9th Circuit Allows Copyright Holders’ Rights To Go On… and On… and On…

By J. DeVoy

On September 10, 2010, the Ninth Circuit Court of Appeals ruled that software producers can forbid the transfer or resale of their products in their shrink-wrap or click-wrap licenses.  The court’s opinion in the case, Vernor v. Autodesk, Inc., No. 09-35969 (9th Cir. 2010), is available here.

The decision deals a blow to the first sale doctrine that Eric Cartman would best describe as a “kick in the nuts.”  Under the first sale doctrine, established in Bobbs-Merrill Company v. Straus, 210 U.S. 339 (1908), and codified in 1976 as 17 U.S.C. § 109, a purchaser can transfer a lawfully made copy of the copyrighted work without permission once it has been obtained.  As long as the purchaser makes no unauthorized copies of the work, the copyright holder’s rights in a particular copy of the work end once it has been sold.

Vernor essentially exempts software makers from this rule.  Vernor, a frequent user of eBay, had sold more than 10,000 items using the site, including software.  In April 2007, Vernor purchased four used copies of Autodesk’s AutoCAD software, then in its 14th Release.  When Vernor attempted to sell this software on eBay, Autodesk sent DMCA takedown notices to the auction site.  For the first three notices, Vernor filed counternotices, alerting eBay that the sales were not copyright infringement, and eBay reinstated the auctions.  After Autodesk’s fourth DMCA notice, eBay suspended Vernor’s account due to fears of repeat infringement.  eBay feared that if it did not terminate Vernor’s account for repeat infringement, it would vitiate eBay’s safe harbor protections for copyright infringement under 17 U.S.C. § 512(c).

At the heart of the debate lies the distinction between a purchaser and a licensee.  While the firs purchase doctrine protects purchasers, it doesn’t offer its protections to licensees.  The trial court found Vernor’s actions to be protected under the first sale doctrine, as it evaluated Autodesk’s license agreement and Vernor’s actions under United States v. Wise, 550 F.2d 1180 (9th Cir. 1977).  Under Wise, the court determines whether a software user has a license or ownership based upon “1) whether the agreement was labeled a license, and 2) whether the copyright owner retained title to the copy, required its return or destruction, forbade its duplication, or required the transferee to maintain possession of the copy for the agreement’s duration.” Id. at 1190-92.  In light of this precedent, which predated other relevant cases, the trial court found that based on the facts and other circumstances surrounding Vernor’s acquisition of the software, he was a purchaser and, thus, protected by the first purchase doctrine.

That ruling, however, was predicated on the trial court’s perception that Wise was incompatible with the MAI trio of cases decided over a decade after Wise.  See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995); Wall Data, Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006).  Those cases dealt with software owners making copies of software as an essential step in the use of software — a development intended to prevent owners from being liable for infringement every time their software was used and a full copy was loaded into their random access memory, or RAM. See 17 U.S.C. § 117(a)(1).  The conclusion of these cases is that only outright owners of software are entitled to use the essential step defense, but that licensees are not, as the creation of a full copy of the software violates the copyright holder’s right of reproduction.  In these cases, the distinction between owners and licensees was determined by the restrictiveness of the software’s license agreement; the more restrictive the agreement, the more likely the court was to find it a license and not a sale.

Reversing the trial court and synthesizing the circuit’s precedents, the Ninth Circuit held that 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.  The court found that Autodesk’s end user license agreement satisfied all of these conditions, as does presumably most professional grade software — the Software & Information Industry Association, with members including McAfee, Adobe, Oracle and Google, urged the court to rule as it did.

Consequently, Vernor did not own the software, and could not transfer it freely to his customers.  In turn, those customers could not become owners of the software by buying it from Vernor.  Instead, they would be infringers on Autodesk’s right of reproduction because they lacked the company’s license to install and use its software.

The decision then goes on to consider the economic realities of its decision.  It is true that allowing licenses that restrict transfers of the work theoretically eliminate deadweight loss, and allow the producer to slice the market into various price points it can target with ease.  As Guy A. Rub notes in his article Contracting Around Copyright, though, this his not necessarily a good thing: The ability to provide limited access on the low end of the market provides an incentive – and justification – for making people who require unlimited access to overpay for it.  This is avoidable with the first sale doctrine because everyone pays the same price for a product, and transferability is affected only by what puts into the product.  Therefore, different products must be put onto the market at different price points in order to engage in price discrimination so long as the first purchase doctrine applies; if it can be avoided, as the Ninth Circuit indicates it can be in this most recent decision, there is less incentive for creation.  Under this regime, producers are rewarded for slowly creating a large, bloated product for which they can overcharge consumers who need all of the product’s features, all while offering neutered versions to price sensitive consumers who require less functionality.

