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Commentary

Victory for the First Sale Rule in " The Case of the Promotional CDs"

By Iam Tiaclf*

(June 18, 2008) - Universal Music Group (UMG) suffered a possibly fatal blow last week in its war to stop the trade in promotional copies of its new music releases. In a lawsuit filed in federal court in California, a trial judge ruled that despite UMG's claim that its gifts of promo CDs to music critics, disk jockeys, and others was only a "license," in fact the recipients were free, under the "first sale" rule of copyright law, to dispose of the CDs as they pleased. The victorious defendant was Troy Augusto, aka Roast Beast Music Collectables, who makes a living buying collectible CDs and reselling them on eBay. Many of the CDs Augusto sells are promotional copies - that is, CDs sent out before release to generate buzz.

UMG claimed that it owns the promotional copies it distributes and that reselling them infringes its copyrights. The publishing industry makes similar claims about review copies. Used book stores have long sold review copies - including, currently, two major stores, Powell's Books in Oregon and Strand Bookstore in New York City - but at least one powerhouse in the secondhand market prohibits resale of all promotional copies - Amazon.com.1 Similarly, eBay allows promotional copies to be posted for auction but requires that they be removed if the copyright owner files a complaint with the site.2 If book publishers and music companies have their way, all retailers will eventually follow Amazon's lead.

I. The Legal Background: The First Sale Doctrine

The purpose of copyright law is set forth in the Constitution - to give artists and writers the exclusive right to their creations for a limited time in order "to promote the progress of science and useful arts."3 Because copyrights operate as government-sponsored monopolies, they give copyright owners expansive and sometimes anti-competitive powers, making legislative limitations especially critical.

The first sale doctrine is one such important limitation. The law grants any lawful owner of a particular copy of a copyrighted work the right to sell or otherwise dispose of that copy without the copyright owner's permission.4 The name "first sale doctrine" is actually somewhat misleading because any lawful transfer of ownership implicates the doctrine - whether a sale or a gift.5

To understand the doctrine, it is important to distinguish between ownership of the copyright and ownership of the material object. By selling or giving away a copy of a copyrighted work (for example, a book), the copyright owner loses the right to control what happens with that particular item. The transfer has no impact, however, on the right of copyright owners to stop others from copying the book. The law is really an extension of the "common law" right to control the disposition of personal property - that is, part of the judicially-created law of property. It extends only to the right to transfer physical copies of the work. It has important consequences for the free movement of ideas and expression in our culture - allowing, for example, libraries to loan books, video stores to rent movies, and music shops to resell used CDs, LPs and audio tapes.

II. The Music Industry vs. The First Sale Doctrine

The music industry has long been averse to the first sale doctrine, and in 1984, it successfully lobbied Congress to create a limited exception. The Record Rental Amendment made it illegal to rent or lease sound recordings. In the 1990s, the industry attempted to impede the resale of CDs by threatening sanctions against music stores that sold them used. Musician Garth Brooks joined the fray, attempting to stop distribution of his new album to any store that sold used CDs. The music companies conspiring to stifle the secondhand CD market were quickly accused of violating antitrust laws, and they consequently abandoned their efforts.6

In light of this, it is not entirely surprising that Augusto was attacked for his actions. According to court documents, he had sold nearly 20,000 CDs as of March 2007. Capitol and Virgin Records went after Augusto in 2004, making nearly identical allegations to those made by UMG. He settled the previous litigation, but this time he received legal representation from the Electronic Frontier Foundation (EFF), and fought back.7

III. The Question of Ownership

In its complaint (the document that lawyers file in court to start a lawsuit), UMG argued that the first sale doctrine is not applicable because the distribution of promotional copies grants a mere license to use the CDs and does not convey ownership to the recipient. To see whether they are right, we must analyze the circumstances under which music companies distribute these CDs. According to Kyle Munson, the Online Entertainment Editor at the Des Moines Register, the copies arrive in the mail unsolicited, typically stamped with a notice that the item is an advance copy.8

I reviewed a sample of 16 promotional CDs sent to Munson in the last few years from various music labels and found that music companies identify the CDs as promotional copies in many different ways, ranging from a simple sticker that says "NOT FOR RESALE" on the cover, to a notice printed on the back cover stating that the CD is property of the record company and must be returned on demand. One CD in the sample was printed with Munson's name on the CD itself, an attempt to create the impression that the conveyance is limited to one specific person. Many of the notices on the CDs used language invoking a license, and one of them was even enclosed in a sealed envelope printed with language stating that by opening the envelope, the user agrees to be bound by the terms and conditions of the so-called license.9

This last technique is borrowed from the software industry's practice of including "shrink-wrap licenses" or "click-through licenses" with their products - where buyers theoretically consent to terms by opening the box or installing the software. The attempt to imitate software licenses is not surprising, as software companies have essentially succeeded in rewriting the structure of consumer transactions to maintain control over what is done with their copyrighted products after the consumer takes possession. While commentators have widely questioned the enforceability of shrink-wrap and click-through software licenses for a variety of legal and policy reasons, courts have generally tended to enforce them against consumers.10

In contrast, the mass distribution of free promotional copies of CDs occurs in a much less contractual setting. While music reviewers may feel a journalistic duty not to share the album with the general public, there is no act, request, or bargain made by the recipient to create a contractual obligation. Not only is there no negotiation of terms, but the transaction, if it can be called that, is entirely one-sided. The music company initiates the distribution, decides the terms on which it is made and garners nearly all of the benefit, in the form of free publicity. The same is true of review copies of books and advance copies of movies.

