Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:

A new decision out of the 9th Circuit court of appeals is potentially bad news for GameStop, eBay, gamers and pretty much anyone who buys software. The full decision in Vernor v. Autodesk is available here [PDF], but this column should provide a pretty good summary and analysis of the case, which deals primarily with a legal concept called the "first-sale doctrine." The doctrine, which falls under copyright law, is what allows libraries to lend books, DVDs, CDs, etc., and what allows for the concept of resale.

The first-sale doctrine was added to the Copyright Act of 1976 after being introduced in case law in 1908. In short, the doctrine lets you, as the purchaser of a legal copy of a book, movie, game, or other copyrighted work, resell or give away that legal copy to subsequent owners without permission from the copyright holder. It doesn't give you any rights to the work protected by the copyright, or the ability to otherwise violate the copyright by making copies of the work; it only removes the copyright holder's control over legal, physical copies of the work after they are first sold to a consumer. In other words, GameStop's business owes everything to this doctrine.

Few issues cropped up around the first-sale doctrine prior to the advent of software. A copy was a copy, and first sale was simply applied. While there were some isolated issues concerning movie reels, the issue of sold vs. licensed only really became a major point of contention with the widespread use of software. The debate over licensed vs. sold is at the heart of the Autodesk case, and the 9th Circuit's ruling is what should give software consumers some cause for alarm. The practical implication of the ruling isn't perhaps as disconcerting as the potential suggested not only by the ruling but also by arguments presented by Autodesk: the potential death of first sale for digital media and software as a whole.

Imagine a future in which there is no secondary market for used games.

So, what is the sold vs. licensed debate? Addressing this issue is the first step to understanding the wider implications at hand. In short, copyrighted material that is licensed to an end user is exempt from the first-sale doctrine, and the license agreement controls what the licensee (the consumer) can and can't do with the product. As pretty much every PC or Mac game comes with an End User License Agreement, there has been a long standing argument between whether or not those titles are subject to the first-sale doctrine, just as other licensed software would be. Console games, on the other hand, have been viewed more like music and movies, which have always been considered sold and subject to first sale for home use.

While past cases haven't been perhaps as clear cut on software, the Autodesk decision is relatively unequivocal: The software was licensed and was therefore not subject to the first-sale doctrine. In fact, the factors stated by the court for when a software is "licensed" make it such that most all retail software with an EULA is in fact licensed. Those factors are that the copyright holder: "(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." So long as these three factors are satisfied, the software is licensed and therefore not subject to first sale. The court, however, goes on to describe the legislative history of the doctrine, noting:
The House Report for § 109 underscores Congress' view that the first sale doctrine is available only to a person who has acquired a copy via an "outright sale". H.R. Rep. No. 94-1476, at 79 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5693. The report also asserts that the first sale doctrine does not "apply to someone who merely possesses a copy or phonorecord without having acquired ownership of it." Id.
In short, unless there is an "outright sale," there is no first sale. Even if you come to possess software secondhand from someone who never acquires ownership, you aren't protected from being subject to infringement for copies created on your hard drive or parts of the software stored in RAM. More importantly, the ruling discounts the elements of indefinite possession and recurring license payments, something that, in the past, had been more critical to the analysis of sale vs. license.

The 9th Circuit's ruling is what should give software consumers some cause for alarm.

It is worth noting that the court ignores the "economic realities" argument that managing the secondary market in this way is highly impractical and places an exceptional burden on the purchaser of secondhand goods, not to mention libraries. The complete discussion of this point starts on page 13885 (legalese for "page 23") of the decision, but in short, the court accepted the position that forcing everyone to buy copyrighted material via a license from the creator "lowers prices for all consumers by spreading costs among a large number of purchasers" and reduces piracy.

The implication of the ruling, however, is much broader. It's been suggested that, given notice and appropriate compliance with the factors noted, anything could be similarly removed from first sale, with eBooks being the most likely next candidate. Digitally distributed games are, on most platforms, already subject to controls over transfers. Even retail console games, with some changes to sales methodologies, could be conformed to these rules; not to mention practically any other intellectual property (though it would likely be the subject of a court battle).

Given the explosion of digital media and with these changes to the first-sale concept, imagine a future in which there is no secondary market for used games and content; in which there are no libraries. After all, without a first-sale doctrine, neither can exist. That's not to say there aren't legitimate concerns from content creators, especially with the ease of duplicating digital content. As is always the case with intellectual property, a balance needs to be struck between the rights of producers and the rights of consumers. Given the amount of time it traditionally takes for the government to create these kinds of rules, I think the industry should look at ways to accomplish this; whether that's creating a content management system that includes an ownership transfer mechanism on platforms like Xbox Live or Steam, or a more legitimate way to transfer ownership of retail games with activation codes. The current technology could support such a system; it's just a matter of creating a good and efficient way to do so.

[Image credit: Stan]


Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc., where he is a board member of the Dallas chapter. Opinions expressed in this column are his own.

Reach Mark at: lawofthegame [AAT] gmail [DAWT] com

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This article was originally published on Joystiq.