Can a 2nd sale of a used software be valid under a EULA?
A re-sale of a used software program to the public may be valid under an End-User License Agreement (or EULA) where the doctrine of first sale finds application.
The New Civil Code is clear and straightforward. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent[i]. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof[ii]. The owner has the right to enjoy and dispose of a thing, without other limitations than those established by law.[iii]
For physical products, the aforementioned provisions make perfect sense. For virtual and intangible products, the application of these laws may not be that clear and straightforward.
In the case of software programs, the sale transaction is accompanied by a software license or a user license or what is termed as an End-User License Agreement or EULA.
In a typical EULA, the first buyer (or a buyer of an original software) does not pay for the software itself. The first buyer actually paid for a license or a right to use the copy of the software in accordance with the provisions of the EULA. An interesting situation arises when the first buyer decides to sell the used software.
Can a re-sale, to the public, of a used software be valid under a typical EULA?
Scope of the Discussions
Discussions on this paper will focus on the nature of the EULA and the application of the so-called first sale doctrine, in the Philippine setting.
The software programs contemplated in these discussions are the typical software coming from giant software makers from outside the Philippines. As such, controversies are likely to likely to cite the relevant case laws. Due to the dearth of local jurisprudence on the matter, relevant case laws from foreign jurisdiction may be important to review.
For purposes of this paper, application of the principles of the conflicts of laws, while relevant and material, will not be dealt with in detailed fashion. To simplify discussions, Philippine courts acquire jurisdiction and the point of contact will be US Copyright Laws and case laws. It will be presumed that these software makers copyright laws will assert their rights under US Copyright laws and the relevant case laws decided recently, at least as far as this paper is concerned.
Nature of the EULA
A EULA is a legal contract between the manufacturer and/or the author and the end user of an application. The EULA details how the software can and cannot be used and any restrictions that the manufacturer imposes. [iv] The license may define ways under which the copy can be used, in addition to the automatic rights of the buyer including the first sale doctrine.[v]
Not every EULA is the same. To avoid soaring transaction costs of forming custom-tailored licensing agreements with countless customers in scattered markets, many copyright holders have resorted to standardized mass-market licenses.[vi]Some contracts stipulate acceptance of the agreement simply by opening the shrink-wrapped package; some require the user to mail back to the manufacturer a signed agreement or acceptance card; some require the user to accept the agreement after the application is installed by clicking on an acceptance form that appears on the user’s monitor. This last method is typical of applications that can be downloaded from the Internet. In all instances, the user has the option of not accepting the EULA, subsequently surrendering the rights and ability to use the software.[vii]
As in typical legal contracts, the EULA protects both parties from liability if the software is used in a way not intended by the manufacturer or author.
Digital technology has rapidly increased the availability of copyrighted material. Controversies and the subsequent rulings of the courts are likely to evolve into balancing the rights of the copyright owner and the first buyer.
The first sale doctrine or the exhaustion doctrine
Section 106 of the US Copyright Act of 1996 expressly grants copyright owners six exclusive rights. Among these is the exclusive right to distribute copies of their works to the public, including by offering copies for sale, lease or auction.
Under the first sale doctrine, however, in most circumstances, the distribution right is extinguished when a copyright owner transfers ownership of a particular copy of a work to another person as provided in Section 109 of the US Copyright Act.[viii].
The first sale doctrine provides a defense to copyright infringement. Section 109(a) further provides that the defense extends only to “the owner of the particular copy”. Once the copy is sold, the copyright holder has no further power over it. For the first sale doctrine to apply, lawful “ownership” of the copy or phonorecord is required. As Sec 109(d) prescribes, first sale doctrine does not apply if the possession of the copy is “by rental, lease, loan, or otherwise without acquiring ownership of it.”[ix]
A contentious issue is the phrase “distribute copies…to the public” in Sec 16(3) of the US Copyright Law. The contrary view – that the right of distribution need not be necessarily be to the public at large because Sec 16(3) incorporates both the right to vend and right to publish under Sec 1 of the US Copyright Act of 1909, the latter right applying to any sale, not just a sale to the public at large – effectively strips the phrase “to the public” of all its meaning.[x]
The doctrine of exhaustion refers to the analogous doctrine applicable to patents. For purposes of this paper, the first sale doctrine (as against exhaustion doctrine) is more relevant as US laws and jurisprudence refer to the re-sale of software as a copyright issue.
