Matthew ZagajaCopyright SeminarProf. Lewis Kurlantzick

THE FIRST-SALE DOCTRINE AND DIGITAL COPIES

Introduction

The Supreme Court originally recognized the first-sale doctrine

as a limitation on copyright law in the case Bobbs-Merrill Co. v. Straus.1

In Bobbs-Merill the appellant owned the copyright to a book titled The

Castaway. The publisher of The Castaway printed a notice that warned

consumers not to resell the book for less than one dollar and that if

they did so it would constitute copyright infringement. Undeterred, and

possibly even encouraged by this warning, the defendants bought

copies of the book and sold them for less than a dollar. The

unauthorized sale prompted the publisher to file suit against the

defendants for copyright infringement. The Supreme Court dismissed

the claim stating:

“the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract.”2

This principle was later extended and codified by Congress when

it enacted Section 109 of the Copyright of Act of 1976. Section 109

“restates and confirms the principle that, where the copyright owner

1 210 U.S. 339 (1908).2 Id at 350.

has transferred ownership of a particular copy or phonorecord of a

work, the person to whom the copy or phonorecord is transferred is

entitled to dispose of it by sale, rental, or any other means.”3

Specifically it states:

(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.4

However, the section has been subsequently amended to

exclude the commercial leasing of music or software unless the

software is embedded into a piece of hardware.5 The sound recording

exemption was added in 1984 at the behest of the music industry

3 H. REP. NO. 94-1476 (1976).4 Copyright Act, 17 USC § 109(a) (2006).5 Copyright Act, 17 USC § 109(b) (2006) (stating, “[n]otwithstanding the provisions of subsection (a), unless authorized by the owners of copyright in the sound recording or the owner of copyright in a computer program (including any tape, disk, or other medium embodying such program), and in the case of a sound recording in the musical works embodied therein, neither the owner of a particular phonorecord nor any person in possession of a particular copy of a computer 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 phonorecord or computer program (including any tape, disk, or other medium embodying such program) by rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending. Nothing in the preceding sentence shall apply to the rental, lease, or lending of a phonorecord for nonprofit purposes by a nonprofit library or nonprofit educational institution. The transfer of possession of a lawfully made copy of a computer program by a nonprofit educational institution to another nonprofit educational institution or to faculty, staff, and students does not constitute rental, lease, or lending for direct or indirect commercial purposes under this subsection.”).

based on its concern that renters of their products were copying them

and keeping those copies instead of destroying them after their use.6

Software producers obtained similar relief after making the case that

they too would suffer a similar fate since their products were also easy

to duplicate.7

Other than those two amendments there has been little

modification of the first-sale doctrine by Congress. At its inception

Congress did not anticipate many of the issues that arose when first-

sale met the new technologies of the 1990s and 2000s.8 In the late

nineties members of Congress began to think about what changes

should be made in order to accommodate new technologies.

Congressmen Dick Boucher and Tom Campbell created a proposal in

1997. They introduced a bill that would update the first-sale doctrine to

apply to digital copies. It also proposed extending the first-sale

doctrine to allow electronic transmission of a lawfully acquired digital

copy of a work as long as the person making the transfer eliminated

that copy of the work from the his system at substantially the same

time that the transfer was made.9 That bill failed to pass.10 Finally, in

6 RALPH S. BROWN & ROBERT C. DENICOLA, COPYRIGHT 330 (Robert C. Clark et al. eds., 10th ed. 2009).7 Id.8 See H. REP. NO. 94-1476 (1976).9 Press Release, Congressman Rick Boucher, Boucher and Campbell Introduce Comprehensive Copyright Legislation (Nov. 14, 1997), available at http://www.ninch.org/News/CurrentAnnounce/Boucher.html#release.10 See HR 3048, 105th Cong. (1997).

1998, Congress made a second attempt to update copyright law to

address the issues created by new technologies when it enacted the

Digital Millennium Copyright Act.11 Otherwise the application of first-

sale doctrine to digital copies has been left up to the interpretation of

the courts.

This first section of this paper will provide background on the

new technologies and their relationship to copyright law. Next it will

discuss the Digital Millennium Copyright Act and its impact on first-

sale. The third section will address the impact of shrink-wrap and

clickwrap licensing on first-sale. It will then discuss the two approaches

taken by the courts to digital copies: sale and license. The paper will

then analyze the proposal by the Uniform Law Commission to resolve

the license versus sale debate. The sixth section will look at policy

arguments for and against treating the sale of digital goods as a sale

instead of a license. Finally it will conclude by proposing that the

legislature enact a statute to clarify that digital goods are sold as

opposed to being licensed and affirm the right of consumers to resell

these goods by requiring companies to allow their transfer.

New Technologies Create New Challenges For First Sale

When first-sale was conceived most copyrighted works were

distributed in a physical form. Each copy of a newspaper or novel

required paper to be printed on. Movies could only be purchased on 11 U.S. COPYRIGHT OFFICE, DIGITAL MILLENNIUM COPYRIGHT ACT SECTION 104 REPORT 5 (1998).

videocassette tape and music was sold on records or audiocassettes.

Over the past two decades this paradigm has shifted. Personal

computers now allow individuals to download music, movies, and

books in minutes and seconds. The copies people can download are

perfect replicas, not degraded audiocassettes, videocassette tapes, or

photocopies. The challenge of regulating distribution is further

compounded by the fact that the cost of creating these perfect copies

is often less than a penny and requires little effort on the part of a

pirate.12

Content companies have developed a multitude of technologies

to deliver digital copies of their wares. The first modes of technology

are floppy and compact diskettes. Like videocassettes or books this

mode requires the user to obtain physical media to insert into their

computer. The computer then makes a copy or plays the content

directly from the media. For the most part, users can easily sell and

dispose of the physical media to a third-party if they no longer want

it.13 However some companies have taken the position that this is not

legal.14

12 This refers to the marginal cost of making copies using free software like Bit Torrent. Before making the copies the pirate would have to purchase a computer and Internet access.13 See Copyright Act, 17 USC § 109(a) (2006) (suggesting that the practice of reselling used software, music, and movies in a physical medium is acceptable).14 See Microsoft Corp. v. David Zamos, 2004 WL 3145786 (N.D.Ohio) (Zamos was sued for selling an educational copy of Microsoft software on eBay after his school bookstore declined to accept it as a return, Zamos countersued and after much negative publicity Microsoft

The next mode of technology allows for the delivery of content

downloaded over the Internet by the user and retained by them in the

same manner they own their records or books. Amazon developed its

Kindle eBook reader which allows users to download electronic copies

of books from Amazon’s online store and view them instantly on a

screen that displays text at a quality comparable to printed paper.15

Apple developed its iPod to allow users to listen to digital music

purchased from its iTunes store.16 Both of these technologies embed

digital rights management to ensure users do not make copies and

provide no mechanism for the sale or transfer of the copies.17

Generally users cannot transfer or resell the digital copies stored on

their devices.18 However, a company called ReDigi has recently made

headlines for offering a marketplace for individuals to resell their

digital music files.19 ReDigi lets owners of files sell and transfer them to

settled). The resale of used video games and music is more common. See, e.g., Pre-Owned Games, GAMESTOP, http://www.gamestop.com/preowned; HALF.COM, http://www.half.com.15 Kindle, AMAZON.COM, https://kindle.amazon.com/.16 iPod, APPLE, http://www.apple.com/ipod/.17 See Jeremy Toeman, Where’s the Kindle Used eBookstore?, LIVING DIGITALLY (May 18, 2009), http://www.livedigitally.com/2009/05/18/wheres-the-kindle-used-ebook-store/.18 See, e.g., iTunes Terms and Conditions, APPLE, http://www.apple.com/legal/itunes/us/terms.html; Kindle License Agreement and Terms of Use, AMAZON, http://www.amazon.com/gp/help/customer/display.html/ref=hp_left_sib?ie=UTF8&nodeId=200506200.19 Ben Sisario, Site to Resell Music File Has Critics, N.Y. TIMES (Nov. 14, 2011), http://nytimes.com/2011/11/15/business/media/reselling-of-music-files-is-contested.html.

other ReDigi users and to make money when they sell those copies.

