eBay Reseller of OEM Software Denied First Sale Defense

By Zi Wang

In Adobe Sys. v. Hoops Enter. LLC (N.D. Cal. 2012), the court rejected the first sale defense asserted by an eBay reseller of original equipment manufacturer (OEM) copies of software, drawing a distinction between licenses and sales of copyrighted works.

Adobe sued the defendants for copyright infringement, alleging that the defendants sold OEM copies of Adobe software through the use of eBay and other websites.  The defendants countersued Adobe for a declaratory judgment of copyright misuse.  In particular, the defendants contended that Adobe’s assertion of copyright protection contravened the first sale doctrine, as codified in 17 U.S.C. § 109.  The defendants also asserted the first sale doctrine as an affirmative defense.

The defendants obtained OEM copies of Adobe software that had been unbundled from the hardware with which they were originally packaged, such as Dell and Hewlett-Packard computers.  The defendants then re-bundled the software with items such as a piece of photo paper, a blank DVD, or a media card reader without Adobe’s authorization, and resold it online.

Adobe stated that it distributes its copyrighted software pursuant to licensing agreements that restrict the use, location of distribution, transfer and sometimes who is qualified to obtain the product, and does not transfer title to the software at any time.  Under Adobe’s licensing agreements applicable to OEM copies, these copies may not be unbundled and sold separately or re-bundled with products not approved by Adobe.

The defendants proffered evidence of Adobe’s licensing agreements with Dell and Hewlett-Packard.  The court included details of the Dell agreement in its opinion as an example.  The agreement contains following provisions and restrictions:

Dell is granted a license.

Dell is required to obtain a similar agreement with any third-parties prior to authorizing or sublicensing the software to them.

Adobe retains ownership of intellectual property rights in the software and places substantial restrictions on Dell’s use of the software.

Dell is prohibited from promulgating the software through specified means and requires that the software be bundled with specified Dell hardware.

Dell is obliged to take steps to prevent resellers from selling the software separately from this hardware.

Dell is required to include Adobe’s end-user license agreement with the hardware in such a way that the user can read it before accessing the software media and must include Adobe’s “copyright and proprietary notices.”

The court followed the Ninth Circuit’s holding in Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010) that the first sale affirmative defense is unavailable to those who are only licensed to use their copies of copyrighted works.  The court also adopted a three-prong test set out in Vernor:  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.

Accordingly, the court found that the first sale doctrine does not apply to the Adobe OEM software at issue because Adobe licenses, rather than sells, its OEM software.

Take-Away Points:  Copyright owners are well advised to utilize carefully drafted licensing agreements and maintain sufficient control over the copyrighted works in order to maximize their rights under copyright law.  End-users of software products that come with computer hardware should be put on notice that they cannot assume that they “own” their copies of such software and their rights vis-à-vis these copies may be curtailed by licensing agreements between software vendors and hardware manufacturers.

Supreme Court Extends Exhaustion Doctrine

Supreme Court Finds Sale of Device Extends Patent Exhaustion to Unlicensed Method Claims  

In Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. ___; 86 USPQ2d 1673 (June 9, 2008), the Supreme Court held that the doctrine of patent exhaustion applies to unlicensed patented methods used by a sold patented device and that LG’s sale of such devices to Intel, who then sold such devices to Quanta, exhausted LG’s patent rights against downstream purchasers.  The unanimous decision, authored by Justice Thomas, overruled the decision by the Federal Circuit which had held that method patents were not within the scope of the patent exhaustion doctrine. Continue reading Supreme Court Extends Exhaustion Doctrine