Once an individual receives an unsolicited promotional CD in the mail, it is unlikely she contemplates that the music company retains ownership and can reclaim possession. Indeed, as the court found, even the music companies do not believe they own the promo copies once they distribute them; and they make no demand that they be returned. Without this or any other benefit to the companies from the gift (except the hope of publicity), their simply pasting a label that says the CD is a license has no legal effect.11

IV. Conclusion

Copyright owners argue that the secondhand market shrinks the amount of royalties they receive, thereby decreasing the incentives for publishing houses and music labels to invest in the creation of new books and CDs.12 Whether this is a legitimate concern or a pretext for increasing monopoly profits is unclear, but it is difficult to argue that the resale market actually cuts off the incentives for artists and writers to create and share their works with the public. The proliferation of sales of used books and CDs on the Internet actually benefits artists and writers by cultivating and widening the audience for their products - hardly a deterrent to create.

Whether the sale of promotional copies of copyrighted works serves this function is debatable, but the larger issue at stake is whether copyright owners can stop the first sale doctrine from taking effect, and if they can, what steps they have to take to make it happen. If the first sale doctrine could be eliminated by simply calling the transaction a "license," an important legislative check on the copyright monopoly would be effectively lost. It would allow copyright owners to get the advantage of retaining ownership and control over the copies they distribute, while simultaneously reaping the benefits - free publicity in the case of promotional copies - of what is effectively a gift.

Copyright laws represent a careful balancing by the government - an attempt to produce incentives for artists to create and spread their works by granting them exclusive rights, while doing as little as possible to restrict the free flow of ideas and expression in our society. If stamping a license label on products were sufficient to stop the transfer of ownership, copyright owners could disrupt the legislative balance with mere formalities.

December 21, 2007; updated May 31 and June 18, 2008

For the court's decision in UMG v. Augusto, go to http://www.eff.org/files/filenode/umg_v_augusto/LA07CV03106SJO-O.pdf. For all the court documents in the case, go to http://www.eff.org/cases/umg-v-augusto.

In a similar case, a court in Washington State ruled in May 2008 in favor of an eBay seller who wanted to sell copies of AutoCAD software that he bought from a third party. The manufacturer, Autodesk, insisted that it could stop him, because it had only "licensed" its original sale of the software packages. The court found that despite the so-called license, Autodesk has sold the software, and that under the first sale rule, it could be resold. See the court's decision at http://www.citizen.org/documents/vernororder.pdf.

* Iam Tiaclf is a pseudonym. Updates to this article are by Marjorie Heins

Notes

1. Information on Powell's and the Strand, from telephone conversations with the author, November 2007. For Amazon's policy, see http://www.amazon.com/gp/help/customer/display.html?ie=UTF8&nodeId=537780.

2. See http://pages.ebay.com/help/policies/promotional.html. For background on the procedure for such "take-down" letters to website owners, see Marjorie Heins and Tricia Beckles, Will Fair Use Survive? Free Expression in the Age of Copyright Control (FEPP, 2006), pp. 4-5, and Laura Quilter and Marjorie Heins, Intellectual Property and Free Speech in the Online World: A Public Policy Report (FEPP, 2007).

3. U.S. Constitution, Article 1, section 8.

4. The first sale rule is found in the U.S. Copyright Act at 17 U.S.Code 109(a).

5. For more information, see "The Progress of Science and Useful Arts": Why Copyright Today Threatens Intellectual Freedom (Free Expression Policy Project, 2003).

6. See "Wherehouse comes out on top winning the Used Cd Skirmish," Los Angeles Business Journal, Sept. 13, 1993. See also Adam Sandler, "NARAS Backs Distribs in Used CD Fight," Variety.com, Aug. 12, 1993. The Record Rental Amendment is part of the first sale section of the copyright law, 17 U.S.Code 109(b).

7. For more information, see http://www.eff.org/cases/umg-v-augusto.

8. Via email to the author, Nov. 2007.

9. This CD happened to be provided by a UMG-owned music label, but interestingly, the two other CDs I reviewed that were provided by UMG-owned labels used different techniques.

10. See Steven A. Heath, "Contracts, Copyright and Confusion: Revisiting the Enforceability of 'Shrink-Wrap' Licenses" - 5 Chicago-Kent J. Intell. Prop. 12 (2005); and Nathan J. Davis, "Presumed Assent: The Judicial Acceptance of Clickwrap," 22 Berkeley Tech. L.J. 577 (2007). Compare, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (holding that shrinkwrap licenses are enforceable contracts), with SoftMan Products Co. v. Adobe Systems Inc., 171 F. Supp. 2d 1075 (C.D. Cal. 2001) (holding that software license restricting transfer of software conflicts with first sale doctrine).

11. See the court's decision in UMG v. Augusto, http://www.eff.org/files/filenode/umg_v_augusto/LA07CV03106SJO-O.pdf. The court also ruled that Augusto wasn't entitled to damages based on UMG's allegedly intentional misrepresentations of its legal rights. The court said the law was unclear at the time, and UMG had a good faith - if mistaken - belief that its claim against Agosto was valid.

12. See "Used Books: Publishers, Authors See New Threat," Publisher's Weekly, Sept. 24, 2004.


The Free Expression Policy Project began in 2000 as a project of the National Coalition Against Censorship, to provide empirical research and policy development on tough censorship issues and seek free speech-friendly solutions to the concerns that drive censorship campaigns. In 2004-2007, it was part of the Brennan Center for Justice at NYU School of Law. Past funders have included the Robert Sterling Clark Foundation, the Nathan Cummings Foundation, the Rockefeller Foundation, the Educational Foundation of America, the Open Society Institute, and the Andy Warhol Foundation for the Visual Arts.

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