Notes & Comment
Vol. 2011, No. 4
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Copyright Law
Software Licenses and Copyright Misuse
We’ve previously written about the importance, at the start of a business relationship involving intellectual property, of properly documenting the parties’ rights and obligations. Failing to do this potentially threatens a small company’s very survival. We’ve also highlighted the importance of respecting limitations in software license agreements.
A new decision by the U.S. Court of Appeals for the Ninth Circuit involving Apple software license agreements further illustrates this point. The case demonstrates the necessity, wisdom and value of using thorough and well-written software license agreements to protect valuable intellectual property. Apple, Inc. v. Psystar Corporation, Civ No. 10-15113 (9th Cir. September 28, 2011).
The Facts
Psystar Corporation is a small computer manufacturer. Apple, Inc., of course, is a global leader in consumer software and hardware technology. Psystar sought to leverage Apple’s software for its own benefit by copying Apple’s Mac OS X Operating System using a technical process that created a master version, and it then loaded copies of Apple’s reproduced OS into each of Psystar’s Apple-like computers. Psystar essentially sought to produce knock-off Apple computers without doing the hard work of developing its own technology. As part of this scheme, Psystar also acquired standalone copies of the same Mac OS X system. It included with each computer a new shrink-wrap copy acquired from Apple, as well as an onboard copy of Apple’s Mac OS X Operating System that Psystar had reproduced. Apple wasn’t amused and litigation ensued.
As one would expect from a world class technology leader, Apple’s software was distributed according to the terms of a thorough and comprehensive software license agreement (SLA). The SLA prohibited use of Apple’s OS on any computers that were not “Apple-labeled.” In other words, Psystar wasn’t allowed by the SLA to copy Apple’s software and distribute it with Psystar’s computers. Apple’s SLA contained standard license grants and strict usage limitations, none of which were remarkable. More remarkable were the innovative legal arguments Psystar advanced to circumvent Apple’s SLA.
Psystar claimed that Apple’s SLA was a misuse of Apple’s copyright because it improperly sought to limit Psystar’s lawful use of Apple’s Mac OS X system on Psystar’s computers. Psystar asserted that it had purchased ownership of Apple’s software under copyright law’s “first sale doctrine.” Psystar next argued that as lawful owner of the Apple software, any limitations in Apple’s SLA on its use of the software with Psystar’s computers amounted to copyright misuse by Apple. The trial court and the Ninth Circuit rejected Psystar’s arguments.
The Decision
The Ninth Circuit had two main issues to decide: did Psystar’s acquisition of Apple’s OS software on the open market constitute a “first sale” of the software by Apple that gave ownership of the software to Psystar? If yes -- if Psystar was lawful owner of the Apple software it acquired -- were Apple’s SLA restrictions on the software that Apple sought to enforce in the litigation (such as the restriction that Apple’s OS could not be distributed with “non-Apple-labeled” computers) an unlawful misuse of Apple’s copyright in the software?
First Sale Doctrine. The “first sale doctrine” states that purchasers of copyrighted works acquire ownership of the works and may sell, copy, distribute or do with them as they please without infringing the original seller’s copyright. The copyright statute specifically says that the first sale doctrine doesn’t apply to transactions involving the “rental, lease, loan, or [other such distribution]” of the IP. In those types of transactions, the customer doesn’t acquire ownership of the copy that they buy, only a license to use it.
Software licenses have emerged as the principal means of reserving ownership of underlying software with the vendor. In other words, one who acquires a copy of software pursuant to a SLA typically is a licensee of the software and not its owner. They only buy a license to use the software, not title to the software itself. The owner of the software -- the licensor -- usually sets forth the rights and obligations of the licensee in the SLA. That’s what Apple did in this case. The “first sale doctrine” didn’t apply here. Apple continued to own the Mac OS X system, Psystar only acquired a license to use it, and Apple’s SLA governed what Psystar may and may not do with it.
Copyright Misuse. In some cases, the owner of software may, in a SLA, try to impose anti-competitive terms and conditions on a licensee that can amount to copyright misuse. Copyright misuse is a judicially-created affirmative defense to copyright infringement. If a licensee is sued for copyright infringement for using software contrary to the terms of an anti-competitive SLA, the licensee may have a defense of copyright misuse.
However, the copyright misuse defense is rarely successful, and usually only when a copyright owner seeks to leverage a limited copyright monopoly to control things that aren’t covered by the copyright monopoly. For example, a SLA restriction that bars a licensee from using competitive products could be copyright misuse. Similarly, a SLA that prevents a licensee from developing products that compete with the licensor is a possible misuse of copyright. In Apple, Inc. v. Psystar Corporation, by contrast, the SLA required Psystar to use Apple’s software only on Apple’s computers. That’s not an impermissible overreach of Apple’s software copyrights. The SLA didn’t bar Psystar from developing its own software and hardware or using third party products. There was no copyright misuse.
Summary and Conclusion
Psystar’s legal arguments and business model didn’t pass the smell test. Apple distributed its valuable software under the terms of a standard software license agreement. It retained ownership of the software and could reasonably control what a licensee may do with the software. A SLA restriction limiting use of Apple’s software to Apple’s computers was reasonable. There are at least two key takeaways from the decision in Apple, Inc. v. Psystar Corporation: always use SLAs when distributing valuable intellectual property, and don’t include unreasonable anti-competitive restrictions in the SLAs.
© Matthew Joseph 2012. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, corporate formations and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.