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The First Sale Doctrine: Licensee or Owner?

1. In General

The theory of the First Sale Doctrine under the Copyright Act 17 U.S.C. § 101 et. seq. is that an individual who purchases an authorized copy may use and resell that particular copy free of any restraint by the copyright owner. 17 U.S.C. § 109(a) (emphasis supplied). See Bobbs Merrill Co. v. Straus, 210 U.S. 339 (1908). A copyright owner’s sale of an authorized copy “exhausts” the copyright owner’s exclusive distribution and display rights, such that the purchaser may use, resell, or display that copy free of any claim of infringement. 17 U.S.C. § 109(a).[1] In short, the First Sale Doctrine addresses a copy owner’s rights as opposed to the copyright owner’s rights.

The First Sale Doctrine does not apply, however, to the separate exclusive rights of copying, derivative work preparation, and public display or performance. See 17 U.S.C. § 106 (which sets forth five separate and distinct rights). See, e.g., Red Baron-Franklin Park, Inc. v. Taito Corp., 883 F.2d 275, 280 (4th Cir. 1989), and Columbia Pictures Industries, Inc., v. Aveco, Inc., 800 F.2d 59, 64 (3d Cir. 1986). See also 17 U.S.C. § 109(e) (which, to legislatively overrule Red Baron, permits display of copyrighted video games in coin-operated equipment). The First Sale Doctrine only applies to the copyright owner’s exclusive rights of distribution and display in its copyrighted work, which are “automatically” conveyed to the buyer or the copy owner upon sale. 17 U.S.C. § 109(a) and (c).[2] Section 106(3) provides that the copyright owner has the exclusive right to distribute and to authorize distribution of copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership or by rental, lease, or lending. Section 106(4) and (5) give the copyright owner the exclusive right to publicly perform or display a literary, musical, dramatic, or choreographic work or a pantomime, motion picture, or other audiovisual work. Section 106(6) gives the copyright owner the exclusive right to perform a sound recording work publicly by means of a digital audio transmission. To prove infringement, the copyright holder must demonstrate only that it possesses a valid copyright, that the copyrighted material was registered for copyright, and that there was unauthorized copying. The principal means of showing unauthorized copying is through access and substantial similarity. Ford Motor Co. v. Summit Motor Products, 930 F.2d 277, 290–91 (3d Cir. 1990) (copying is shorthand for violating any of the five exclusive rights of copyright owners).

The First Sale Doctrine acts as a defense to a claim of infringement. At least one court has held that the defense is available “only to copies legally made and sold in the United States.” Omega S.A., v. Costco Wholesale Corp., 541 F.3d 982, 986 (9th Cir 2008), aff’d per curium, 562 U.S. 40 (2010) Interestingly, at least several courts have held that overseas purchases of software manufactured outside of the United States are not entitled to invoke the first sale defense, 17 U.S.C. § 109(a), to a claim of infringement. Microsoft Corp. v. Big Boy Distribution, LLC, 589 F. Supp.2d 1308 (S.D. Fla. 2008); Microsoft Corp. v. Intrax Group, Inc., d/b/a Surplus Computers, 2008 WL 4500703 (N.D. Cal. Oct. 6, 2008) (rejecting first sale defense for software manufactured and licensed outside of U.S.); Microsoft Corp. v. Software Wholesale Club, Inc., 129 F. Supp.2d 995, 1006 (S.D. Tex. 2000) (“first sale doctrine does not apply to admittedly counterfeit unit”).

Software developers, in order to avoid application of the First Sale Doctrine and retain control over redistribution of their programs, have typically distributed even mass-market software under license, rather than through an outright sale, in order to prevent the First Sale Doctrine from severing control over redistribution. See Microsoft Corp. v. Software Wholesale Club, Inc., 129 F. Supp.2d 995 (S.D. Tex. 2000) (first sale doctrine not applicable to licensed software); Adobe Systems, Inc. v. One Stop Micro, Inc., 84 F. Supp.2d 1086, 1089 (N.D. Cal. 2000) (“First sale doctrine is only triggered by an actual sale.”); Allen-Myland, Inc. v. Int’l. Business Mach. Corp., 746 F. Supp. 520 (E.D. Pa. 1990) (first sale doctrine does not apply to computer programs).

For computer software, Section 109(b) limits the First Sale Doctrine and the rights of copy owners in three ways. First, adaptations may not be transferred without permission of the copyright owner. This is true even under the First Sale Doctrine as there is no right to create derivative works. Second, under Section 117 the owner of a program may make an archival copy or an adaptation of the program if such adaptation is essential to the use of the original program by a computer, and that the creator of the copy may only transfer it as part of lease, sale, or other transfer of rights in the underlying program. Exact copies authorized to be made under Section 117 may be transferred without permission of the copyright owner only as part of a transfer of all rights in the underlying program. The distribution right conveyed to the buyer does not, for example, include the right to make further copies for resale.

Third, it provides that the owner of a copy of computer software cannot lend or rent that copy to third parties without permission from the copyright owner. See Microsoft v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (E.D.N.Y. 1994) (unauthorized distributor of a copy of software not entitled to protection under First Sale Doctrine because owner licensed not sold software to distributor’s supplier); Triad Systems Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995), cert. denied, 516 U.S. 1145 (1996) (software sold to customers is subject to 17 U.S.C. § 117 protection while copies that are licensed are not); and Stenograph LLC v. Sims, 2000 WL 964748, 55 U.S.P.O. 2d 1436 (E.D. Pa. 2000) (first sale doctrine does not apply to gifts).

