Evan on Engineering Software

Found this blog entry, written by Julie Machak-Fulks, at the Scott & Scott law firm's web site:

"The BSA and SIIA are not the only organizations pursuing business for software copyright infringement. Though it is a member of both the BSA and SIIA, Autodesk, which manufactures the popular design software AutoCAD, often pursues audit targets on its own.

"The audits begin much like those instituted by the BSA or SIIA. The target of Autodesk’s audit will receive a letter from a law firm representing Autodesk demanding the business’ cooperation in disclosing the number Autodesk installations on its network and the number of Autodesk licenses it owns, including serial numbers. The law firm will assert it has received information that indicates the business may have more installations of Autodesk software than it is licensed to use. The letter will go on to describe the various penalties associated with copyright infringement and it may threaten the business with civil litigation.

"Targets who receive such letters should treat the matter very seriously. It is important to know your legal rights and protect your legal position before responding to a request for information from a software publisher who is trying to conduct an audit. Additionally, many companies who prepare their own responses to Autodesk without the benefit of counsel and before conducting a thorough investigation often receive an unexpectedly high settlement offer from Autodesk.

"In many cases, Autodesk demands a settlement payment calculated as the MSRP of the allegedly unauthorized products installed on the business’ network multiplied by three. The multiplier, Autodesk argues, is the penalty for using unauthorized software and is assessed in lieu of proceeding with formal judicial resolution. The use of multipliers as an approximation of damages is a hotly contested issue."

I actually wasn't looking for anything on this subject.  I just stumbled onto it.

Once upon a time, I was an AutoCAD reseller.  Autodesk used to pay resellers for reporting users with unauthorized copies.  I always felt it was a problem -- Autodesk winked and nodded at unauthorized copying for years, gaining marketshare as a result, then turned around and asked its resellers to turn in their customers.

In any event, Autodesk still makes a lot of money from settlements for unauthorized copies. They list some of the settlements on their website.  Autodesk also provides information and software on its website for doing "self-audits."

Here's my advice: Take Autodesk's EULA to a lawyer, and have them tell you what it says.  Then draw your own conclusions.

A bit of fun, regarding Autodesk's software license agreements.

Autodesk includes a clause in their licenses, that if you sell your copy of AutoCAD (the box, documentation and disks), your software license automatically terminates.

Yep -- if you sell your copy of AutoCAD, you're no longer authorized to use it.  All of Autodesk's obligations to you immediately cease. And all of your obligations to Autodesk immediately cease.  There is no license agreement in force.

That means you can't transfer your license agreement to the buyer... because you no longer *have* a license agreement to transfer.  All you can transfer is the box, documentation, and disk.  Autodesk no longer has any recourse against you, because your license with them no longer exists.

Yet, if the buyer (who bought a box, documentation, and disk from you) happens to insert the disk  into their computer... up will pop a screen that says... "Autodesk is willing to license the accompanying software to you only upon the condition that you accept all of the terms contained in this license agreement..."

Wow... imagine that.  The software clearly popped up a bonafide offer from Autodesk to license the buyer the software.  No need to transfer the original license -- the software happily offers the buyer a brand new license.

Now, some lawyers might argue that this doesn't mean anything... but that would be a dangerous argument, don't you think?  It could turn around on them, and undermine any chance that courts would be willing to enforce the validity of clickthrough agreements in other cases.

I think this is hilarious.  I think it's so hilarious that Autodesk's lawyers don't even want to consider that it might be true.

(I am not a lawyer, though I've hired enough of them in the past.  You want to legal advice on software licensing?  Get your own lawyer. Consider my comments here for "entertainment purposes only.") 

Randall Newton recently wrote The Man Who Dared to Sell AutoCAD R14 on eBay, about Tim Vernor, an eBay seller who is suing Autodesk over the right to resell original copies of old versions of AutoCAD.  Owen Wengerd has the court documents on his website, www.adskvoda.com.

The issues at hand in this case are not unique to Autodesk or AutoCAD.  The Electronic Frontiers Foundation filed suit against Universal Music Group a month ago, in a case that deals with many of the same issues.

Following is my understanding of the background of the case.  I will admit ahead of time that I'm going to make some presumptions, since I've not seen the relevant ebay listings, and don't have any inside information as to who did exactly what.  But I think most of my presumptions are reasonable.