This is a great proposition if you’re a producer and have a dominant product like the Adobe Creative Suite, but comes at the expense of a secondary market and competition from businesses that may offer a lower-cost product targeted at a market segment with needs less intense than those at the top of the market.  As previously noted on this blog, this is a damaging proposition for consumers, whose software purchases will always have an invisible tether back to the original copyright holder and never truly be theirs for purposes of ownership and resale.

The opinion notes that it is superficially at odds with other Circuits’ handling of this issue, but the competing decisions seem to be distinguishable.  On one hand, the Ninth Circuit is the Supreme Court’s problem child and most oft-overturned court, but generally for reasons other than copyright law.  As home to much of the country’s entertainment and technology businesses, the Ninth Circuit, and more specifically California’s courts, have the most to say about these issues and frequently have the opportunity to speak first.

How the first sale doctrine’s tension with expanded copyright licensing and licensor rights will be resolved is yet to be seen.  The interests of consumers and producers are at odds, as they usually are, but the consequences of this dispute are much more significant than most people would imagine.  In the mind of the consumer, buying software means it’s theirs, to do whatever lawful activity they desired with it, which until now included selling it.  To the benefit of producers, that seems to be changing, and may not be limited to software for very long.

Penny Arcade Turns Traitor: Says Used Game Purchasers “Pirates”

by Christopher Harbin

I’m stark raving mad right now.  I’ve never been much of a hot head.  And over the years my old age has tempered my immediate reactions, but I went from Calmsville to Livid City after reading Penny Arcade’s latest comic without so much as a stopover at Smoldering Anger Junction.

The comic was commenting on a new trend in video games.  Recently, game publishers have locked more and more content that was traditionally included in a game behind an online pay wall.  For example, earlier this year, EA Sports started preventing those purchasing used games from playing online by including a one-time use code inside new packages.  Some publishers have even put content included on the physical media behind a pay wall.  So you have to pay someone to get at content on the disc.  I have no doubt that you will soon see console publishers putting the entirety of their content behind a one-use code.  For years, PC gamers have had to engage in various workarounds to sell their games.

Copyright – particularly the first-sale doctrine – looms over and informs every part of this discussion.  See, when you buy a work, under the Copyright Act, you own it.  You’re entitled to do what you please with it.  You can burn it, resell it, keep it, devise it, trade it, or gift it.  Just like the rest of your personal property.  Underpinning every publisher’s shady little move with respect to digital goods is the veiled threat of bringing down the mighty beast of copyright infringement upon those that defy them.  I have pounded the table on this subject before, but copyright owners view copyright law as an understanding only between themselves and the government – consumers, that is the public, be damned.  Remember, just three years ago the RIAA maintained — in court — that consumers have no right to rip their CDs onto their MP3 players.

And Penny Arcade buys into this paradigm hook, line, and sinker.  The gist of their latest comic – and the narrative that accompanies it — is that purchasers of used video games are not customers of the publishers.  While this is sort of correct – used games don’t put money directly into publishers’ coffers – it’s not actually correct.  Which we all know is the best kind of correct.  Let’s get at this from another industry:  auto sales.  One reason people buy Hondas, Toyotas, and Volvos is that they hold their resale value better than other comparable vehicles.  Thus, at the original sale, they command a premium price.  So it’s obvious that producers do in fact see value in used car sales.  DeVoy sums up the criticism to Penny Arcade’s shoddy argument best: “Only idiots think they buy products from their producers, LOL!”  Indeed, DeVoy.  If game publishers are worried that they aren’t getting a “fair” cut of used game sales, they can do what every other industry does.  Price it up front.  Let the market decide.  They should not be able to wield the mighty sword of copyright law in a way other industries don’t get to do.

