The 9th Circuit of Appeals has reaffirmed the right of software companies to circumvent the first-sale doctrine by “licensing” rather then “selling” its products. The significance of this ruling cannot be overstated—it could singlehandedly destroy the used software market.
In 2005, one Timothy Vernor bought a sealed copy of AutoCAD Release 14 at a garage sale. In 2007, Vernor purchased four used copies of Release 14 from an authorized dealer, Cardwell/Thomas & Associates (CTA). He subsequently placed all but two copies on eBay, and in each instance, Autodesk appealed to the Digital Millennium Copyright Act (DMCA), alleging copyright infringement. In 2009, the courts ruled in Vernor’s favor, reaffirming his rights under the first-sale doctrine. But the 9th Circuit of Appeals recently overturned that decision—according to the ruling, the software license overrides the first-sale doctrine.
Let’s analyze this. Under 17 U.S.C. § 106, copyright holders have exclusive rights to (among other things):
(3) distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending
However, the first-sale doctrine (see Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350-51, 1908) places significant limitations on these rights. As enumerated in 17 U.S.C. § 109:
(a) Notwithstanding the provisions of section 106 (3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.
The key word is owner. Software manufacturers allege that users don’t purchase their products; they license them. Accordingly, Software License Agreements (SLAs) circumvent the first-sale doctrine, because customers don’t own the software. This apparent loophole has dogged the secondary market for years. Until now, however, the courts have sided with consumers.
Think about what this means. Nearly every single piece of physical media – CDs, DVDs, Blu-Ray, Video Games – is licensed, not sold. Using the 9th Circuit precedent, entertainment companies could rightly argue that their media cannot be resold on the secondary market. eBay’s business model would practically collapse. A significant portion of Gamestop’s business lies in used game sales. Target and Best Buy are both attempting to mine this lucrative market.
Game companies have condemned the secondary market for years. This ruling will open the floodgates. The SLA loophole could encompass all forms of physical media, and the slope gets more slippery by the minute. Consumer rights have taken a big hit.
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