The ReDigi software makes sure that the original owner does not keep

a copy on his or her own computer. The owners of ReDigi argue that

their technology is legal under current doctrine, but the record

companies dispute that assertion.20

The newest mode of delivering digital goods involves storing

them on a remote server and accessing the stored data in real time

from a client computer. This manner of storing content is commonly

referred to as the cloud.21 Instead of keeping music, movies, or other

content on your local hard drive it is streamed in real time over the

Internet.22 Examples of this cloud computing technology include the

music service Spotify23 and Apple’s iCloud.24 However this technology is

not limited to music; it can also be used to serve software. For example

Google Docs allows people to edit spreadsheets or documents just as

they can with Microsoft’s Office software.25 Since the software or music

being served does not reside on a user’s machine the user does not

20 Id.21 Jonathan Strickland, How Cloud Computing Works, HOWSTUFFWORKS.COM (April 8, 2011), http://computer.howstuffworks.com/cloud-computing/cloud-computing.htm.22 Id.23 What is Spotify?, SPOTIFY, http://www.spotify.com/us/about/what/.24 Apple – iCloud – Your Content. On all your devices, APPLE, https://www.apple.com/icloud/.25 See Google Docs Tour, GOOGLE (2011), http://www.google.com/google-d-s/tour1.html.

have a copy that he can use to engage in a first-sale.26 The majority of

these services are offered as part of a monthly or annual subscription

package.27 As long as you subscribe to the service you have access to

the content or software.28 Once your subscription runs out then you

lose access to the entire music library or to the software programs you

were using.29

Despite the lack of ability to engage in a first-sale these

platforms are proving to be popular due to the advantages that the

companies provide to their subscribers.30 For example, users of Spotify

need not pick and choose which songs they purchase; they have

access to the entire licensed library of music.31 Users of Apple’s iTunes

in the Cloud service can re-download any song they have previously

purchased from the iTunes music store.32 Furthermore any applications

that were purchased from Apple’s App Store are automatically

26 See Jonathan Strickland, How Cloud Computing Works, HOWSTUFFWORKS.COM (April 8, 2011), http://computer.howstuffworks.com/cloud-computing/cloud-computing.htm.27 Eric Knorr, What Cloud Computing Really Means, INFOWORLD, http://www.infoworld.com/d/cloud-computing/what-cloud-computing-really-means-031.28 Id.29 Id.30 See G.F., There’s room yet in the cloud, THE ECONOMIST (Aug. 24, 2010), http://www.economist.com/blogs/babbage/2010/08/dropbox. 31 See What is Spotify?, SPOTIFY, http://www.spotify.com/us/about/what/.32 iTunes in the Cloud, APPLE, http://itunes.apple.com/icloud.

upgraded to the latest version when they are released.33 No longer are

users required to go to the retail store and buy the next upgrade.

Nimmer, in his treatise, concurred with the view that software in

the cloud is not sold to a consumer and therefore not subject to the

first-sale defense.34 He also noted that companies might be able to

place components of their software in the cloud to prevent consumers

from reselling it.35 This practice of combining elements of cloud and

non-cloud computing platforms to prevent first-sale use of software

has already emerged in the field of online video games. Electronic Arts,

a video game producer, has created a system it calls Project Ten

Dollar. The project is a coupon program that rewards people who

purchase new games with downloadable content and upgrades.36

Individuals that buy used copies are then given the option to pay ten

dollars to get the same goods.37 Project Ten Dollar represents a

significant potential source of revenue since a third of all games sold in

the United States are sold second-hand.38 Therefore while Electronic

Arts would not completely prevent second-hand sales of its software, it

33 Apple – App Store – Buy, download, and install apps made for Mac., APPLE, http://www.apple.com/mac/app-store/.34 2-8 NIMMER ON COPYRIGHT § 8.1235 Id.36 Cliff Edwards, Electronic Arts: Lost in an Alien Landscape, BUSINESSWEEK (Feb. 10, 2011), http://www.businessweek.com/magazine/content/10_08/b4167064465834.htm.37 Id.38 Id.

is able to capture some of the revenue that was previously lost from

those sales.

Digital Rights Management

A new technology that is able to control and prevent the copying

of computer files is also creating a new set of challenges for the first-

sale doctrine. Digital rights management is a blanket term referring to

technology that allows the owner of a copyright to determine how,

when and how often a buyer can use digital content that has been

copyrighted (or not).39 The application of this technology raises novel

issues about the possibility of the secure technology outliving the

copyright term of the data that it protects.40 These concerns have been

blunted somewhat by the fact that many of these technologies have

been defeated or companies have chosen to scale back their usage of

them.41 However, in spite of the fact that the technologies have been

defeated, the Digital Millennium Copyright Act prohibits the

circumventing of these technological protection measures unless the

39 digital rights management, BUSINESSDICTIONARY.COM (last visited December 4, 2011), http://www.businessdictionary.com/definition/digital-rights-management.html.40 See LAWRENCE LESSIG, CODE V 2.0 6 (Basic Books 2006).41 See Apple Unveils Higher Quality DRM-Free Music on the iTunes Store, APPLE (April 2, 2007), http://www.apple.com/pr/library/2007/04/02Apple-Unveils-Higher-Quality-DRM-Free-Music-on-the-iTunes-Store.html; see also Ken Fisher, Apple’s Fairplay DRM Cracked, ARSTECHNICA (April 2004), http://arstechnica.com/old/content/2004/04/3608.ars.

protections fall under one of the exemptions granted by the Librarian

of Congress.42

Digital rights management comes in many forms. Apple utilizes it

on its videos in a form called Fairplay.43 Amazon has its on its kindle

books in a form called AZW.44 It is also integrated into displays in a

form known as HDCP. HDCP creates a secure link between a video

output and input source so that you cannot capture the digital video

signal from your computer or DVD player and then record it.45 These

technologies are mostly seamless to users, but some individuals may

notice them, such as the case of a person who has downloaded iTunes

music purchases to multiple computers. Also the protection technology

is especially noticeable when you digitally rent content, as the DRM will

remove the files from your computer after a certain time period has

expired.

The Digital Millennium Copyright Act and First-Sale

The statute that prevents individuals from breaking the digital

rights management protection on their content is the Digital

Millennium Copyright Act. This revision of the Copyright Act was

42 Universal City Studios, Inc. v. Corley, 273 F.3d 429 (2d Cir. 2001).43 iTunes Store: About Authorization and Deathorization, APPLE (Dec. 01, 2011), http://support.apple.com/kb/HT1420.44Jeremy Kirk, Hackers Claim Victory in Cracking Amazon Kindle DRM, PC WORLD (Dec 23, 2009, 1:20 PM), http://www.pcworld.com/article/185408/hackers_claim_victory_in_cracking_amazon_kindle_drm.html.45 About DCP, DIGITAL CONTENT PROTECTION (2011), http://www.digital-cp.com/about_dcp.