Tim is in the business of selling products on eBay.  He bought an original copy of AutoCAD R14 -- presumably including the documentation and disks -- from a third-party, then offered it in an auction on eBay.  Autodesk filed a "Notice of Claimed Infringement" with eBay, whereupon eBay cancelled Tim's Auction.  Tim appealed the cancellation with eBay, and after Autodesk didn't respond to the appeal, eBay reinstated the auction.  Actually, Tim went through this process five separate times over a two year period, with five separate copies of AutoCAD R14.  After the fifth time, eBay suspended his seller account, presumably because of too many notices of infringement -- even though Autodesk never followed up to stop the auctions after Tim appealed.  Although Tim was ultimately able to get his account reinstated, he decided to sue Autodesk -- the only recourse he had available to stop them from filing further notices of infringement, and endangering his ability to make a living.

When Autodesk filed its notices of claimed infringement with eBay, it would have almost certainly used eBay's electronic form, which has two significant sections:

• The first is a statement, signed under under penalty of perjury, that they have "a good faith belief that the listings identified... offer items or contain materials that are not authorized by the IP Owner, its agent, or the law, and therefore infringe the IP Owner’s rights."  

• The second is an section where they must identify, from a predefined list, the legal basis for the notice.   In this case, the only relevant choice would have been the following: "3.1. Software offered for sale in violation of a license."

Seems pretty clear cut, doesn't it?

Actually... it's clear cut enough that Autodesk may be in trouble here.

Tim was offering items that were genuine, original, and came from Autodesk.  He wasn't offering fake goods, or unauthorized copies.  The box, the documentation, and the disks were all the real thing. I presume that he was not offering his own  license to use the software (which would not have been authorized by Autodesk), but was just passing along whatever was in the box.

You might counter that Tim was violating the AutoCAD R14 license agreement by selling this package.  But Tim wasn't subject to the license agreement.  He'd bought the package from someone else.  Since he didn't install it (I hope he didn't), there was never a contract formed between him and Autodesk.  

It might help to understand this if I explained that there is a difference between a software package, and software in the abstract.  A software package may consist of a number of components, including packaging, books, documentation, serial numbers, activation codes, and disks.  Software in the abstract is just the set of instructions -- effectively a blueprint -- separate from physical manifestation (The Supreme Court made this a lot clearer a few months ago, in AT&T v. Microsoft.)  Tim wasn't selling software in the abstract.  He was selling a box, some books, documentation, and disks.  All tangible goods.

In most parts of the United States, when you go into a computer store, and plunk down your hard-earned cash to buy a software package, the terms of that purchase are subject to an important law: The Uniform Commercial Code.  Here is the text of the California Commercial Code. Lawyers love to argue about whether software in the abstract is a good or a service, and thus whether it's subject to article 2 of the UCC.  I suppose the argument is interesting if you order the software electronically, and its delivered by the internet, as a series of pulses of light across miles of fibre optic cable.  The argument is a little less interesting with AutoCAD R14, which comes in a box you can put on the shelf.  Try and tell Best Buy stores that all those boxes of software they have sitting around aren't "goods" under the UCC. 

Another important law relating to this matter is the US Copyright Act, 17 U.S.C. § 109, which gives owners of a legal copy of a copyrighted thing the right to sell it.  This is called the first sale doctrine.

The typical response from software vendors about the first sale doctrine is to point out that their software is licensed and not sold.  Thus, the license trumps the first sale rights provided under copyright law.  This argument holds water -- if the customer has actually assented to the license.  Until that assent, there is no contract formed.  Adobe tried this tack a few years ago, and lost -- making case law in the process.

In Tim's case, I see a couple of interesting potential twists.

• The person who signed the eBay notice of claimed infringement, Andrew S. Mackay, likely had no good-faith basis to believe that the goods and materials offered by Tim were not genuine, and thus not authorized by Autodesk.  Nor did he apparently have any basis to believe that a license agreement existed between Tim and Autodesk which would have limited Tim's statutory rights.  So, in short, he likely perjured himself.

• If it's Autodesk's policy to send notices of claimed infringement on many AutoCAD products that are being listed on eBay, without first checking to see if there exists a license agreement between the seller and Autodesk, then it gets more interesting... because it shows a pattern of potentially fraudulent behaviour.  This could open up RICO and class-action claims.