Known as the Computer Software Rental Amendments Act of 1990, Section 109(b) also addresses computer software rentals. It provides that, unless authorized by the owner of the copyright in a software program (including any tape, disk, or other medium embodying such program), no person in possession of a particular copy of a software program (including any tape, disk, or other medium embodying such program) may, for the purposes of direct or indirect commercial advantage, dispose of or authorize the disposal of the possession of that computer software (including any tape, disk, or other medium embodying such program) by rental, lease, or lending, or any similar act. Section 109(b) specifically excludes nonprofit libraries and nonprofit educational institutions from its prohibitions on renting, leasing, or lending copies of copyrighted software. In short, Section 109 prohibits the rental of a copy of a computer program by the owner of a copy without the permission of the licensor. 17 U.S.C. § 107. See, generally, Central Point Software, Inc v. Global Software & Access, Inc., 880 F. Supp. 957 (E.D.N.Y. 1995).

Section 109(d) further limits the scope of application of the First Sale Doctrine by providing that, unless authorized by the copyright owner, the provisions of 17 U.S.C. §§ 109 (a) and (c) do not extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without also acquiring ownership of it.

For a general discussion, see Robins, Anticipating the First Sale and Essential Step Doctrines in Software Licensing, 30 Computer & Internet Law 9 (Oct. 2013) Carver, Why License Agreements Do Not Control Copy Ownership: First Sales and Essential Copies, 25 Berkeley Tech L.J. 1887 (2010).

2. Applicability to Software

A software owner needs to consider how it will protect its software. It may be able to protect methods and processes by either trade secret or patent. Patents, however, require revealing the protected process to the public, while trade secret protection requires keeping it confidential. Thus, the same process cannot be protected by both methods. By writing the software, the owner receives copyright protection on the actual expression. This protection does not, however, prevent third parties from independently developing software that performs the same function.

When granting a license to a licensee, a vendor needs to consider what protections it has in the software, and what rights (or sticks in the bundle) it wishes to convey to the licensee. The scope of the license granted will govern the licensee’s use. Only if the licensee exceeds the scope may the licensor seek damages or other remedies from a licensee under any intellectual property regimen. Thus, the license grant should be drafted broadly enough to permit use by the licensee, but narrowly enough to enable the intellectual property holder to use copyright, patent, or trade secret law to stop or prevent infringement by the licensee.

There is no uniform test for ascertaining whether a transaction is a sale or a license. In Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010), the Ninth Circuit established a three part test to determine whether the user is an owner or licensee of the software:

“[A] software user is a licensee rather than an owner of a copy 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.”

Id. at 1111

The first two prongs will usually be satisfied in any dispute, making the third prong the determinative issue. The Vernor court cited the governing agreement’s restrictions on the transfer of the software and the retention of ownership by Autodesk. The agreement also contained prohibitions “against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device.” Id. Thus, it appears, at least in the Ninth Circuit, that language to this effect will satisfy the third prong and allow a court to find the existence of a license and not a sale.

In general, the label placed on the transaction by the parties is not determinative. “[I]n determining whether a transaction is a sale, a lease or a license, courts look to the economic realities of the exchange.” SoftMan Products Co., LLC v. Adobe Systems, Inc., 171 F. Supp.2d 1075, 1084 (C.D. Cal. 2001). Courts will look to the nature of the transaction itself to reach a decision and will examine such factors as to whether the underlying agreement reserves title with the owner, transfers “limited rights,” allows the “purchaser” to permanently retain possession for a single up-front payment or contains restrictions on any future transfers of the software, prohibits resale, or simply requires the payment of an additional fee. UMG Recordings, Inc. v. Augusto, 558 F. Supp.2d 1055 (C.D. Cal 2008) (permanent possession without further benefit to copyright owner indicative of sale). Restrictions on the number of users and the number of computers within the licensed entity are indicative of a license. Finally, a court will look to extrinsic evidence to reach a decision. United States v. Wise, 550 F.2d 1180 (9th Cir. 1977); Adobe Systems Incorporated v. One Stop Micro., Inc., 84 F. Supp.2d 1086 (N.D. Cal. 2000) (software licensed not sold despite use of terms “purchase,” “owned” and “repurchase” in underlying agreement).

In UMG, the court found the software had been sold not licensed despite the copyright owners structuring the transactions as a license. In concluding the defendant had not misappropriated the owner’s rights under copyright law, the court focused on the fact that the defendants had not made a copy of the copyrighted work prior to reselling their copies. Because the defendant had not made copies, the defendant was simply exercising its rights under the First Sale Doctrine to transfer the single copy in their possession.

For a discussion of several different types of intellectual property protections available for software, see Neelakantan & Armstrong, Source Code, Object Code, and the Da Vinci Code: The Debate on Intellectual Property Protection for Software Programs, 23 Computer & Internet Law 1 (Oct. 2006).

[1]. Section 109(a) codifies the First Sale Doctrine, which provides “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 that copy or phonorecord.”

[2]. The owner of a copyright embodying the copyright work receives only the right to display that physical copy where it is located. 17 U.S.C. § 109(a).

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