THE FIRST SALE DOCTRINE

Ivan Hoffman, B.A., J.D.



        In a decision that has potential significant implications for the record business, the book publishing business and any other business that uses “freebies” to promote forthcoming product, the Ninth Circuit has ruled that a restriction placed on “promotional” CDs by a record company did not create a license, as the restrictions stated, but in fact created a “sale” and thus the record company lost control over the product.  In that instance, the defendant, who had acquired the promotional CDs, was freely able to sell those CDs, thereby depriving the record company of the right to make those sales.  Substitute “book publishing” for “record” in this paragraph, and you can see the implications for that industry as well.

        Given the drop off in sales of real world formats such as CDs or hard copy books, this represents another blow.

        These were the facts, as outlined by the Court, in UMG Recordings, Inc. vs. Augusto:

The material facts of the case are undisputed. UMG is among the world's largest music companies. One of its core businesses is the creation, manufacture, and sale of recorded music, or phonorecords, the copyrights of which are owned by UMG.1 These phonorecords generally take the form of compact discs (“CDs”).

Like many music companies, UMG ships specially-produced promotional CDs to a large group of individuals (“recipients”), such as music critics and radio programmers, that it has selected. There is no prior agreement or request by the recipients to receive the CDs. UMG does not seek or receive payment for the CDs, the content and design of which often differs from that of their commercial counterparts. UMG ships the promotional CDs by means of the United States Postal Service and United Parcel Service. Relatively few of the recipients refuse delivery of the CDs or return them to UMG, and UMG destroys those that are returned.

Most of the promotional CDs in issue in this case bore a statement (the “promotional statement”) similar to the following:

This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.

Some of the CDs bore a more succinct statement, such as “Promotional Use Only-Not for Sale.”2

Augusto was not among the select group of individuals slated to receive the promotional CDs. He nevertheless managed to acquire numerous such CDs, many of which he sold through online auctions at eBay.com. Augusto regularly advertised the CDs as “rare ? industry editions” and referred to them as “Promo CDs.”

After several unsuccessful attempts at halting the auctions through eBay's dispute resolution program, UMG filed a complaint against Augusto in the United States District Court for the Central District of California, alleging that Augusto had infringed UMG's copyrights in eight promotional CDs for which it retained the “exclusive right to distribute.” The district court granted summary judgment in favor of Augusto, and UMG appealed. We have jurisdiction of the appeal pursuant to 28 U.S.C. § 1291.

        As indicated, the trial court granted a summary judgment in favor of the defendant, ruling that the shipping of the promotional CDs constitute a “sale” under the “first sale doctrine” and thus the defendant did not infringe on the right of UMG to sell its product (one of the essential rights of copyright).  Section 106 of  the United States Copyright act provides that copyright owners have the exclusive right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership.”

        However, the Copyright Act goes on to state, in 109:

(a) Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord 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 or phonorecord.
        The Court stated:
Augusto invokes the “first sale” doctrine embodied in § 109(a) of the Act. 17 U.S.C. § 109(a). He argues that the circumstances attending UMG's distribution of the discs effected a “sale” (transfer of ownership) of the discs to the original recipients and that, under the “first sale” doctrine, the recipients and subsequent owners of those particular copies were permitted to sell or otherwise dispose of those copies without authorization by the copyright holder.

In the alternative, Augusto argues that the original recipients were entitled to treat the CDs as gifts under the Unordered Merchandise Statute, enacted as part of the Postal Reorganization Act of 1970, and therefore had “the right to retain, use, discard, or dispose of [them] in any manner [they saw] fit,” in this case, by selling those CDs to the thrift shops and second-hand stores where Augusto states he purchased them. See 39 U.S.C. § 3009(a), (b) (2006); see also Postal Reorganization Act of 1970, Pub.L. No. 91-375, 84 Stat. 719 (codified at 39 U.S.C. § 101).

Notwithstanding its distinctive name, the doctrine applies not only when a copy is first sold, but when a copy is given away or title is otherwise transferred without the accouterments of a sale. See 4 Patry on Copyright § 13:15; see also United States v. Atherton, 561 F.2d 747, 750 (9th Cir.1977) (“The ‘sale’ embodied in the first sale concept is a term of art.”). “[O]nce the copyright owner places a copyrighted item in the stream of commerce ?, he has exhausted his exclusive statutory right to control its distribution.”

The Court went on to distinguish situations in which an actual “license” is created by the distribution method and thus, in such instances, the owner of the product so distributed does not give up ownership rights to the recipient.
We have recognized, however, that not every transfer of possession of a copy transfers title. Particularly with regard to computer software, we have recognized that copyright owners may create licensing arrangements so that users acquire only a license to use the particular copy of software and do not acquire title that permits further transfer or sale of that copy without the permission of the copyright owner. Our most recent example of that rule is Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir.2010). Others are Wall Data Inc. v. Los Angeles Cnty. Sheriff's Dept., 447 F.3d 769 (9th Cir.2006); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir.1995); MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir.1993). All of these cases dealt with the question whether arrangements with consumers amounted to sales of copies, or succeeded in awarding only licenses. They recognized that the mere labeling of an arrangement as a license rather than a sale, although it was a factor to be considered, was not by itself dispositive of the issue. See, e.g., Vernor, 621 F.3d at 1109 (construing United States v. Wise, 550 F.2d 1180, 1190-92 (9th Cir.1977)).
        But, the Court concluded, the transaction at issue in this case amounted to a sale and not a license.
Our conclusion that the recipients acquired ownership of the CDs is based largely on the nature of UMG's distribution. First, the promotional CDs are dispatched to the recipients without any prior arrangement as to those particular copies. The CDs are not numbered, and no attempt is made to keep track of where particular copies are or what use is made of them. As explained in greater detail below, although UMG places written restrictions in the labels of the CDs, it has not established that the restrictions on the CDs create a license agreement.3

