned an Environmental Law Certificate for advanced work in Environmental Law. Mr. Garcia is licensed to practice in the States of Missouri and Illinois, and is a licensed patent attorney with the United States Patent and Trademark Office. He concentrates his practice on commercial contract and transactional issues, insurance coverage issues, policy and contract analysis, interpretation and statutory conformity.

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