Congress’s attempt to update copyright law for the twenty-first

century. The Digital Millennium Copyright Act did not make any

changes to section 109 (the portion of the Copyright Act that covers

first-sale), but critics pointed out that the act could limit first-sale rights

collaterally. As a result, Congress directed the Copyright Office to

furnish a report on the impact of the Act on Section 109.46 In its report

the Copyright Office included comments by people that believed that

provisions of the Digital Millennium Copyright Act, specifically 17 U.S.C.

1201 which makes it a crime to circumvent a technological measure

that controls access to a copyrighted work, undercuts the purpose of

section 109.47 The commenters believe that this restriction frustrates

the goals of the first-sale doctrine by allowing control of the copy

beyond its first sale.48 Commenters were also concerned that the

provision would hinder traditional library operations like sharing

resources with other libraries or of engaging in preservation of digital

copies.49 However, the Copyright Office disagreed with these concerns

by taking the position that section 109 is a limitation on the copyright

owners distribution right as opposed to a positive right that creates

secondary markets.50

46 The Digital Millennium Copyright Act, HR 2281, 105th Cong. § 104 (1998).47 U.S. COPYRIGHT OFFICE, DIGITAL MILLENNIUM COPYRIGHT ACT SECTION 104 REPORT 9 (1998).48 Id at 40.49 DMCA: The Digital Millennium Copyright Act, AMERICAN LIBRARY ASSOCIATION, http://www.ala.org/advocacy/copyright/dmca. 50 Id at 16.

Congress also provided the Librarian of Congress with regulatory

authority to exempt classes of works from 17 U.S.C. 1201 if the users

of the copyrighted works were adversely prevented from making non-

infringing uses of their content. So far the Librarian has engaged in this

process four times. As a result he has exempted circumvention of

CSS51 for purpose of criticism or comment, computer programs that

enable wireless telephone handsets to execute software applications52,

computer programs that enable wireless handsets to connect to a

communications network, video games where the purpose is to test for

security vulnerabilities, and eBooks when all the available versions

prevent the text from being read aloud.53 In enacting these exemptions

the Librarian of Congress did not allow users to circumvent the

technological protections in order to resell their digital copies of

software, music, or other content.54

The Copyright Office also questioned whether the anti-

circumvention rules would have any impact on first-sale at all.55 Some

commenters believe that locking content behind technological

51 CSS is short for Content Scrambling System and is the technology utilized to encrypt the movies on DVDs. 52 This process is commonly referred to as jailbreaking.53 U.S. Copyright Office, Rulemaking on Exemptions from Prohibition on Circumvention of Technological Measures that Control Access to Copyrighted Works54 Note that in the previous sentence the rights were restricted to specific purposes as opposed to being granted as a blanket exemption.55 U.S. COPYRIGHT OFFICE, DIGITAL MILLENNIUM COPYRIGHT ACT SECTION 104 REPORT 40 (1998).

protection is a doomed business strategy.56 They also argue that the

licensing of DVD players did not disadvantage consumers.57 At the time

the discomfort of the various industries with digital technologies and

their fear that a lack of technological protection would destroy their

profits suggested that there would be a widespread adoption of these

technological measures.58 However the pendulum eventually swung in

the opposite direction, as digital files have been made available in

major mediums like iTunes and the Amazon music store without digital

rights management.59

The fact that some companies no longer use DRM has not

assuaged the fears of groups like the Electronic Frontier Foundation.60

Harvard Professor Lawrence Lessig criticized section 1201 of the Digital

Millennium Copyright Act as a subsidy for the creators of the digital

rights management technology.61 Lessig noted that individuals such as

Dmitry Skylarov have been arrested for providing technology that

circumvents the technological protections on Adobe’s ebooks.62 He

56 Id.57 Id. Some of the commenters were concerned that since manufacturers were required to be licensed in order to produce DVD players it would frustrate certain aspects of the first-sale doctrine. See id at 35.58 See WALTER ISSACSON, STEVE JOBS 398 (2010).59 See Changes Coming to the iTunes Store, APPLE (Jan. 6, 2009), http://www.apple.com/pr/library/2009/01/06Changes-Coming-to-the-iTunes-Store.html.60 See The “First Sale” Doctrine, ELECTRONIC FRONTIER FOUNDATION, https://www.eff.org/files/firstsale2.pdf.61 LAWRENCE LESSIG, CODE V2 116.62 Id at 117.

further noted that the DVD-Copy Control Association sued websites

that allowed the download of the DVD decryption program DeCSS.63

These consequences seemed harsh to Prof. Lessig since he believes

that DeCSS enabled uses that would otherwise be considered fair or in-

line with the first-sale doctrine.

Digital Files: Licensed or Sold?

The advances in technology and changes in mode of distribution

from physical to digital copies present a problem for the courts:

determining whether digital copies are sold or licensed. The majority of

digital copies of software or other content sold today is accompanied

by a license that a user must assent to before they can use their

purchased product.64 Despite the assertion by companies that the

digital copies are licensed and not sold, the federal courts have not

always agreed.65 This ambiguity has lead to litigation against alleged

violators of license agreements by software companies. Since the

Supreme Court has not spoken on this issue, this section looks to the

decisions of lower courts to ascertain the current state of the law.66 63 Id. For more information on DeCSS see Dr. David S. Touretzky, DeCSS for Linux and DVD, CARNEGIE MELLON UNIVERSITY, http://www.cs.cmu.edu/~dst/DeCSS/.64 Martin Samson, Click-wrap agreement held enforceable, INTERNET LIBRARY OF LAW AND COURT DECISIONS, http://www.internetlibrary.com/publications/cwahe_art.cfm65 Compare Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991); Softman Products, Inc. v. Adobe Systems, Inc., 171 F.Supp.2d 1075 (C.D. Cal. 2001) to Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010) cert. denied, 132 S. Ct. 105 (U.S. 2011).66 The Supreme Court has yet to try a case on this issue. It did receive a petition for certiorari in Vernor but declined to hear it. Vernor v.

Some early courts concluded that software is licensed. A 1994

decision by the Eastern District of New York held that Microsoft

licensed and did not sell its products.67 This case, Microsoft v.

Harmony, involved not only the distribution of software that Microsoft

had sold to its licensees but also software that Microsoft had analyzed

and determined to be counterfeit.68 This proved to be important

because the court noted that under no circumstances could the sale of

a counterfeit good be protected by the first-sale doctrine.69 Yet in spite

of this distinction, the licensing paradigm was later adopted by the

United States District Court for the Northern District of California. In

Adobe Sys. Inc. v. One Stop Micro, Inc.70 the court held that the license

agreement for Adobe’s software applied to the software distributor

even though the distributor was not a signatory to the license

agreement and the distributor infringed the copyright by violating the

license agreement.71 In this case One Stop Micro purchased

educational versions of Adobe’s software, which it then modified and

sold as full commercial versions to non-educational users.72 One Stop

Micro’s actions, according to Adobe, were a violation of the Off Campus

Autodesk, Inc, 621 F.3d 1102 (9th Cir. 2010) cert. denied, 132 S. Ct. 105 (U.S. 2011).67 Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208, 213 (E.D.N.Y. 1994).68 Id at 212.69 Id.70 Adobe Sys. Inc. v. One Stop Micro, Inc., 84 F. Supp. 2d 1086 (N.D. Cal. 2000)71 Id at 1087.72 Id at 1088.

