OOPS! Know What Your Licenses Say!

            Lots of activity on the legal front over the past several weeks.  Recent court decisions effect how you might look at use of licensed software by third parties.

            [First the disclaimers:  I’m not an attorney and these comments do not constitute legal advice.  Consult your attorneys; for your convenience and theirs, links to the court decisions are provided below.]

            Autodesk provides its AutoCAD software under a Software License Agreement that all customers must agree to before installing the software.  The SLA states that: 1) Autodesk retains title to all copies of the software; 2) the customer has a nonexclusive and nontransferable license to use the software; 3) customers are prohibited from renting, leasing or transferring the software without Autodesk’s prior consent. In addition, there are other significant license restrictions including requiring the destruction of all copies of previous versions after an upgrade.

            Timothy Vernor purchased several unopened used copies of AutoCAD from one of Autodesk’s direct customers and resold the copies on eBay.  The District Court held that the sales were lawful and did not infringe on Autodesk’s copyright, because two of the Copyright act’s affirmative defenses apply to owners of copies of copyrighted works, the first sale doctrine and the essential step defense. 

            The Ninth District Court of Appeals in Vernor v. Autodesk, Inc., No. 09-35969, 9/10/10 overturned the lower court decision finding that Autodesk’s direct customers are licensees of their copies of the software rather than owners.  Because Vernor did not purchase the copies of the software from an owner, the first sale doctrine cannot be invoked and an essential step defense cannot be asserted.

            Because Vernor purchased the software from a licensee and not an owner, the sale did not constitute a transfer of ownership.  As a result, copyright infringement liability may be imposed upon Vernor and subsequent users of the software, because its subsequent use is in contravention of the original software license agreement. 

            What’s the lesson here for us?  Know your seller. Understand the terms of the license agreement before you buy.  And, begin with the end in mind.  Determine up front what your likely plan will be at the end of your use of the software.  Don’t expect to be able to sell, donate or transfer it unless the license specifically allows it. 

            Compliance Source develops, licenses and sells mortgage-financing forms to residential lenders.  Digital Docs develops, licenses and supports computer software that prepares residential-mortgage loan documents.  Jointly they developed technology that allows mortgagees to merge their own transaction-specific information with Compliance Source and Digital Docs proprietary forms and prepare customized loan documents. 

            GreenPoint Mortgage Funding signed a licensing agreement to use the technology to streamline its loan packaging process.  The licensing agreement allowed GreenPoint and its Originating Lenders access to closing documents.  It specifically prohibited GreenPoint from copying, selling or sublicensing the forms database.  The licensing agreement also included a specific license to “use the Software Products in a Production Environment at the Customer Site Locations.”  It specifically prohibited sub-licensing to third parties.  GreenPoint allowed its attorneys access to the technology to prepare loan documents. 

            Compliance Source and Digital Docs sued GreenPoint for breach of the license agreement, and the District Court found in favor of GreenPoint on the basis that use of the licensed property by a third-party solely on behalf of and for the benefit of the licensee is not a transfer or sublicense.

            In Compliance Source, Inc. and Digital Docs, Inc. v. GreenPoint Mortgage Funding, Inc. No. 09-10726, 10/18/10, the Fifth District Court of Appeals stated that because the license agreement expressly prohibited any use not explicitly permitted by the agreement itself, and because the attorney’s use was not explicitly permitted in the agreement, the District Court’s decision was in error, reversed and remanded for reconsideration.

            What’s the lesson here for us?  Simply granting any third party access to licensed technology may be considered a breach of your license agreement. Seek permission first, or better yet, negotiate up front your ability to grant attorneys or service providers access to or use of the technology in the normal course of business.

            Bottom Line:  Know what your licenses say!

Our guest blogger is Dan Wallace, a staff member at ICN and Caucus-The Association of Technology Acquisition Professionals. For advice on software license agreements, contact ICN.