For software developers seeking to protect copyright in their
works, a recent appeals court decision underscores the importance
of carefully drafting shrink-wrap agreements so that those
agreements are construed as licences and not sales agreements.
Autodesk, Inc. had provided copies of its AutoCAD software to a
customer, CTA, as part of a settlement. CTA then purported to sell
the software to Mr. Vernor, who in turn sought to resell the
software on eBay. Autodesk sent eBay a takedown notice under the
Digital Millennium Copyright Act claiming copyright
infringement, and eBay suspended the auction. Mr. Vernor then
sought a declaration from the court that the resales did not
infringe Autodesk's copyright.
As we reported in TLQ 4:2, the District Court ruled that Mr.
Vernor's sale of the software on eBay did not violate the terms
of the AutoCAD shrink-wrap licence agreement with CTA. The court
found that CTA did not violate the agreement because the transfer
of software from Autodesk to CTA was not a licence in the first
place, but rather a sale of software subject to certain
restrictions. As a software sale, the "first sale"
doctrine of US copyright law protected CTA's sale to Vernor and
Vernor's subsequent sales on eBay. That doctrine "permits
a person who owns a lawfully made copy of copyrighted work to sell
or otherwise dispose of the copy."
Autodesk appealed the District Court decision to the US Court of
Appeals for the Ninth Circuit. In conducting its analysis, the
appeals court identified three characteristics that distinguish
software sales from software licences. A licence will be found
where the transfer agreement:
includes an express statement of license grant;
significantly restricts the transferee's ability to
re-transfer the software; and
imposes other notable restrictions on the use of the
The court observed that the shrink-wrap agreement in this
indicated that the licence could only be transferred with
imposed restrictions on modifying, translating, and
reverse-engineering the software;
prohibited removing company marks; and
prevented circumvention of the software copy protection.
Since the court found that Autodesk "imposed significant
transfer and use restrictions" on the software copies, the
court ruled that CTA was a licensee rather than an owner of the
program. As Autodesk's transfer to CTA was not a sale, CTA was
not entitled to resell its copies of the software to Vernor under
the first sale doctrine. Since Vernor did not receive title to the
software, he could not, in turn, pass ownership of the copies to
his eBay customers. Consequently, the court found that the sales by
CTA and Vernor infringed Autodesk's exclusive right to
distribute the software.
McCarthy Tétrault Notes
The ruling highlights the importance of drafting clear and
unambiguous licensing terms for software and other
copyright-protected works. Even though CTA had obtained the copies
of the software under a "Settlement Agreement and
Licence," the lower court still originally ruled that
Autodesk's transfer to CTA was a sale rather than a
For software developers wishing to license their software, the
appeals court decision highlights the importance of including
significant limits on the use and transferability of the programs
in their shrink-wrap agreements. Imposing periodic licence fee
payments rather than a single upfront charge will also help to
demonstrate a clear intent to license rather than sell a
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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