• Autodesk might try to show that Tim, in the process of acquiring the AutoCAD R14 packages, induced the sellers to violate the terms of their license agreements with Autodesk.  Might be hard to do, if he bought the packages in the normal course of business. (It could be even more fun if he bought them through a bankruptcy trustee sale -- since a judge would have already ordered their sale.  It could get complicated.  Autodesk might first have to establish that there was a valid license agreement in effect for each package, then it would likely have to defend the conscionability of any clauses which "took back" ownership of disks and documentation.  Autodesk's recourse would more than likely be against the original customer, not Tim.

Who knows how long Tim wants to ride this?  If he's serious, he's going to probably need to file a second ammended complaint, to clean up some of his claims and requests for relief.  I think he ought to contact the Chilling Effects Clearinghouse, to see if he can get high quality representation.  Autodesk always hires top-gun lawyers -- I'd not want to go up against them pro se.

In any case... I'm not a lawyer.  I can't give Tim any legal advice.  But I can watch to see what Autodesk has to say in responding to his complaint.

Many years ago, Intergraph acquired the Clipper processor division of Fairchild Semiconductor, and as part of the deal, got some microprocessor related patents.  It wasn't that Intergraph wanted to be in the microprocessor business, but that their workstations of that vintage were based on the Clipper, and if they wanted to stay in the business, they were forced into acquiring the technology, lest Fairchild abandon it.  Fast-forward a few years, and the Clipper is history -- but the patents aren't.  After an epic legal battle, Intergraph won about $700 million in settlements from Intel and AMD.  It then proceeded to go after Intel customers HP and Gateway, getting another $150 million or so.  Intergraph is now going after Fujitsu, NEC, and Toshiba.

You'd think that the settlement with Intel would have protected their customers, by providing them with an "implied license."  Yet, that's not the case.

On July 7, 2006, the Federal Circuit ruled in the case of LG Electronics, Inc. v. Bizcom Electronics, Inc., Civ. 05-1261, that a license agreement that disclaimed an implied license may also establish a conditional sale, thus defeating the application of patent exhaustion.

Rather than try and explain this all in my own words, I'm going to (with their permission) use the analysis by the IP law firm Fenwick & West:

LG Electronics, Inc. (“LGE”) owns several patents relating to information management within personal computers and brought infringement suits against a number of defendants in the personal computer industry.  Prior to launching suit, LGE had granted Intel a license that covered its entire portfolio of patents on computer systems and components.  The license covered Intel’s microprocessors and chipsets.  The defendants purchased the microprocessors and chipsets from Intel or its authorized distributors and installed them in computers.  The LGE-Intel license expressly disclaimed any implied license to Intel’s customers who combined the microprocessor or chipsets with non-Intel products.  The license also required Intel to notify its customers that they were not licensed to combine the Intel products with non-Intel products.   The appeal involved Intel customers who each received such notice from Intel.

In its suit, LGE asserted that the combination of Intel manufactured microprocessors or chipsets with other computer components infringed its patents.  In response, the defendants argued that LGE’s claims were barred because by licensing the patents in suit, implied licenses were created that covered the accused combinations, and the patent exhaustion doctrine was triggered.  On motions for summary judgment, the District Court rejected the defendants’ implied license defense, but concluded that the patent exhaustion doctrine applied to each of the apparatus claims of the patents within the Intel license.  LGE appealed the District Court’s resulting grant of summary judgment of noninfringement.

Decision

The Federal Circuit first addressed defendants’ implied license argument.  To prevail on an implied license defense, defendants must establish that the products have no noninfringing uses and the circumstances of the sale “plainly indicate” that the grant of a license should be inferred.  The Federal Circuit agreed with the District Court’s conclusion that the circumstances of the sale did not warrant the inference of a license in this case. The Federal Circuit found that, regardless of any noninfringing use, no implied license existed because Intel expressly informed defendants’ that its license with LGE did not extend to the combination of an Intel product with a non-Intel product.

The Federal Circuit next turned to the patent exhaustion doctrine.  Under this doctrine, an unconditional sale of a patented device exhausts the patentee’s right to control a purchaser’s use of the device.  Courts have reasoned that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods.  The exhaustion doctrine, however, does not apply to an expressly conditional sale or license.  If a condition is placed on the sale or license, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the ‘use’ rights conferred by the patentee.