We also hold that, because the CDs were unordered merchandise, the recipients were free to dispose of them as they saw fit under the Unordered Merchandise Statute, 39 U.S.C. § 3009, which provides in pertinent part that,

(a) [e]xcept for , free samples clearly and conspicuously marked as such,  the mailing of unordered merchandise ? constitutes an unfair method of competition and an unfair trade practice.

(b) Any merchandise mailed in violation of subsection (a) of this section may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without any obligation whatsoever to the sender.

        The Court added:
Augusto attempts to invoke this statute directly in his defense, but the statute in terms confers rights only on recipients of unordered merchandise. Augusto does not contend that UMG shipped the promotional CDs to him, nor does he show that any of his sources in fact treated the CDs as gifts.4 The significance of the Unordered Merchandise Statute is not that it applies to Augusto, but that it confers on the recipients the “right to retain, use, discard, or dispose of[the CDs] in any manner that [they] see[ ] fit, without obligation to the sender,” UMG. 39 U.S.C. § 3009(b). This provision is utterly inconsistent with the terms of the license that UMG sought to impose on the recipients. Because the statute grants to the recipients the right to treat the CDs as their own, shipping the unordered CDs to the recipients rendered the recipients owners, not licensees, of the CDs for purposes of the first sale defense. This effect of the Unordered Merchandise Statute distinguishes this case from those involving computer software, where the software consumers clearly ordered and paid for the software licensed to them. See, e.g., Wall Data, 447 F.3d at 774.

There are additional reasons for concluding that UMG's distribution of the CDs did not involve a consensual licensing operation. Some of the statements on the CDs and UMG's purported method of securing agreement to licenses militate against a conclusion that any licenses were created. The sparest promotional statement, “Promotional Use Only-Not for Sale,” does not even purport to create a license. But even the more detailed statement is flawed in the manner in which it purports to secure agreement from the recipient. The more detailed statement provides:

This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.
It is one thing to say, as the statement does, that “acceptance” of the CD constitutes an agreement to a license and its restrictions, but it is quite another to maintain that “acceptance” may be assumed when the recipient makes no response at all. This record reflects no responses. Even when the evidence is viewed in the light most favorable to UMG, it does not show that any recipients agreed to enter into a license agreement with UMG when they received the CDs.6
Because the record here is devoid of any indication that the recipients agreed to a license, there is no evidence to support a conclusion that licenses were established under the terms of the promotional statement. Accordingly, we conclude that UMG's transfer of possession to the recipients, without meaningful control or even knowledge of the status of the CDs after shipment, accomplished a transfer of title.

Return of possession is not invariably required in a license, however. We have since read Wise and our software licensing cases to prescribe three considerations that we may use to determine whether a software user is a licensee, rather than an owner of a copy. First, we consider whether the copyright owner specifies that a user is granted a license. Second, we consider whether the copyright owner significantly restricts the user's ability to transfer the software. Finally, we consider whether the copyright owner imposes notable use restrictions.

This formulation, however, applies in terms to software users, and software users who order and pay to acquire copies are in a very different position from that held by the recipients of UMG's promotional CDs. As we have already explained, UMG has virtually no control over the unordered CDs it issues because of its means of distribution, and it has no assurance that any recipient has assented or will assent to the creation of any license or accept its limitations. UMG also does not require the ultimate return of the promotional CDs to its possession. Although the failure to require return of the CDs may not, by itself, conclusively establish a sale under our precedent, it is one more indication that UMG had no control over the promotional CDs once it dispatched them. UMG thus did not retain “sufficient incidents of ownership” over the promotional copies “to be sensibly considered the owner of the cop [ies].” Krause v. Titleserv, Inc., 402 F.3d 119, 124 (2d Cir.2005).

Conclusion

        Moral: if you are sending out copies of your goods, whether records, books or any other goods, make sure you proceed appropriately so that you do not lose control over your goods and thus lose more sales than even now.

Copyright © 2011 Ivan Hoffman.  All Rights Reserved.

****************

This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

****************

No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

FOR MORE INFORMATION INCLUDING IF YOU WOULD LIKE TO BE PLACED ON MY MAILING LIST TO RECEIVE NOTICES OF NEW ARTICLES AND OTHER RELATED INFORMATION:


MAIL

Where Next?




Ivan Hoffman Attorney At Law || More Articles For Writers and Publishers || More Articles for Recording Artists, Song Writers, Actors and Entertainers || Home