An infringer may rely on the first sale doctrine as a defense to an alleged violation if he overcomes the burden of proving that he lawfully owned the copy he distributed.[xi]
The first sale doctrine was first recognized in 1908 US Supreme Court case of Bobbs-Merill Co vs. Straus. This principle was reaffirmed in the US Copyright Act of 1909 and in the current US Copyright Act.[xii]
The first sale doctrine only limits copyright holders’ distribution right. However, occasionally this principle clashes with the copyright owner’s other rights such as reproduction and adaptation rights.
In 1997, in the case of Lee v. A.R.T. Co., the defendant bought plaintiff’s artworks in the form of notecards and then mounted them on ceramic tiles, covering the artworks with transparent epoxy resin. Despite plaintiff’s assertion of violation of his adaptation right, the 7th Circuit held that the adaptation right was not violated and that defendant’s sale of the tiles was protected under the first sale doctrine[xiii]. However, based on very similar facts, the 9th Circuit in Mirage Editions, Inc. v. Albuquerque A.R.T. Company held that plaintiff’s adaptation right was infringed and that the first sale doctrine did not protect the defendant under such circumstances[xiv].
Between 2000 and 2001, two cases involved the software company, Adobe. The application of the first sale doctrine boiled down to the issue of ownership. The doctrine applied, thus no infringement, when the first sale conferred ownership to the first purchaser.
In the first case, the Northern California District Court in 2000, recognized the unique nature of distributing software and trade usage, as well as the express restrictive language of the contract. The Court held that Adobe’s EULA provided purchasers with a mere license, rather than ownership[xv]. In the second case, the Central California District Court ruled, in 2001, that EULA’s are mere “labels” and in reality, Adobe sells its software to distributors.[xvi]
In 2008, in the case of Vernor v. Autodesk, Inc. the 9th Circuit created a three-factor test to decide whether a particular software licensing agreement is successful in creating a licensing relationship with the end user. The factors include: 1) whether copyright owner specifies that a user is granted a license; 2) whether the copyright owner significantly restricts the user’s ability to transfer the software to others; and 3) whether the copyright owner imposes notable use restrictions on the software. In Vernor, Autodesk‘s license agreement specified that it retains title to the software and the user is only granted a non-exclusive license.[xvii]
On July 3, 2012, the European Court of Justice ruled on July 3, 2012, that it is indeed permissible to resell software licenses even if the digital good has been downloaded directly from the Internet, and that the first-sale doctrine applied whenever software was originally sold to a customer for an unlimited amount of time, as such sale involves a transfer of ownership, thus prohibiting any software maker from preventing the resale of their software by any of their legitimate owners.[xviii]
Jurisprudence have shown that the courts have taken different approaches to sort out when only a license was granted to the end user as compared to ownership. Most of these cases involved software-licensing agreements. In general, the courts looked beyond the face of the EULAs to conclude whether the agreements create licensing relationship or if they amount to sales subject to first sale doctrine under Section 109 of the US Copyright Laws. Thus, specifying that the agreement grants only a “license” is necessary to create the licensing relationship, but not sufficient. Other terms of the agreement should be consistent with such a licensing relationship[xix]. Otherwise, there is a sale.
The clash among technology, the law, and the ensuing rights and obligations of contracting parties seem apparent. Nevertheless, a balanced tension is very workable and will serve to sustain the integrity of the copyright laws in the Philippines.
The rapid changes in the software technology will lead to faster obsolescence of software programs. The Philippines will be no exception. Newer and better software programs will always be available. A good portion of these software users will continue to upgrade. Other software users may simply decide to re-sell. These phenomena create a supply of “obsolete” and unwanted software products which will find its way into the second-hand software market.