Applying this doctrine, the District Court concluded that defendants’ purchase of the microprocessors and chipsets from Intel constituted an unconditional sale.  In reaching its conclusion, the District Court noted that LGE was entitled to impose conditions, but failed to do so. The District Court concluded that Intel’s notification letter was not sufficient to transform an unconditional sale into a conditional one, because it did not demonstrate that defendants agreed as a condition of sale not to combine the microprocessors and chipsets with non-Intel products.  Thus, the District Court found LGE’s patent rights exhausted because defendants’ purchases were in “no way conditioned” on their agreement not to combine the Intel products with other non-Intel parts.  

The Federal Circuit disagreed.  First, it stated that the LGE license itself constitutes a sale for exhaustion purposes.  It created a conditional sale by disclaiming a license to combinations of Intel and non-Intel components and requiring Intel to notify its customers of the limited scope of the license.  The Federal Circuit concluded that therefore, LGE’s rights in asserting infringement of its system claims were not exhausted.

Impact

This decision establishes that a patent holder can avoid the application of both the implied license and the patent exhaustion doctrines to its apparatus claims by placing appropriate restrictions in the scope of the licenses it grants and requiring downstream notice by the licensee of those restrictions.

This decision seems to strengthen Intergraph's position in going after Intel's customers.  Yet, one thing I've wondered about is how Dell managed to dodge a bullet, and get Intel to cover them under the original agreement with Intergraph.

I think I've figured it out.  I had a Dell motherboard go bad a while back.  Turns out, it was manufactured by Intel.  In the LGE suit, the basis for going after Intel customers was that "the combination of Intel manufactured microprocessors or chipsets with other computer components infringed its patents."

My guess is that Intel has essentially made their customers "an offer they can't refuse."  If the customers buy processors and motherboards from Intel, then they're covered if Intel gets sued over anything.  If they buy their motherboards elsewhere, Intel's not going to cover them in any settlements it negotiates.

In the case of the Intergraph suits, Intel protected its good customer Dell (who toed the line, bought all Intel products, and didn't buy AMD processors), but left other customers (who were impudent enough to buy motherboards or chipsets elsewhere) slowly twisting in the wind.

Now, here's a sad bit:  If you were to go out and build your own clone computer, buying an Intel processor and a third-party motherboard, you might very well be subject to being sued by Intergraph, LGE, and anyone else who happens to own some microprocessor related patents -- if they could assert that your purchase of the processor or motherboard was a "conditional sale." 

Fortunately, at least for now, Section 2 of the Uniform Commercial Code seems to govern purchases of goods in commerce, such as computer parts -- so, as any purchase of hardware you make is not really "conditional", it's unlikely that you'll start getting legal threats for building your own clone.  Unfortunately, however, software vendors generally argue that their products are not goods in commerce subject to the UCC, but are rather IP licensing agreements -- which contain no implied licensing rights.

This creates a spectre that an aggressive patent troll could go after not just software developers, but their customers as well.
 

Maybe a little off the beaten path for this blog, but very relevant:  The Supreme Court ruled today in a case involving eBay and MercExchange, on the issue of whether injunctions would be generally given automatically in cases involving patent infringement.  You can read a great analysis of this decision at the Fenwick & West web site (good folks, these.  Some of my favorite IP attorneys.)

This ruling will affect the case involving Autodesk and Microsoft, and an inventor who had obtained a patent relating to software copy protection.  In short, although Autodesk and Microsoft lost in the first round, the opposing party is not likely to have the "big stick" of threatening to shut off sales of their products through injunction -- as was the situation with the recent case of NTP v. Research In Motion (RIM, developers of the Blackberry), where the spectre of an injunction forced RIM to enter into a $612 million settlement.

Quoting from Fenwick's analysis:

In ruling for defendant eBay, the Supreme Court clarified that plaintiffs seeking permanent injunctions in patent cases must always satisfy a four-factor equitable test in order to obtain a permanent injunction. Specifically, the patent owner must prove that (i) the plaintiff has suffered an irreparable injury, (ii) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury, (iii) that an equitable remedy such as an injunction is warranted in light of the balance of the hardships between the plaintiff and defendant, and (iv) that the public interest would not be disserved by the granting of an injunction. 

While I believe that Autodesk and Microsoft will ultimately find prior art in their case, and the patent in question will be eventually overturned, this ruling comes non-to-soon for them, and would appear to give them some breathing room.  Too bad it didn't come soon enough for RIM.