Friday, September 30, 2011

9th Circuit Apple software decision offers another lesson for software sellers: license restrictions vs. competition

Author:  Tom Casagrande
The 9th Circuit recently offered additional clarity for software sellers about what kinds of license restrictions are permissible.  In short, even very strict restrictions are permissible as long as they do not, by their terms or in effect, prevent users from developing competing products.

Apple Inc. v. Psystar Corp., No. 10-15113 (9th Cir. Sept. 28, 2011) concerned Apple’s claim that Psystar infringed Apple’s copyright when it bought Apple MAC OS X operating system software, imaged it on to non-Apple computers, and then sold the computers.  Psystar’s activities violated a restriction in the license Apple purported to grant purchasers at the point of sale, which prohibited “licensees” of the software from using the system on non-Apple computers. 

Psystar argued that this restriction was either inapplicable or invalid.  Specifically, Psystar first argued that the transaction was a sale and, as such, first sale doctrine precluded Apple’s attempt to restrict how Psystar used the software.  In the alternative, Psystar argued that even if the transaction was license, the use restriction constituted misuse of Apple’s copyright. 
The 9th Circuit noted held that Apple validly structured the transaction as a license and not a simple sale.  Invoking its recent discussion of the sale/license issue in Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111 (9th Cir. 2010), the court noted that the document accompanying the purchase contained the three earmarks of a license:  (1) it stated that it was a license and not a sale; (2) it contained significant transfer restrictions; and (3) it contained significant use restrictions.  First sale doctrine therefore did not immunize Psystar’s activities.

Nor did the restrictions in the license amount to copyright misuse, because they reasonably restricted use of the software but did not prevent the development of competing products.  The court distinguished decisions in cases where similar types of restrictions on the types of products with which software could be used effectively made it impossible for users to develop competing software.