In Skilling v. United States (June 24, 2010), the U.S. Supreme Court agreed with Jeffrey Skilling, former CEO of Enron, in holding that his part in the elaborate scheme to prop up Enron’s stock prices through faulty accounting practices (which led to Enron’s bankruptcy filing and $11 billion in losses to shareholders) did not amount to a violation of 18 U.S.C. § 1346, the honest-services mail and wire fraud statute.

Unlike fraud that involves a victim’s loss of money or property that profits an offender directly, the “honest services” doctrine targets corruption that may result in no loss of money or property to the betrayed party.  For example, a city official might accept bribes or kickbacks from a third party for awarding a contact on the same terms as one that could be negotiated at arm’s length.  The city might even gain from the terms eventually negotiated, but actionable harm results from denial of the right to the bribe-taker’s “honest services.” 

These cases often involve public corruption, but the courts have recognized private-sector honest-services fraud, and many private-sector employees have been prosecuted under the criminal mail and wire fraud statutes. 

In Skilling, the U.S. Supreme Court held that § 1346 only criminalizes bribes or kickbacks that deprive a victim of honest services (as opposed to the self-dealing and non-disclosure that Skilling was prosecuted for).  The Court noted that Congress was free to revisit the statute to criminalize the type of conduct engaged in by Skilling and his cohorts at Enron, which caused the loss of the pensions of some 20,000 former employees.  The Court reasoned, however, that the statute as currently drafted does not proscribe such conduct, and therefore to hold Skilling criminally liable would deprive him of fair notice, one of the key tenets of due process. 

The Skilling case is not unusual in the annals of business fraud, and is in fact a textbook case.  Many civil fraud cases involve schemes that cause wide-ranging damage and suffering, and can end up before the grand jury because of related violations of criminal laws.  Citizens’ rights advocates already have pounced on the Skilling decision, observing that a civil fraud judgment against the offender cannot possibly make all of the victims whole and therefore criminal punishment must be imposed. Some commentators have decried the Court’s decision, noting that this is the second time the U.S. Supreme Court has invalidated use of the mail fraud statute to prosecute honest-services fraud (the first time in 1987, in McNally v. U.S., 483 U.S. 350 (1987)). 

While the U.S. Congress is free to attempt to criminalize Skilling’s conduct under the mail and wire fraud statutes, the public may have to wait for any amendments to the honest-services statute because of current legislative priorities.  Criminal defense attorneys already have observed that the Skilling decision will cause civil defendants of that ilk to breathe easier.

Is it lawful to buy “OEM” (Original Equipment Manufacturer) or “Academic” versions of software at drastically reduced prices?  Those versions are subject to different licensing agreements and not permitted for standard commercial and consumer use. A number of online vendors claim that their OEM and Academic versions of software are “100% Legal” and permitted for unrestricted use. They even offer warranties and money-back guarantees, and attempt to justify their actions with legal theories that would not be dismissed out of hand by most judges.

One such legal theory is the “First Sale Doctrine.” This doctrine permits the owner of a copy of a copyrighted work to lawfully dispose of that copy through resale. The online vendor might claim that, since it lawfully owns copies of OEM and Academic versions of software, it can dispose of those copies at any price it chooses. The First Sale Doctrine was formulated in 1908 in the context of sales of books, where the first purchaser of lawful copies of a book chose to resell them at drastically reduced prices. The copyright owner claimed copyright infringement. Bobbs-Merrill Co. v. Straus, et al., 210 U.S. 339 (1908).

The intellectual property laws of the U.S. (and international treaties) protect the rights of creators to profit from their creations. A creator of content (such as a software developer or manufacturer) need not part with his ownership of the content (i.e., the copyright). He can grant a mere license (i.e., permission) for people to use the content according to the terms of a license agreement. In Bobbs-Merrill, the U.S. Supreme Court noted, in ruling against the copyright holder, that it had failed to assert any rights under a contractual license agreement.

The First Sale Doctrine is inapplicable to the OEM/Academic software controversy. The software manufacturers are relying on their rights under contractual license agreements, and not only on copyright law, to enjoin the unrestricted sale of OEM/Academic versions of their software.

The standard OEM license permits the licensee to integrate the software into original equipment (hardware). The standard Academic license permits the licensee to use the software for educational purposes at approved institutions. Assuming the licenses contain no anti-assignment restrictions, software distributors are free to transfer their licenses. They are not free, however, to transfer the right to use the software in a way not permitted by their licenses. It is axiomatic that one cannot transfer rights that one does not possess.

While the software distributor may own the physical copy of the CD containing the software, it does not own the content on the CD. Therefore resale of the physical copy of the CD is permitted by the First Sale Doctrine, while unrestricted transfer of the content is not.