Tycho even goes so far as to say that those who buy used games are pirates.  I find this kind of rhetoric wholly disingenuous – especially coming from Tycho who often prides himself on distilling substantive wheat from the rhetorical chaff.  But here Tycho has completely failed and comes off looking like an industry shill.  When one buys a used car, have they burned and pillaged the auto industry?  Why should video games be treated any differently?  Don’t even bring up the fact that digital goods don’t physically degrade:  1) even MP3s degrade after many copies; 2) under copyright law you aren’t allowed able to keep a copy and transfer a new one to another – that’s infringement and; 3) books that are kept well physically degrade far after the economic value has been extracted.

Tycho and Gabe are by far some of the smartest and most engaging commentators on the games industry, but their latest comic is a prime example of what happens when quasi-journalists become too close to their industry.  Tycho even admits it:  “You meet one person who creates games for a living, just one, and it becomes very difficult to maintain this virtuous fiction [that buying a used game isn’t piracy.]”  They start putting faces to products and thinking of the little beating hearts in cribs inside the homes of developers.  It’s certainly a noble thought.  But in propagating this logically-flawed and rhetorically-misleading argument they cosign big media’s efforts to erode our rights.  Shame on you, Penny Arcade.

Update:  The always brilliant Bill Harris takes a more tempered view

Cyberblogging soulmate Mike Masnick hit this issue about 9 seconds before I did.

Man “finishes” World of Warcraft

What’s with the “hugging”?

‘Little Gray” beat the game after killing 390,895 creatures, administering 7,255,538,878 points of damage, completing 5,906 quests (averaging 14 quests a day), raiding 405 dungeons and hugging 11 players. I believe we can safely add another statistic to the numbers — he has had sex 0 times during this period. (source)

Grand Theft Lawlz – Video Game Roundup

Does the column title suck? Have a better suggestion? Sound off in the comments!

I’m in beast mode today. I’m not sure whether it’s because finals are close or because the weather in Michigan sucks. Either way, I’m dropping rage up in the Satyricon.

Electronic Arts Sends Media Illegal Brass Knuckles

As part of their press kit for their newly-released Godfather II game, Electronic Arts shipped brass knuckles to gaming journalists. Problem? They’re illegal in several states. It’s even illegal to ship them in California (where EA is based). In a short interview with Gamepolitics.com, EA confirmed they were recalling the knuckle-dusters as well as crapping their pants:

“EA: I hope you’re enjoying our Godfather II press kit, including the novelty brass knuckles. To help you take proper care to dispose of the item, we’re sending you a pre-paid shipping package.

And I can’t discuss this any further.

GamePolitics.com: Are you doing this with all of the journalists who received the brass knuckles? Or just me because I wrote about them?

EA: I can’t discuss this any further.”

Gamestop sells used games as new.

Apparently, Gamestop has a policy that allows employees to take brand-spanking-new video games home, play them (you know, for review purposes), and then bring them back to the store for resale to consumers as “new.” In an amazing show of stupidity, attorney Mark Methentis doesn’t see what the big fat hairy deal is:

“However, I still think that if the plastic seal is not a major issue, there is no difference in the game experience between a perfect condition new disk and a perfect condition disk played once by an employee, besides the potential public relations issues. Of course, when I say perfect condition, I mean everything: kept in a smoke free environment, free of dirt, not kept in direct sunlight or damaging temperatures, etc. I believe that’s a major factor as to why the GameStop employees I’ve known are far more likely to check out a used title than a new one.”

Let me clue you in, Mark. It is a major issue. Asswipe sixteen-year-old kids working at Gamestop aren’t particularly known for their responsible nature. Anytime I’ve ever bought a used game from Gamestop, it looks like the previous owner played it on their Sandpaper360. So, when I buy a game labeled as “new”, I expect it to not have been used in someone else’s console. I mean the plain language of “new” implies that THE PRODUCT HASN’T BEEN USED. I mean, why are used games cheaper if consumers don’t value a new product? Use your noodle, Mark!

Whatever. I can’t stay mad at you Methentis. I dig your blog. BFFs?

Over at Kotaku, a non-lawyer takes a better stab at it:

The FTC Act Test for false advertising states that there must be a representation, omission or practice that is likely to mislead the consumer. Second, the FTC examines the practice from the standpoint of a reasonable consumer. Finally, the representation, omission, or practice must be a “material” one (whether the act or practice is likely to affect the consumer’s conduct or decision with regard to a product or service). In GameStop’s situation, it sounds like the employees have mislead the customer by representing that the game is new and omitted the fact the game has been used. A reasonable customer would not pay full price for a used game; the representation or omission would affect the customer’s decision; and therefore, the representation or omission is material and would constitute false advertising.

