The Incredible Shrinking First-Sale Rule: Are Software Resale Limits Lawful?

Abstract

This article addresses efforts by software publishers to control the secondary market in their products, by invoking the rights that the Copyright Act grants them to control distribution of copies of their products, and by imposing contractual restraints on redistribution of those products. Under the Copyright Act's first-sale doctrine, a copyright owner's right to control distribution of a copy of its copyrighted work, such as a CD-ROM containing a computer program, is exhausted with its initial sale of that copy. Software publishers routinely seek to avoid application of this doctrine by arguing that their products are only licensed, not sold; and numerous courts that have considered this argument have agreed with the software publishers. The article demonstrates that the courts have erred in accepting this argument, misunderstanding the crucial distinction the Copyright Act makes between an intangible copyrighted work and the material object on which it is distributed. Software publishers likewise try to avoid the first-sale doctrine by declaring that they retain title to the software copies they distribute, by placing restrictions on their distributors' authority to transfer the copies, and by attaching running use restrictions on those copies in the form of clickwrap licenses. The article shows that these approaches too are of dubious efficacy. It then describes two readily available distribution methods that software publishers may employ to blunt the impact of the first-sale doctrine: rental rather than sale of the software copies, and operating as an application service provider.

The article next looks at the issue from a public policy perspective, considering arguments for amendment of the Copyright Act to eliminate the first-sale doctrine with respect to software copies. It finds that the policy considerations that justify legal rules promoting free alienability of copies of copyrighted works in general apply just as strongly to software copies, and that the proposed amendment of current doctrine is not justified.

Finally, the article demonstrates that software publishers cannot extend their control over copies of their products by imposing contractual restrictions on the authority of end users to resell or give away their software copies, since the Copyright Act preempts state law to the extent it would allow enforcement of such restrictions.

Keywords: Software, first-sale

JEL Classification: K19