Reseller Agreement between Adobe and One Stop Micro.73 The court

concluded that because of the number of restrictions in the license

that undeniably interfere with the reseller’s ability to further distribute

the software, it was proper to hold the software was licensed.74 The

court further looked to typical industry practices to determine whether

or not software should be considered licensed or sold. It noted that it is

the understanding of most resellers that the software is licensed and

that in the case of multi-user licenses the only physical difference

between a single and multi-user version of software is the underlying

license.75

Yet other courts have ruled that software is a sold instead of

licensed. The most prominent case that supports this proposition is

Step-Saver Data Systems v. Wyse Technology.76 In that case the

district court stated that the language printed on each package of

software sold by TSL to Step-Saver was the complete and exclusive

agreement under § 2-202 of the Uniform Commercial Code and held

that the box-top license disclaimed all express and implied warranties

otherwise made by TSL.77 On appeal to the Third Circuit Step-Saver

argued that the contract for the purchase of programs was made when

TSL agreed to ship the copy at the agreed price and that the box-top

73 Id.74 Id at 1091.75 Id.76 939 F.2d 91 (3d Cir. 1991)77 Id at 94.

license was a material alteration to the party’s contract and it did not

become part of the contract under UCC § 2-207.78 TSL responded by

stating that the contract did not come into existence until Step-Saver

received the program, saw the terms of the license, and opened the

program packaging.79 The Third Circuit turned to UCC § 2-207 as the

governing law. In applying the statute the court required the seller to

demonstrate unwillingness to proceed with the transaction unless

additional or different terms are included in the contract. It noted that,

“[b]ecause a purchaser has made a decision to buy a particular

product and has actually obtained the product, the purchaser may use

it despite the refund offer, regardless of the additional terms specified

after the contract formed.”80 In regards to the applicability of first-sale

doctrine issues in this case, the court noted, “[w]hile these

transactions took place in 1986–87, before the Computer Software

Rental Amendments were enacted, there was no need to characterize

the transactions between Step-Saver and TSL as a license to avoid the

first-sale doctrine because both Step-Saver and TSL agree that Step-

Saver had the right to resell the copies of the Multilink Advanced

program.”81

78 Id at 96.79 Id.80 Id at 103.81 Id at 96.

Proponents of software as a sale also point to SoftMan Products

Co., LLC v. Adobe Sys., Inc.82 as supporting their position. In this 2001

case in the Central District of California the court held that a

distributor’s purchase of copyrighted products constituted a sale and

not a license. The court reasoned that the provisions of the license

conflicted with the first-sale doctrine and noted that in Step-Saver Data

Systems Inc. v. Wyse Technology the Third Circuit stated that

characterizing a software transaction as a license is “largely

anachronistic”.83 The court proceeded to cite a laundry list of

precedent supporting the position that software is sold and not

licensed.84 It then also looked to the realities of the situation. It noted

that Adobe transfers large amounts of merchandise to its distributors

and that they pay full value and accept the risk that the software may

be damaged or lost.85 They also accept the risk they will not be able to

sell the product. The court quoted an especially pertinent analysis by

Professor Raymond Nimmer:

Ownership of a copy should be determined based on the actual character, rather than the label, of the transaction by which the user obtained possession. Merely labeling a transaction as a lease or license does not control. If a transaction involves a single payment giving the buyer an unlimited period in which it has a right to possession, the transaction is a sale. In this situation, the buyer owns the copy regardless of the label the parties use for the contract. Course of dealing and trade usage may be

82 171 F. Supp. 2d 1075 (C.D. Cal. 2001).83 Id at 1083.84 Id.85 Id.

relevant, since they establish the expectations and intent of the parties. The pertinent issue is whether, as in a lease, the user may be required to return the copy to the vendor after the expiration of a particular period. If not, the transaction conveyed not only possession, but also transferred ownership of the copy.86

It then cites the following factors as being particularly relevant to

whether the software is licensed or sold:

[T]emporally unlimited possession, absence of time limits on copy possession, pricing and payment schemes that are unitary not serial, licenses under which subsequent transfer is neither prohibited nor conditioned on obtaining the licensor's prior approval (only subject to a prohibition against rental and a requirement that any transfer be of the entity), and licenses under which the use restrictions principal purpose is to protect intangible copyrightable subject matter, and not to preserve property interests in individual program copies.87

The court distinguished Adobe Sys. Inc. v. One Stop Micro, Inc.88 based

on the fact that in One Stop the issue involved a distributor peeling off

and destroying the educational version stickers on the software and

then reselling it as commercial software, and thus declined to follow

the Northern District of California. It further noted that the court in One

Stop placed weight on the testimony of Adobe’s experts and suggested

that doing so may have been erroneous.89 It also distinguished

Microsoft v. Harmony on the grounds that defendants were selling

86 Raymond Nimmer, The Law of Computer Technology § 1.18[1] p. 1–103 (1992).87 SoftMan Products Co., LLC v. Adobe Sys., Inc., 171 F. Supp. 2d 1075, 1086 (C.D. Cal. 2001)88 Adobe Sys. Inc. v. One Stop Micro, Inc., 84 F.Supp.2d 1086 (N.D.Cal.2000).89 See SoftMan Products Co., LLC v. Adobe Sys., Inc., 171 F. Supp. 2d 1075, 1086 (C.D. Cal. 2001).

counterfeit Microsoft products instead of actual Microsoft products that

they had lawfully obtained.90

David Nimmer, in his treatise on copyright, advocates that the

distribution of digital goods be treated as a sale instead of a license.

He notes that in Adobe v. One Stop a contractual term that was

unilaterally included in their contracts became binding on parties not in

privity to the contract.91 He also is concerned that the Adobe gloss

undermines first-sale, which he views as an important aspect of the

Copyright Act.92 Nimmer takes the position that the federal Copyright

Act preempts any state law that characterizes the sale of software as a

license instead of an outright sale.93 He quotes SoftMan, saying

“[s]ound policy rationales support the analysis of those courts that

have found shrink-wrap licenses to be unenforceable. A system of

‘licensing’ which grants software publishers this degree of unchecked

power to control the market deserves to be the object of careful

scrutiny.”94

Nimmer also astutely argues that if the first-sale doctrine did not

apply to software then there would have been no need for the software

industry to lobby for an amendment to the first-sale doctrine.95 If the

90 Id.91 2-8 NIMMER ON COPYRIGHT § 8.1292 Id. 93 Id.94 Id quoting SoftMan Products Co., LLC v. Adobe Sys., Inc., 171 F. Supp. 2d 1075, 1086 (C.D. Cal. 2001).95 Id.