Ah. The sound of sweet sweet common sense.

Time Warner Cable Execs Announce Draconian Bandwidth Caps

Lara Crigger over at Gamerswithjobs and Bill Harris of Dubious Quality both chime in on Time Warner’s plan to roll out a 5GB bandwidth cap in test markets. For those of you not technically inclined, 5GB is less than one hi-def (high def? HD?) movie. Coincidence? I think not. I think this move is obviously designed to bolster on demand video.

Bill Harris writes:

“So if you’re Time Warner, and you can’t stop the bleeding, what do you do? You leverage the monopoly you have inside franchise cities for broadband service. They could never roll out this kind of pricing plan, could never use it to pressure content providers, if there was any real competition. I think this is the line in the sand, though, and they’re going to defend it as fiercely as they can.”

Without competition, this will be an inevitable race to the bottom and ISP’s will see this as just another revenue stream. As much as I despise TWC, I’d like to see them implement caps just to highlight this issue. My mother, 70 years old, watches HD shows on Hulu. I’d bet money she goes over 5GB every other day. When Joe and Sally Consumer start getting overage notices from their “unlimited” broadband provider, they’re going to freak out.

It will be glorious.

Capcom Wins Zombie Infringement Case

ZOMBIES!!!

by Christopher “Undead” Harbin,
Legal Satyricon Correspondent

I’m only really scared of one thing in this world. Zombies. Really – they freak me out. I think it’s because my brother made me watch Return of the Living Dead when I was a kid. Couple the freaking flesh eaters with Linnea Quigley’s (B-movie scream queen) naked wet boobies in a graveyard and the scene was set for childhood scarring.

Anyways, I digress. In 2006, Capcom created a zombie-themed video game “Dead Rising.” The main character in the Dead Rising was a photojournalist dropped into a zombie-infested mall in order to get the scoop on the recent zombie wave. After a play through, it was obvious the game was an homage to George Romero’s Dawn of the Dead / Day of the Dead / Mid-Afternoon of the Dead series of zombie classics. MKR group, who owns the trademarks to the movies, threatened to block the release.

Capcom got a little skittish and sought a declaratory judgment that it did not infringe on MKR groups trademarks. In turn, MKR group counterclaimed for dilution, misappropriation, and copyright and trademark infringement. On October 10th, the USDC of Northern California granted Capcom’s Motion to Dismiss ruling that the two works were not substantially similar under the extrinsic test. The opinion delves into interesting detail of the plots of both works and Judge Richard Seeborg demonstrates excellent knowledge of zombie lore and the nuances of the game and the movie that sets them apart. Given a cursory glance, it might appear the two plots are somewhat similar, but it seems Judge Seeborg took the time to explore both the game and the movie when ruling on the merits. Kudos!

Passing Unconstitutional Laws has a Price

GameSpy reports:

The Entertainment Software Association (ESA) announced [on June 30] that the state of Minnesota paid $65,000 in attorney fees and expenses incurred as a result of their successful challenge to Minnesota’s unconstitutional video game law. The ESA, which prevailed over similar unconstitutional laws in nine other jurisdictions, now has been awarded close to $2 million in fees and expenses spent in defending gamers, developers and publishers’ First Amendment rights. For the rest of this article, click here.

Video Game Law Developments

Minnesota is the latest state to see its video game censorship law struck down. See Minnesota Loses Appeal of “Fine the Buyer” Video Game Law.

Massachusetts, on the other hand, decided that it would like to be slapped down too — so it is debating the adoption of another Jack Thompson style video game law — virtually the same text that was struck down as unconstitutional in Louisiana. See Massachusetts Will Consider Video Game Legislation This Week.

The proposed Massachusetts legislation is here.

Singapore Bans Video Game over Lesbian Sex

Singapore’s Board of Film censors has banned “Mass Effect,” because players have the option of having their female avatar make out with (and feel up) a female alien. Photos after the jump.

The FBI Must be Really Bored

It appears that the FBI is sending agents into the online game, “Second Life” to investigate the virtual casinos there.

Violent Video Games