As these transactions grow in number, the validity of such re-sale will always be put into question by the parties, before the proper courts of jurisdiction. At the heart of the controversy is what the EULA actually provides the purchaser. Is it a mere license, or is it a sale which confers ownership to the purchaser? If the EULA is not clear enough, the court’s interpretation of the EULA will govern.
Like any other contracts, the EULA is the law between the first buyer and the copyright owner. The rights and obligations of the former depends on the terms of the EULA which he agreed to by an overt act which may include, signing or “clicking” the appropriate portion of the on-line form. Thus, a re-sale of a used software program to the public is valid under an End-User License Agreement which confers ownership to the first buyer. In this case, the first-sale doctrine applies.
The application of the first-sale doctrine needs to be responsive to the realities of the digital age. In the Philippines, the application of the first sale doctrine will be shaped by statutes and rulings of the Supreme Court. The very integrity of the whole intellectual property system might be in jeopardy if interpretations of the EULA will not be consistent. In this case, enforceability of the EULA provisions and the application of the first sale doctrine (or non-application, as the case maybe) must be sustained in a manner consistent with the spirit and letter of the relevant laws and jurisprudence.
To achieve this under current Philippine settings, the EULA must be simple and clear. It should clearly define whether it grants a mere license or it is actually a sale. The EULA should make it easy for the consumer to understand what he is actually paying for.
Giant software companies cannot be compelled to produce consumer friendly EULA formats for the lowly Filipino consumer. But with a steady stream of consumer education activities, coupled by subtle compulsions from local policy makers, the Filipino software consumer may not be forced to agree to a EULA which, more often than not, constitutes a contract of adhesion.
When the Filipino consumer is able to clearly discern a licensing relationship from a sale transaction, natural market forces will take over. The consumer will now be able to decide between a licensing arrangement and a straight sale. Software offerings will be shaped by consumer preferences. Market segments will arise – one for licensed software, the other one for sold ones, where re-sale will be allowed. Bottom line, consumer rights are well-protected.
A simple and clear EULA also paves the way for enhanced protection of the intellectual property rights of the owners of the copyrighted software. The same market forces that benefitted the software users will likewise provide benefits for the software makers.
The sustained and increased demand for software programs will increase market size and provide specific entry points for prospective, as well, current software suppliers. The resulting market segments will provide the software suppliers more flexibility in terms of production planning as well as marketing strategies.
The motivation to produce “pirated” software will likewise be reduced. The barriers to entry to what was once a monolith industry for the giant software company suddenly, will be gone. Fringe players who chose to “pirate” will now have more reasons to comply and compete in accordance with industry regulations.
[i] Article 1458, New Civil Code
[ii] Article 1477, New Civil Code
[iii] Article 428, New Civil Code
[vi] Graham, Justin. “Preserving the Aftermarket in Copyrighted Works: Adapting the First Sale Doctrine to the Emerging Technological Landscape”. Stanford Technology Law Review. Retrieved from http://stlr.stanford.edu/pdf/preserving-the-aftermarket
[viii] Rostein, RH, et al. “The First Sale Doctrine in the Digital Age”. Intellectual Property and Technology Law Journal. Retrieved from http://intellectualpropertyattorneyslosangeles.com/images/ps_attachment/ attachment1114.pdf
[x] Graham, Justin. “Preserving the Aftermarket in Copyrighted Works: Adapting the First Sale Doctrine to the Emerging Technological Landscape”. Stanford Technology Law Review. Retrieved from http://stlr.stanford.edu/pdf/preserving-the-aftermarket
[xi] Rostein, RH, et al. “The First Sale Doctrine in the Digital Age”. Intellectual Property and Technology Law Journal. Retrieved from http://intellectualpropertyattorneyslosangeles.com/images/ps_attachment/ attachment1114.pdf
[xv] Adobe Sys. Inc v One Stop Micro, Inc, 84 F. Supp. 2d 1086 (N.D. Cal. 2000), as cited by Rostein, RH, et al. “The First Sale Doctrine in the Digital Age”.
[xvi] Softman Products Co. v. Adobe Sys. Inc., 171 F. Supp. 2d 1075 (C.D. Cal 2001). As cited by Rostein, RH, et al. “The First Sale Doctrine in the Digital Age”.