licensing schemes already in place for software included a prohibition

on leases and such terms were enforceable then there would have

been no need for the software industry to secure an exemption to

section 109 of the Copyright Act. Nimmer argues that since the

software had been sold, the industry needed to obtain this amendment

to the Copyright Act to prevent the software from being leased.96

Yet Nimmer’s position was dealt a blow by the Ninth Circuit in

Vernor v. Autodesk.97 Vernor is the case of a man who bought several

used copies of AutoCAD 14 from one of Autodesk’s customers and sold

them on eBay.98 After Autodesk sent letters asking Mr. Vernor to cease

and desist from his activity he brought an action for a declaratory

judgment to establish that reselling the items on eBay did not infringe

Autodesk’s copyright.99 The District Court granted summary judgment

in favor of Vernor and the Ninth Circuit reversed.100

In reversing the district court’s decision the Ninth Circuit

determined that Autodesk’s direct customers are licensees of its

software as opposed to being owners.101 In order to make that

determination it looked to how AutoCAD policed the software license:

Autodesk takes measures to enforce these license requirements. It assigns a serial number to each copy of

96 Id.97 621 F.3d 1102 (9th Cir. 2010) cert. denied, 132 S. Ct. 105 (U.S. 2011)98 Id.99 Id.100 Id.101 Id at 1103.

AutoCAD and tracks registered licensees. It requires customers to input “activation codes” within one month after installation to continue using the software. The customer obtains the code by providing the product's serial number to Autodesk. Autodesk issues the activation code after confirming that the serial number is authentic, the copy is not registered to a different customer, and the product has not been upgraded. Once a customer has an activation code, he or she may use it to activate the software on additional computers without notifying Autodesk.102

The court looked to two previous cases to ascertain what test to

use to determine whether the software was licensed or sold. The first

case was United States v. Wise103, which involved the issue of whether

motion picture companies had executed first sales when they

transferred their copies to distributors. The court looked to the

following factors to determine whether there was a sale or license:

“whether the agreement (a) was labeled a license, (b) provided that

the copyright owner retained title to the prints, (c) required the return

or destruction of the prints, (d) forbade duplication of prints, or (e)

required the transferee to maintain possession of the prints for the

agreement's duration.”104

The second was a series of cases that are referred to as the MAI

trio.105 The MAI trio raised the issue of whether the holders of software

were owners for purposes of the essential step defense. The essential

102 Vernor v. Autodesk, Inc., 621 F.3d 1102, 1104-05 (9th Cir. 2010) cert. denied, 132 S. Ct. 105 (U.S. 2011)103 550 F.2d 1180 (9th Cir. 1977).104 Id at 1190-92.105 Vernor v. Autodesk, Inc., 621 F.3d 1102, 1109 (9th Cir. 2010) cert. denied, 132 S. Ct. 105 (U.S. 2011).

step defense allows the owner of a copy of software to make a copy if

it is an essential step in the utilization of the computer program in

conjunction with the machine. Such a copy would not be considered

infringement for copyright purposes.106 The owner of a copy may raise

this defense but a licensee may not.107 In the MAI trio the customers

were held to be licensees who were not entitled to claim the essential

step defense.108 The court reconciled Wise and the MAI trio to

pronounce the following considerations to determine whether a user is

a licensee as opposed to the owner of a copy: whether the copyright

owner specifies that a user is granted a license, whether the copyright

owner significantly restricts the user's ability to transfer the software,

and whether the copyright owner imposes notable use restrictions.109

The court further noted that Congress responded to MAI by amending

section 117 to permit a computer owner to copy software for

maintenance or repair purposes but did not disturb its holding.110

The court bolstered its conclusion that the copies were licensed

and not sold by looking to the legislative history of section 109. It

noted that the House report asserted that the doctrine did not apply to

a person who merely possesses a copy without having acquired

106 Id.107 Id.108 Id at 1110.109 Id at 1111.110 Id.

ownership of it.111 It also delved into the history of the essential step

defense to note that Congress substituted the reference to the person

entitled to assert the defense as being the rightful owner instead of the

possessor.112

Shrink-wrap and Clickwrap Licensing

Part of the efforts to control first-sale by copyright holders

include the use of shrink-wrap and clickwrap licensing. This licensing

involves the placing of a license agreement outside a copy of a good

that claims assent is indicated by removing the shrink-wrap

surrounding the copy, or in the case of clickwrap an agreement

appears on the computer screen and must be accepted before the

digital good can be accessed.

The most recent case addressing the issue of shrink-wrap

licenses is UMG v. Augusto.113 This case involved the distribution of

promotional CDs from UMG that contained a shrink-wrap license. The

shrink-wrap license stated:

This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.114

111 H.R.Rep. No. 94-1476, at 79 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5693.112 Vernor v. Autodesk, Inc., 621 F.3d 1102, 1112 (9th Cir. 2010) cert. denied, 132 S. Ct. 105 (U.S. 2011).113 UMG Recordings, Inc. v. Augusto, 628 F.3d 1175 (9th Cir. 2011).114 Id at 1178.

Seemingly undeterred by the warning on the discs, individuals did

transfer their promotional discs to Augusto who then began selling

them at auction on eBay.com.115 Annoyed at the sale of the promotion

CDs on eBay, UMG sent Augusto a cease and desist letter and

attempted to shut Augusto down via eBay’s dispute resolution

process.116 Failing to get the CD sale listing removed UMG resorted to

filing suit against Augusto. In court, Augusto raised first-sale as an

affirmative defense under 17 USC 109(a).117 The issue turned on

whether the original recipients of the discs owned them or were

licensed them. In order to determine whether the discs were sold or

licensed, the court adopted the three-part test from Wise. In its

analysis the court noted that UMG did not make any attempts to

recover the promotional CDs.118 That fact along with the absence of a

recurring benefit to UMG other than to restrain trade lead the court to

determine that the discs were owned instead of licensed.119 It also

distinguished the ownership of the discs from cases involving the sale

of software that is ordered and paid for by invoking the unordered

merchandise statute.120

The right of first sale also came under assault via shrink-wrap

when a group of digital versatile disk (DVD) distributors decided to

115 Id.116 Id.117 Id at 1179.118 Id at 1182.119 Id.120 Id.

embed a message on their disks asserting that they were for sale

only.121 After they made an exclusive licensing agreement with

Blockbuster they created a plan to put a phone number on their disks

that would be sold at retailers that would encourage users to report if

they rented the disk from an unauthorized rental store.122 The court

dismissed the case for lack of ripeness but re-asserted that rental

companies do have the right to rent disks purchased from retail stores

whether or not distributors approve of it.123

It is important to note that in the case of clickwrap licenses the

courts have characterized the transaction differently than the shrink-

wrap licenses. In the case of ProCD v. Zeidenberg, the defendant

brought a consumer database package and then resold the contents of

the database to commercial customers at a cost that was less than

that of the actual commercial license.124 “This license, which [was]

encoded on the CD-ROM disks as well as printed in the manual, and

which appears on a user's screen every time the software runs,

limit[ed] use of the application program and listings to non-commercial

purposes.”125 The district court ruled the license was ineffectual since it

did not appear on the outside of the package.126 Then the Seventh

121 NEGB, LLC v. Weinstein Co. Holdings, 490 F. Supp. 2d 89 (D. Mass. 2007).122 Id at 93.123 Id.124 ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1450 (7th Cir. 1996).125 Id.126 Id at 1449.

Circuit reversed because it is normal for more specific terms of a

license to be inside a package that can be read from the comfort of

one’s home.127 It distinguished this case from Step-Saver on the

grounds that the case involved a single form contract and was a

consumer contract instead of a commercial contract.128

It is clear from both Bobbs-Merrill and UMG that courts are more

reluctant to apply shrink-wrap licenses that are attached to music or

books than the shrink-wrap or clickwrap licenses that are attached to

software. Furthermore commercial entities appear to have more

flexibility in negotiating their terms and exercising their rights than

consumers.

