Copyright Infringement and the First Sale Defense

The Ninth Circuit’s recent decision in the case of Dolby Systems, Inc. v. Christenson, focuses primarily on the issue of which party bears the initial burden of proof with regard to a “first sale” defense in a copyright infringement action. As the reader will see, however, this case really provides a cautionary tale as to the consequences a party may face when it plays games during discovery.

Adobe, a software publisher and the copyright holder for titles such as the “Photoshop” series sued Christenson in October 2009 alleging copyright and trademark infringement. (This column will not address the trademark issues.) Christenson ran a website on which he “re-sells” Adobe software, which he purchases from third party distributors apparently without Adobe’s authorization. Adobe claimed that it does not sell its software, but merely licenses them and that Christenson infringed on its copyrights when he “re-sold” its titles. Christenson claimed that his activities were protected under the First Sale Doctrine, claiming that he lawfully purchased the software from third parties, who had also “purchased” the software from Adobe.

Adobe’s lawsuit against Christenson was apparently quite contentious. The Ninth Circuit observed that the lower court proceedings were “punctuated by discovery disputes, sanctions and multiple rulings on the admissibility and exclusion of evidence.” Both parties filed cross-motions for summary judgment. The District Court, after excluding certain evidence offered by Adobe because it had not been produced during discovery, granted summary judgment in Christenson’s favor as to the copyright infringement claim after recognizing that the First Sale Defense applied. Adobe appealed this finding to the Ninth Circuit.

The Ninth Circuit began by first recognizing that Adobe had established a prima facie case of copyright infringement. That is, Adobe had to “prove ownership of a valid copyright and violation by Christenson, the alleged infringer, of at least one of the exclusive rights conferred by the Copyright Act.”   The Ninth Circuit found that Adobe had provided admissible evidence that “established ownership of valid copyrights with a long list of computer software.” The Court then noted that the Copyright Act confers several rights on copyright owners, “including the right of distribution” and that it was undisputed that Christenson had sold copy of Adobe’s copyrighted works on his website without Adobe’s authorization. The Ninth Circuit concluded that “Adobe easily established a prima facie case of copyright infringement.” But that did not end the analysis. The Court then turned to Christenson’s defense under the First Sale Doctrine.

In a copyright infringement action, a defendant may raise the affirmative defense of the First Sale Doctrine which essentially provides that “the owner of a particular copy … lawfully made under this title, or any person authorized by such owner, 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).) The Ninth Circuit recognized the purpose of this defense is to limit a copyright owner’s exclusive distribution rights to the “first sale” only and that once the copyright owner has placed the item into the stream of commerce, the owner “has exhausted [its] exclusive statutory right to control its distribution.” However, it was unclear under prior precedent as to who bore the burden of proof with regard to the First Sale Doctrine. Furthermore, the Ninth Circuit recognized that in digital copyright cases, such as the one before it involving the transfer of software, one crucial factor is to distinguish between a “sale” and a “license.” For more than a century, the U.S. Supreme Court has recognized that the sale of an item can create a defense to a copyright claim while the mere granting of a license will not.

After reviewing the history of the Copyright Act and the amendments thereto, including the issue of the First Sale Defense, the Ninth Circuit recognized that the distinction between a “sale” and a “license” is not always so clear and that it had previously recognized that some software “licensing” agreements actually created a sale. The Ninth Circuit reasoned that to determine whether it was in fact a license, the copyright owner must specify: (1) that it is granting a license; (2) that the license significantly restricts the user’s ability to transfer the software; and (3) that there are notable use restrictions imposed on the user. If a copyright holder cannot satisfy these factors, a court is likely to find that a sale of the software has taken place instead of the granting of a license.

Normally, a defendant raising an affirmative defense bears the burden of proof in establishing the applicability of that defense. The Ninth Circuit concluded that this rule is no different for a defendant asserting the First Sale Defense. That is, the Ninth Circuit held “the party asserting the First Sale Defense bears the initial burden of satisfying the statutory requirements” in that it must show ownership through a lawful acquisition. In essence, “the party asserting a First Sale Defense must come forward with evidence sufficient for a jury to find lawful acquisition of title through purpose or otherwise to genuine copies of the copyrighted software.” Once the defendant has made that showing, “the burden shifts back to the copyright holder to establish such a license or the absence of a sale.”

The Ninth Circuit concluded that this burden shifting procedure made sense because “the copyright holder is in a superior position to produce documentation of any license and without the burden shifts the First Sale Defense would require a proponents prove a negative, i.e., that the software was not licensed.” The court found that this approach was both fair and comported with the legislative history concerning the Copyright Act.

Turning to the case before it, the Ninth Circuit agreed with the lower court that it was undisputed that the defendant had produced evidence that he had lawfully purchased genuine copies of the Adobe software from third party suppliers, i.e. the defendant produced copies of invoices showing his purchases of the software.

Adobe argued that the defendant could not have lawfully acquired the software products because it always licenses its software and does not sell copies of it. However, the Ninth Circuit held that the burden of proof on this issue shifted back to Adobe to come forward with admissible evidence to prove the existence of the claimed licenses. The Ninth Circuit recognized that normally Adobe would produce copies of the specific license agreements so that the court could determine whether in fact a true license had been granted. The Ninth Circuit continued that putting the burden on Adobe of providing copies of the license agreements was not an undue burden since “Adobe and Adobe alone knows the parties with whom it contracts.”

As explained above, there had been a litany of discovery disputes, which apparently included Adobe’s refusal to produce copies of its licensing agreements during discovery. That is, Adobe refused to produce the agreements it had with the “sellers” of the software to Christensen. In fact, it appears that Adobe delayed until after the close of discovery and only in opposing the defendant’s summary judgment motion, to produce these documents. However, the trial court refused to consider this evidence because it had not been produced during discovery and the Ninth Circuit found that it was not error to do so. Given that Adobe, as a result of the exclusion of this evidence, could not come forward with admissible evidence to show that it had granted a license with respect to the software products “re-sold” to the defendant, the Court held that the defendant had met its burden of establishing the First Sale Defense and affirmed the dismissal of Adobe’s copyright infringement claim.

While the Adobe v. Christenson case helped clarify the burdens of proof when the defense of the First Sale Doctrine is raised in a copyright infringement claim, the moral of the case appears that a plaintiff should not “play games” during discovery. Reading between the lines, it is clear that had Adobe timely produced the licensing agreements at issue, it is unlikely that Christenson would have been entitled to summary adjudication of the copyright infringement claims. In fact, Adobe may have even been entitled to judgment in its favor without the necessity of a trial.