Prof. Randal C. Picker, The University of Chicago Law School
October 3, 2011

Over the last year, the U.S. Court of Appeals for the Ninth Circuit has decided three interesting cases at the intersection of copyright, contract, and the first-sale doctrine.  Last September, in Vernor v. Autodesk, the court found that the underlying software transaction should be understood as a license, not a sale, and therefore copyright’s first-sale doctrine did not apply.  The first-sale doctrine, set forth in Section 109 of the U.S. copyright statute, allows purchasers of objects embodying copyrighted works to further sell those objects (books historically, now CDs, DVDs, and more).  (I say more about the case here.)  In January of this year, in UMG Recordings v. Augusto, the court addressed the effect of restrictive legends on the further transfer of promotional music CDs.  The court rejected those legends thereby triggering the protections of the first-sale doctrine. (More here.)

Last week, on Sept. 28, 2011, the Ninth Circuit returned to these issues in a case that turns on a conflict between the most valuable company on the planet, Apple, and upstart computer maker Psystar.  The Ninth Circuit embraces Apple’s approach to software licensing and, even more, limits the operation of the elusive doctrine of copyright misuse.

Psystar is the rarest of creatures in the computer world, a Macintosh clone maker.  The Wintel ecosystem has been organized in an open framework based on chips compatible with Intel’s instruction set and the Windows operating system.  Computer makers could and did enter this world at will and we have seen the rise of leading computer makers from college dorm rooms.  But the world of the Macintosh has been quite different.  This is a world of vertical integration, of hardware and software produced by one firm and designed to work together or not at all.  And the Macintosh has been a premium product, a high-end experience at an even higher price.

Psystar sought to change that by offering a marriage between the Macintosh operating system, OS X, and much less expensive hardware.  Psystar itself didn’t try to write a clone of OS X but instead went into the open market to buy copies of the Mac operating system.  Apple, after all, offered copies of OS X for sale in the open market and Psystar bought copies just as any other customers could.

Or did it?  Apple sees these transactions a little differently, as opportunities to enter into software licenses rather than to purchase software.  As the Ninth Circuit makes clear it in its opinion in Psystar, a key reason that software producers seek to structure these transactions as licenses rather than sales is that it makes it possible for the software producer to sidestep copyright’s first-sale doctrine.

Apple’s software licensing agreement for Mac OS X (SLA) comes with the key restriction: “This License allows you to install, use and run one (1) copy of the Apple Software on a single-Apple-labeled computer at a time.  You agree not to install, use or run the Apple Software on any non-Apple labeled computer, or to enable others to do so.”  This goes to the heart of Apple’s approach to vertical integration: Apple’s operating system runs on, and only on, genuine Apple equipment.

There are other interesting wrinkles here as to exactly how Apple tries to make this restriction work, including a technological lock-and-key system, but ignore all of that for today.  Psystar contended that Apple’s SLA amounted to copyright misuse.  Copyright misuse is a judge-created doctrine imported from an analogous doctrine in patent law known, unsurprisingly, as patent misuse.  The patent law doctrine emerged in the Supreme Court in 1942 in the Morton Salt case, where Morton tried to use its patent over salt machinery to insist that firms using those machines also buy unpatented salt tablets from it.

The Seventh Circuit had concluded that the restriction failed to meet the standard for a tying violation under Section 3 of the Clayton Act, but notwithstanding that, the Supreme Court found another path in creating a junior-varsity competition policy within patent law itself.  The Court understood Morton’s acts to be an “attempted monopoly of the unpatented article” and as therefore a basis for declining to block infringement of Morton’s patent given the “misuse of the patent.”

We still don’t know exactly what to make of this doctrine in copyright.  It is a young doctrine – Psystar dates it as 1990 in the Fourth Circuit’s opinion in Lasercomb – and its amorphous nature makes it an attractive defense to an allegation of copyright infringement.  In Psystar, the Ninth Circuit first embraced its prior analysis in Vernor in finding that Apple had entered into valid licenses of its operating system.  That would mean that the restrictions imposed on the use of Mac OS X by Apple through its SLA would not be subject to restriction by the terms of the first-sale doctrine.  It would have been surprising for the Ninth Circuit to switch courses barely a year after its decision in Vernor, but it is the copyright misuse analysis that is of greater interest.

If enforced, Apple’s licensing restriction would mean that Psystar could not do what it was attempting to do, namely just enter the market for Apple-compatible hardware.  Psystar could choose to try to enter both pieces of the market simultaneously – write its own version of Mac OS X matched with its own hardware – but that changes the required scale and scope of entry considerably.  (And that assumes that other IP laws wouldn’t prevent them from duplicating OS X.)  These questions of systems competition and the extent to which piecemeal entry should be facilitated or blocked are tricky, but you see quickly how the doctrine of copyright misuse might influence this.

Read the Ninth Circuit’s opinion in Psystar to see if you are persuaded by its analysis in distinguishing the prior copyright misuse cases.  The court notes that Apple doesn’t use the SLA to try to block Psystar from developing its own software.  No, in the court’s alternate world, Psystar wouldn’t enter into contracts with Apple at all; had it developed its own software, Psystar wouldn’t be doing any business with Apple at all.  And Morton’s competitors in 1940 were free to enter both pieces of the salt market – machines and tablets – but that didn’t move the Supreme Court to enforce Morton’s patent.

You may like the Ninth Circuit’s analysis in Psystar if you see it as limiting copyright misuse and facilitating locks-and-keys in a world of systems-based platform competition and be much less thrilled with it if you think that piecemeal entry is an essential part of that competition.