Shrink-wrap and clickwrap licenses are a poor manner to restrict

or regulate post-sale behavior like reselling copies. Many attorneys and

businesses view these licenses as a minefield to be navigated every

time they engage in a software purchase.129 There is concern by

purchasers that license agreements may grant third-parties access to

secure facilities without the requisite meeting of the minds or that

improperly engineered software may cause damage to systems and

127 Id.128 Id at 1452.129 See, e.g., Michael Overly, Legal and Business Implications of Shrink-wrap Licenses: Look Before You Click, ISSA, http://www.issa.org/Library/Journals/2011/August/Overly-Shrink-Wrap%20Agreements.pdf. See also Steven Robinson, Security Concerns in Licensing Agrements, Part One: Clickwrap and Shrinkwrap Agreements, SYMANTEC, http://www.symantec.com/connect/articles/security-concerns-licensing-agreements-part-one-clickwrap-and-shrinkwrap-agreements.

leave the purchaser without a remedy because all the warranties were

disclaimed.130 Yet proponents of these licenses argue that they create

economic efficiency since it does not require individual bargaining

between the seller and buyer.131 Such concerns may be exaggerated as

evidenced by the fact that the majority of consumer goods are sold

without extensive licensing terms. The uniformity of expectations

created by developments like the Uniform Commercial Code has

mitigated the confusion that would be created if we required individual

bargaining for each transaction.132 Allowing shrink-wrap or clickwrap

licenses to control when digital goods are sold undercuts the

uniformity of consumer expectations and places too much power in the

hands of sellers.133

The Failure of the Uniform Computer Information Transactions Act (UCITA) Demonstrates Why We Need a Federal Statute

Uniformity was the goal in the early 1990s the National

Conference of Commissioners on Uniform State Laws (NCCUSL) and the

130 Id.131 Francis M. Buono and Jonathan A. Friedman, Maximizing the Enforceability of Click-Wrap Agreements, 4 J. TECH. L. & POL’Y, no. 3, 1999 at 1.132 See Jesse White, Uniform Commercial Code, CYBERDRIVEILLINOIS, http://www.cyberdriveillinois.com/departments/business_services/uniform_commercial_code/home.html.133 This is especially evident to consumers attempting to get a refund for software bundled with their computers that they did not wish to purchase. The difficulty of obtaining refunds for unused copies of Microsoft Windows that have been included with computers sold by popular manufacturers like Dell even spawned a Windows refund day. Marc Merlin, Windows Refund Day, MARC.MERLINS.ORG, http://marc.merlins.org/linux/refundday/.

American Law Institute (ALI) began an effort to address transactions

involving digital goods by modifying Article 2 of the Uniform

Commercial Code.134 Since the modification of Article 2 to cover the

licensing scheme typical in the software world would have required

significant changes they instead proposed Article 2B.135 Yet after years

of work the ALI and NCCUSL could not reach a consensus on the final

form of Article 2B. ALI had reservations regarding key substantive

provisions of the article along with concerns about its overall clarity

and coherence.136 As a result the NCCUSL decided to move forward and

redraft the updated article as a uniform model law.137 In 1999 NCCUSL

promulgated the Uniform Computer Information Transactions Act

(UCITA).138 The Law Commission described UCITA as “an effective set

of contract rules in conjunction with intellectual property law to make it

possible to control unauthorized copying.”139 The Commission took the

position that it was superior for software to be sold in a licensing

contract paradigm instead of a sale contract paradigm.140 In other

words, UCITA would be applied to your standard purchase of software

in a box at a retail store or a downloadable digital good from a website

134 WESLEY D. BLAKESLEE, UCITA – HISTORY AND SCOPE 9 (2000), available at http://www.nacua.org/documents/blakesle.pdf.135 Id.136 Id.137 Id.138 Computer Information Transactions Act Summary, UNIFORM LAW COMMISSION (2011), http://uniformlaws.org/ActSummary.aspx?title=Computer%20Information%20Transactions%20Act.139 Id.140 Id.

and would treat the transaction as a licensing transaction as opposed

to a sale. The Commission took this approach because they feared that

without the ability to control copying that the owners of the intellectual

property would lose the ability to be paid for their work.141 The

Commission noted that licensing is the current standard and that the

underlying policy is to allow for freedom of contract.142 To protect

consumers it included in the uniform law an overriding public policy

defense along with provisions that required vendors to accept returns

of software and to pay for any reasonable expenses incurred as a

result of the return.143

In spite of these protections the technology community was

extremely critical of UCITA. Richard Stallman, the de facto leader of the

open-source software movement, criticized the fact that it made

developers liable for flaws in their software programs but that such

liability might be waived in the clickwrap licenses provided by larger

corporations.144 IEEE, the professional organization that represents

electrical engineers, issued a policy briefing that opposed it based on

the fact that it might allow software publishers to enforce provisions

141 Id.142 Id.143 Id.144 Richard Stallman, Why We Must Fight UCITA, ELECTRONIC FRONTIER FOUNDATION (Jan. 31, 2000), http://w2.eff.org/IP/UCITA_UCC2B/20000131_fight_ucita_stallman_paper.html.

that are burdensome or unreasonable.145 IEEE was also concerned that

besides the lack of traditional protections for rights like returning a

defective product or publishing critical reviews UCITA would allow

vendors to engage in deceptive business practices.146

The attorneys general of thirteen states also submitted a letter in

opposition to UCITA.147 In their letter they noted there were a multitude

of contract formation issues. The first is that purchasers do not expect

to be confronted with surprise terms after they have made a

purchase.148 To prevent consumers from being surprised, the attorneys

general suggested that prior to the formation of any enforceable

contract with a purchaser that notice should be given that additional

terms will be provided in the future.149 The attorneys general also felt

that any terms material to the purchase such as a limit on the number

of copies that should be made should be disclosed to the purchaser

before the software is sold.150

The attorneys general also noted that the protections provided

by UCITA to consumers are only present in the context of mass-market

145 Opposing Adoption of the Uniform Computer Information Transactions Act (UCITA) by the States, IEEE USA (Aug. 28, 2000), http://www.ieeeusa.org/policy/issues/UCITA/ucitakit.pdf.146 Id.147 Letter from Attorneys general to NCCUSL Opposing UCITA (July 23, 1999), available at http://www.jamesshuggins.com/h/tek1/ucita_ags_19990723_letter.htm148 Id.149 Id.150 Id.

transactions.151 Excluded would be access contracts that are used for

information services like Lexis-Nexis or WestLaw.152 These access

contracts are also utilized in the previously mentioned cloud computing

platforms. The attorneys general argue that these services are offered

in mass-market transactions on the same terms to all buyers without

the ability on the part of buyers to negotiate them and therefore they

should be subject to the same restrictions.

They also expressed concern that licensing could lead to

scenarios that were unfairly confusing or frustrating to consumers. The

source of one such frustration might be a requirement embedded in

the license that the consumer checks a standard online location for

updates to the terms of the contract.153 Another potential source of

frustration is something called a negative option contract. This kind of

licensing term could create a scenario whereby a buyer agrees to

receive updates in the mail and must pay for them unless they return

the upgrades after they are shipped.154

The American Library Association also expressed a variety of

concerns with the impact of UCITA on libraries. It specifically noted that

by adopting the licensing paradigm for software, “[b]ecause

information products are licensed and leased from vendors, rather than

purchased and owned by libraries, copyright law's ‘first sale doctrine’

151 Id.152 Id.153 Id.154 Id.

does not apply. … License provisions could eliminate the right of

libraries to lend products, donate library materials, or resell unwanted

materials in the annual library book sale.”155 In response to this

concern the commission approved an amendment that permits the

donation of software to public libraries, public elementary and

secondary schools, but only if the donation was made with the

computer.156 In spite of this small concession the American Library

Association did not believe it went far enough in protecting the interest

of libraries and consumers.

