In Apple, Inc. v. Psystar Corporation, 2011 U.S. App. LEXIS 19707 (9th Cir., September 28, 2011) (“Psystar”), the Ninth Circuit rejected Psystar’s “copyright misuse” defense to Apple’s infringement claim, reaffirming that this oft-misunderstood defense only applies where the alleged misuse by the software licensor “involves restraining development of competing products.” Here, the Ninth Circuit held that Apple’s Software Licensing Agreement (“SLA”) did not restrict Psystar’s ability to develop its own computer hardware and software, thus distinguishing the case from the Fifth Circuit’s decision in Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772 (5th Cir. 1999), where misuse was found.
The Copyright Act provides that the owner of a copyright has the exclusive right to distribute copies of its works, including by sale or other transfer of ownership. 17 U.S.C. § 106(3). However, the Act also provides that the owner of a copy of a copyrighted work “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” 17 U.S.C. § 109(a). Section 109(a) is a codification of the “first sale doctrine,” which holds that “[o]nce [a] copyright owner consents to the sale of particular copies of his work, he may not thereafter exercise the distribution rights with respect to those copies.” Omega S.A. v. Costco Wholesale Corporation, 541 F.3d 982, 985 (9th Cir. 2008), aff’d by an equally divided court, 131 S. Ct. 565 (2010) (per curiam) (quoting 2-9 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 8.12(B)(1), at 8-156 (1978 ed.)). The “first sale doctrine,” however, does not apply to licensed works. 17 U.S.C. § 109(d); Vernor v. Autodesk, Inc., 621 F.3d 1102, 1107-08 (9th Cir. 2010). Thus, a person who buys licensed software may not resell it, claiming that he or she is the “owner of a copy” of a copyrighted work. Vernor, 621 F.3d at 1111. As the Ninth Circuit in Psystar explained, “[i]t is this distinction between sales and licenses that has caused the use of software licensing agreements to flourish and become the preferred form of software transactions.”
As a result of the proliferation of licensing agreements, alleged infringers of software products have turned to the doctrine of “copyright misuse” to attempt to limit the scope of license restrictions. Under this doctrine, courts will not enforce restrictions on use in licensing agreements that effectively prevent the development of competing products. For example, in Practice Management Info. Corp. v. American Medical Ass’n, 121 F.3d 516 (9th Cir. 1997), the Ninth Circuit upheld a copyright misuse defense where the license precluded use of the plaintiff’s copyrighted coding system—which had become an industry standard—with any competitors’ products. In contrast, in Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995), the court held that the defendant was not entitled to assert the defense where the licensing restriction simply prohibited licensees from making copies of the plaintiff’s software and from allowing third parties to use it. In that case, the court held that the software license was not unduly restrictive because it did not “attempt to prohibit [the licensee defendant] or any other [independent service operator] from developing its own service software to compete with [the plaintiff].” Triad, 64 F.3d at 1337.
In Psystar, the Ninth Circuit held that the restrictions in Apple’s SLA were closer to those in Triad than in Practice Management, and thus affirmed the district court’s order holding that Psystar was not entitled to rely on the defense of copyright misuse. In Psystar, Apple licensed its Mac OS X copyrighted operating system software, either preinstalled on its computers or in a stand-alone retail-packaged DVD for the sole purpose of enabling Apple’s existing customers to upgrade their computers to the latest version of Apple’s operating system. Apple also uses “lock-and-key” technology, which prevents its operating system from operating on non-Apple computers. In 2008, Psystar began selling its own “Open” computers with an unopened copy of Apple’s retail-packaged DVD operating system software to run on Psystar’s computers. Psystar was able to make Apple’s operating system work on Psystar’s computers by engineering a work-around of Apple’s lock-and-key technology.
Apple sued Psystar under various theories, including copyright infringement, and Psystar asserted the doctrine of copyright misuse as a defense. The district court granted Apple’s motion for summary judgment, holding that Psystar’s use of Apple’s licensed software was not “fair use,” that Psystar infringed Apple’s copyrights and exclusive right to create derivative works, that Apple’s SLA did not constitute copyright misuse, and that Psystar’s use of decryption software to access Apple’s operating system violated the Digital Millennium Copyright Act (“DMCA”). Apple, Inc. v. Psystar Corp., 673 F. Supp. 2d 931 (N.D. Cal. 2009). The district court also entered a permanent injunction enjoining Psystar from infringing Apple’s copyrights. Apple, Inc. v. Psystar Corp., 673 F. Supp. 2d 943 (N.D. Cal. 2009).
The Ninth Circuit affirmed the district court’s liability findings, but reversed a separate order by the district court sealing certain Apple documents filed in the action. After holding that Apple’s SLA was not a “sale,” but rather created a licensor/licensee relationship, the Ninth Circuit rejected Psystar’s claim that Apple’s SLA was unduly restrictive, and therefore, constituted copyright misuse. Concluding that the case before it was similar to its earlier decision in Practice Management, the court held that Apple’s SLA “merely restricts the use of Apple’s own software to its own hardware,” it does not preclude others from “independently developing and using their own operating systems,” and thus Psystar is free to develop its own software for its own computers. The court also distinguished the Fifth Circuit’s decision in Alcatel, noting that the license in that case effectively prevented the development of competing products, whereas in Psystar, the defendant could independently develop whatever hardware and software products it wanted. The Ninth Circuit also affirmed the district court’s permanent injunction against Psystar.
In Psystar the Ninth Circuit noted that it has applied the doctrine of copyright misuse “sparingly.” Indeed, in distinguishing Triad and Alcatel, the court reiterated that this is a narrow defense available only in cases where the subject license actually “prevents the development of competing products.” Whether Psystar will petition the Supreme Court for review, or whether the Supreme Court will even accept review of the Ninth Circuit’s decision, is unclear. What is clear is that copyright owners—and not just software manufacturers—are increasingly using licenses to help them retain control over the use of their products. And while the Ninth Circuit’s decisions in Psystar, Practice Management, and Triad demonstrate that all copyright misuse cases are intensely fact specific, Psystar teaches that licensing restrictions will generally be upheld unless they are abusive or improperly stifle competition.