In 2000 Virginia became the first state to pass UCITA with much

fanfare.157 Yet the law was rather quickly amended to alleviate the

concerns of its critics. These amendments included a provision that

allowed businesses to transfer software in the event of an acquisition

of an affiliate or subsidiary.158 A special series of protections for

libraries was granted that incorporated into every license (unless the

parties agree otherwise) the following rights: “to lend the copy to users

in the ordinary practices of non-profit libraries or archives, make a

copy for archival or presentation purposes, engage in inter-library

lending, and make classroom and instructional use of a tangible

155 UCITA 101 & 102, AMERICAN LIBRARY ASSOCIATION (May 22, 2006), http://www.ala.org/ala/issuesadvocacy/copyright/ucita/ucita101.cfm.156 Id.157 Carlyle C. Ring, Jr., An Overview of the Virginia UCITA, 8 RICH. J.L. & TECH. 1 (Fall 2001) at http://www.jolt.richmond.edu/v8i1/article1.html.158 Id.

copy.”159 Virginia also added a provision that prohibits electronic self-

help, a process whereby the vendor can disable the software if the

vendor believes that the consumer has breached the terms of the

license.160

Maryland passed its version of UCITA on April 25, 2000.161 Its goal

in passing the law was to signal that the state was hospitable to

business.162 Some noted that politicians in Maryland have traditionally

have been hospitable to the software industry and that the short

legislative sessions in the state gave little time for opposition to

grow.163 Although it was the second state to pass it, Maryland was the

first state in which UCITA went into effect. As a result some software

licenses began including a choice of forum provision that specified

disputes would be brought in Maryland.164 The inclusion of this clause

created concern among corporate consumers that believed it would

cause them to lose the protection of other state laws that they were

used to having. However, like Virginia, Maryland consumer advocates

159 Id.160 Id.161 Marc Jordan, Maryland Adopts Uniform Computer Information Transactions Act, Findlaw, http://library.findlaw.com/2000/May/1/130477.html.162 Id.163 Matthew Mosk & Craig Timberg, State Weighs New Rules for E-Commerce, WASH. POST, February 13, 2000, Page C01, available at http://www.washingtonpost.com/wp-srv/WPcap/2000-02/13/090r-021300-idx.html.164 Patrick Thibodeau, Users look to FTC for help in reining in UCITA, ComputerWorld (Oct. 26, 2000), http://www.computerworld.com/s/article/52913/Users_look_to_FTC_for_help_on_reining_in_UCITA.

were able to secure several concessions. First they inserted a provision

that stipulates that a term is not part of a mass-market license if it is

not available for viewing before and after assent in a printed or

electronic form, and also required that any term that limits the

duration of the license must be conspicuous.165 They also made a

change by disallowing a forum choice clause if it is unreasonable or

unjust (as opposed to unreasonable and unjust).166 Maryland further

protected consumers by disallowing the exclusion of warranties of

merchantability and fitness or the modification of remedies in the

contracts.167 It also prohibited the use of self-help and required thirty

days prior notice and an opportunity for the accused violator to cure

their breach before self-help can be used.168 Finally it included a notice

provision in the case of termination of information services

contracts.169

In 2002 the American Law Institute retracted its support of

UCITA.170 In a story relayed to me by David Biklen, a uniform law

commissioner, the withdrawal of the support for UCITA was based upon

a deal struck between its supporters and opponents. A key supporter

165 WESLEY D. BLAKESLEE, UCITA – HISTORY AND SCOPE 9 (2000), available at http://www.nacua.org/documents/blakesle.pdf.166 Id at 10.167 Id at 11.168 Id at 13.169 Id.170 Uniform Commercial Law, ACADEMON (2006), http://www.academon.com/Comparison-Essay-Uniform-Commercial-Law/128347.

of the uniform law agreed to pull his support if the law was not passed

by two states within a certain time period. While Maryland and Virginia

both passed the law, the time condition was not met and therefore

those states agreed to pull the support of the law.

In spite of the various concerns that were raised about UCITA,

Raymond Nimmer argues that the law has been successful.171 He

argues that UCITA enacted contract rules that are consistent with the

common law.172 He also notes that the first time a Virginia court was

asked to apply UCITA it reached the conclusion that the provider did

not do enough to create a contractual obligation.173 In other words, the

application of UCITA was pro-consumer.

UCITA’s failure demonstrates two important points: consumers

must be engaged and protected in any law that is passed to address

the issue of first-sale doctrine and digital goods, secondarily it shows

that state legislatures are not a good venue to tackle this problem. The

distributed nature of the Internet and commerce involving digital

goods makes state regulation difficult. Distributors of digital content

would have to make sure they conform their business practices to

conflicting state laws.

171 Raymond Nimmer, UCITA in court and doing well, CONTEMPORARY INTELLECTUAL PROPERTY, LICENSING & INFORMATION LAW (April 29, 2011), http://www.ipinfoblog.com/archives/licensing-law-issues-ucita-in-court-and-doing-well.html.172 Id (quoting Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002)).173 Id.

Congress Should Amend the Copyright Statute to Address the Sale/License Dichotomy

In order to create certainty in the marketplace and protect the

rights of consumers and businesses the Congress should enact a

statute that clarifies when digital goods are sold as opposed to being

licensed. The Congress should further amend the Copyright Act to

allow for the resale of digital goods by consumers using existing digital

rights management mechanisms. Congress is empowered to do this

under both the Commerce Clause and the Copyright Clause in the

Constitution.174

The first component of the statute should address when digital

goods are sold or licensed. This section should be strive to respect

current practices by treating services that host their content on remote

servers (in the cloud) as a license because from a consumer standpoint

they are more like a cable television service than buying a movie at

the store. On the flip side, when the consumer downloads a full copy of

the digital good onto his computer or other device, and is not required

to pay additional money to utilize that copy, the transaction should be

treated as a sale. This proposal might draw some criticisms from

business groups that would prefer to treat the sale of software as a

license so they can exert more control over it, but generally it

conforms with current consumer expectations.175

174 U.S. CONST. art. I, § 8, cl. 3; U.S. CONST. art. I, § 8, cl. 8.175 See Mike Masnick, Court Says Reselling Software Is Okay, TECHDIRT (MAY 22, 2008 11:11 AM), http://www.techdirt.com/articles/20080522/0016171201.shtml.

The second part of my solution is to amend section 109 of the

Copyright Act to allow for the resale of digital goods that are sold. The

amendment should address the issues created by the Digital

Millennium Copyright Act by requiring that companies that manage the

ownership of digital goods through the locking mechanisms that were

previously described be required to allow transfer of the title to the

good through its digital locking mechanism. Furthermore it should

require that when a company no longer maintains the central server

that manages the title to the digital goods, that the constituent digital

goods be unlocked so that the alienability of the goods remains

unimpeded.

This solution would create minimal additional costs for

companies that already utilize a central system to manage to the

ownership of digital goods that are sold to consumers. Furthermore it

preserves the rights of consumers to resell their goods without forcing

companies to make it easy for consumers to create unlimited digital

copies. Finally by creating a federal statute we would avoid the

problems created by the failed attempts at developing state solutions.

Why Digital Goods Should Be Sold Instead of Licensed

Realistically the majority of licenses attached to digital goods are

long, unread, and even if they are read they are not completely

understood.176 This lack of understanding has become a cultural 176 See Umika Pidaperthy, What you should know about iTunes’ 56-page legal terms, CNN (May 6, 2011), http://articles.cnn.com/2011-05-

phenomena with parodies of it appearing on Saturday Night Live and

South Park.177 Consumers accept licenses without an actual

understanding of their terms. This lack of understanding cries out for

the kind of standardization of transaction terms that was largely solved

by the Uniform Commercial Code. When consumers purchase software

they should not be surprised by terms that restrict their ability to use

it.

One of the more extreme examples of the kind of power wielded

by software companies when their sales are treated as licenses

involves attempts to stifle free speech. Some software companies,

such as Network Associates, have included non-standard language in

their license agreements that restrict users right to pen reviews about

their software.178 In 2002 New York Attorney General Eliot Spitzer filed

suit to enjoin Network Associates from selling products with a speech

restriction in its license.179 Spitzer succeeded in getting the clause

struck down as deceptive.180 The Attorney General argued that the

06/tech/itunes.terms_1_itunes-users-terms-apple-users?_s=PM:TECH.177 Mike Masnick, How Did the iTunes Terms of Service Become a Cultural Phenomenon All its Own?, TECHDIRT (June 16, 2011), http://www.techdirt.com/articles/20110509/02553714208/how-did-itunes-terms-service-become-cultural-phenomenon-all-its-own.shtml.178 Id.179 Press Release, Office of the New York Attorney General, Judge Orders Software Developer to Remove and Stop Using Deceptive and Restrictive Clauses (Jan. 17, 2003), available at http://www.ag.ny.gov/media_center/2003/jan/jan17a_03.html.180 Id.

product reviews were protected as a fair use under copyright law.181

The New York Attorney General did not reach the issue of license

versus sale and won its suit based on an argument that the clause was

an invalid restrictive covenant that infringed on New York State public

policy favoring free speech.182 The New York Attorney General argued

that restrictive covenants in license agreements must be reasonable

and protect a legitimate business interest, and the court agreed.183

However the fact that Spitzer had to file a lawsuit demonstrates both

the immense bargaining power held by the corporations and the

adverse consequences of allowing software companies to characterize

software sales as a license.

Another problem presented by the current regime involves

returning opened software or movies. Many retailers will not accept

returns of DVDs, CDs, and box software if it was opened.184 This policy

has lead to complaints and bad will by consumers.185 By characterizing

software as a sale and allowing returns it may increase the goodwill

towards retail businesses and software vendors. Furthermore using

181 ELIOT SPITZER, MEMORANDUM OF LAW IN SUPPORT OF PETITION OF ATTORNEY GENERAL 12, available at http://www.ag.ny.gov/media_center/2002/feb/memo_of_law.pdf.182 Id.183 Id.184 See, e.g., Best Buy Store Exchange & Return Policy, BEST BUY, http://www.bestbuy.com/site/Help-Topics/In-Store-Return-Policy/pcmcat204400050028.c?id=pcmcat204400050028.185 See, e.g., ToddG, Policey[sic] for returning software?, BEST BUY COMMUNITY (Jan. 2, 2009 10:47 PM), http://forums.bestbuy.com/t5/Best-Buy-Geek-Squad-Policies/Policey-for-returning-software/td-p/7377.

existing technology the retail stores can notify the software vendor

that the software has been returned so that they can easily disable

copies of the returned version from their central server.186 Current

technology would allow the sellers to disable returned software and

there is no need for software vendors or retailers to characterize the

transaction as a license to allow them to do so. This would alleviate

concerns about software pirates that might buy a copy of the software,

burn a copy to their own disc, and then return the original.

Some businesses may raise concerns that the proposed revision

to section 109 requiring companies to allow the resell of software

might be too burdensome. Companies that manage their software

using activation servers like Microsoft would also be required to have a

mechanism for users to transfer the title to the software. Many

companies have not implemented this. However some companies have

already pioneered similar technology. When Barnes & Noble introduced

its NOOK eBook reader it included a technology called LendMe.187

LendMe allows users of the NOOK reader to lend and borrow books

from each other. Even though the eBooks are digital goods a central

server manages their title and users can let their friends borrow their

books for a limited period of time. Amazon followed suit by adopting

this technology to their Kindle reader and now they allow users to loan

186 See Microsoft Product Activation, MICROSOFT, http://www.microsoft.com/piracy/mpa.aspx.187 Top NOOK Book FAQs, BARNES AND NOBLE, http://www.barnesandnoble.com/ebooks/help-faqs.asp.

their eBooks for 14 days.188 Both of these implementations are limited

to titles where the publisher authorizes this activity and the lending of

the book is temporary. Apple also has setup its digital rights

management software to allow for activation and deactivation of the

right to use digital goods on various computers by the user provided

they input their Apple ID.189 However Apple does not allow a transfer of

the license for its digital goods to another Apple ID.190 In spite of this,

there does not appear to be any technical reason that digital goods

cannot have their titles permanently transferred if Amazon, Apple, or

any other company allowed it.191

Treating the sale of digital goods as a sale instead of a license

and allowing for their resale is more economically efficient. Consumers

already know what to expect when they purchase a product and do not

need to worry about reading pages of legalese before buying physical

copies of books, movies, or music. So why would we require them to do

so before purchasing the digital versions of the same goods?

Furthermore there is a large market for used media such as Half.com,

eBay, and Amazon’s used marketplace. These marketplaces allow for

188 Lending Kindle Books, AMAZON, http://www.amazon.com/gp/help/customer/display.html?nodeId=200549320.189 Mac App Store: Frequently Asked Questions, APPLE, http://support.apple.com/kb/HT4461.190 Id.191 See TJ Luoma, Customers with multiple Apple IDs frustrated by Apple’s “no consolidation” policy, TUAW (Jun 17 2011 8:40 AM), http://www.tuaw.com/2011/06/17/multiple-apple-ids-frustrated-by-apples-no-consolidation-policy/.

Pareto efficient outcomes because goods that have diminished utility

to one party are transferred to another party who value the product

more highly.192

Conclusion

The way the technology currently functions, the idea that

someone would delete their music after selling it appears to be a

fiction. However the idea that people are not sharing their software

with their friends is also a fiction. If Congress strengthens first-sale and

allows companies like Apple and Amazon to regulate it with their DRM

technologies, copy protection will be more palatable for consumers.

They may be more willing to take risks by purchasing things they are

not sure they will want, knowing they can sell them to third-parties if

the product does not meet their expectations or if they are only using

it for a short period of time. The solution that I propose: clarifying what

is treated as a sale or license and then creating a digital right of first-

sale in section 109 strikes the best balance between the rights of

businesses to prevent pirates from copying and protecting consumers

from having to agree to unusual license terms or being stuck with

copies of digital goods they no longer need.

192 David A. Costa, Vernor v. Autodesk: An Erosion of First Sale Rights, 38 RUTGERS L. REC. 223 (2010).