Ninth Circuit Concludes Seller of Promotional CDs Entitled to First Sale Defense
On June 7, 2010, the Ninth Circuit heard oral argument in Seattle in three cases raising important and interesting issues under the Copyright Act. The three cases are: UMG Recordings, Inc. v. Augusto, No. 08-55998 (9th Cir.) from the Central District of California; MDY Industries, LLC v. Blizzard Entertainment, Inc., Nos. 09-15932, 09-16044 (9th Cir.) from the District of Arizona; and Vernor v. Autodesk, Inc., No. 09-35969 (9th Cir.) from the Western District of Washington.
The Ninth Circuit issued its first opinion in these cases on September 10, 2010, in the case of Vernor v. Autodesk (see previous post here) and its second opinion on December 14, 2010, in the case of MDY Industries, LLC v. Blizzard Entertainment, Inc. (see previous post here). On January 4, 2011, the Ninth Circuit issued its opinion in the final case of the trio, UMG Recordings, Inc. v. Augusto.
Troy Augusto obtained a number of UMG promotional CDs generally sent to music industry insiders for the purpose of promoting and marketing new music from music shops and online auctions. Augusto then sold these promotional CDs on eBay, advertising them as rare collectibles not available in stores. Augusto’s actions prompted UMG to send Augusto a cease-and-desist letter claiming that the sale of these CDs infringed UMG’s copyrights and to notify eBay of the same claim. In response, eBay temporarily stopped Augusto’s auctions and suspended his account, although it was later reinstated.
When Augusto continued to sell UMG promotional CDs however, UMG filed suit against him for copyright infringement, alleging that it retained the exclusive right to distribute and sell the promotional CDs. Augusto counterclaimed for violation of the Digital Millennium Copyright Act (DMCA) alleging that UMG knowingly misrepresented to eBay that Augusto’s auctions infringed UMG’s copyrights. Both parties then moved for summary judgment on UMG’s copyright infringement claim and Augusto’s DMCA counterclaim.
As to UMG’s copyright infringement claim, there was no dispute that UMG had established a prima facie case of copyright infringement. Rather, the issue was whether Augusto’s actions were protected by the so-called “first sale” doctrine. The District Court found in favor of Augusto on both issues, granting summary judgment to Augusto on UMG’s copyright infringement claim.
Under the first sale doctrine, codified in Section 109 of the Copyright Act, “the owner of a particular copy or phonorecord lawfully made” under the Act, “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. 109(a). The District Court concluded that to establish a first sale defense to UMG’s copyright infringement claim, Augusto had to prove that (1) the promotional CDs were lawfully manufactured with UMG’s authorization (which was not in dispute); (2) UMG transferred title to the CDs; (3) Augusto was the lawful owner of the CDs; and (4) Augusto disposed of but did not reproduce the CDs (which was not in dispute). The disputed issues therefore centered around the second and third elements.
Augusto argued that title to the promotional CDs was transferred to the music industry insiders—which would then make his subsequent sale of those CDs lawful under the first sale doctrine—under three theories: (1) UMG’s distribution of the promotional CDs to music industry insiders was a gift or sale not a license (as UMG argued) and title to the CDs was therefore transferred to the insiders; (2) the promotional CDs were unordered merchandise under Section 3009 of the Postal Reorganization Act and therefore title was transferred to the insiders; and (3) UMG abandoned the CDs under California law. The District Court agreed with Augusto on the first two theories but rejected the claim that UMG abandoned the promotional CDs.
As to the first theory, UMG claimed that language on the promotional CDs created only a license between UMG and the music industry insiders under which UMG retained title to the CDs. The long version (the parties apparently agreed that the long and abbreviated versions of the language stated essentially the same thing) of the language on the CDs that UMG argued created this license stated:
“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.”
In resolving the question of whether a transaction involves a sale or a license, the District Court stated that it must look beyond the “license” label to the “economic realities” of the transaction.
The court concluded that several of these “economic realities” demonstrated that a gift or a sale, rather than a mere license, had taken place. The fact that the music industry insiders were able to indefinitely possess the promotional CDs was a “strong incident of ownership through a gift or sale.” Nothing required the recipients to return the CDs, UMG did not request return of the CDs and made no affirmative effort to recover them. The absence of a recurring benefit to UMG, the copyright owner, also suggested that there was a gift or sale rather than a license. And the court concluded that “the only benefit to a license for UMG is to restrain transfer of its music.” The court then went on to make a statement—with no reference to the factual source—that arguably bears on the questions presented in two other cases before the Ninth Circuit:
Unlike the use of software, which necessitates a license because software must be copied onto a computer to function, music CDs are not normally subject to licensing. Therefore, the benefits of a license for software do not exist under these facts.
In light of these “economic realities,” the District Court concluded that a gift or sale of the promotional CDs had occurred, that title to the CDs had thus been transferred and Augusto was therefore protected by the first sale doctrine.
The District Court also concluded that title to the promotional CDs was transferred under Section 3009 of the Postal Reorganization Act, which prohibits the mailing of “unordered merchandise” without “the prior expressed request or consent of the recipient.” Such merchandise may be treated as a gift by the recipient who has “the right to retain, use, discard, or dispose of it in any manner he sees fit without obligation whatsoever to the sender.” 39 U.S.C. 3009(b). The District Court concluded that UMG’s distribution of the promotional CDs to music industry insiders fell within the strictures of the act, notwithstanding UMG’s arguments that the insiders were not “consumers” within the meaning of the act, that the act applies only to merchandise for which monetary payment is requested and that the act does not nullify agreements between the mailer and the recipient.
The full text of the District Court’s June 2008 opinion, granting summary judgment in favor of Augusto on UMG’s copyright infringement claim, can be found here.
UMG appealed the District Court’s summary judgment decision to the Ninth Circuit. UMG’s briefing focused on its claim that the first sale defense of Section 109 of the Copyright Act applied only to “owners” of “copyrighted works” (as UMG often referred to the materials at issue, which seems a bit imprecise). Therefore, because, as UMG argued, the music industry insiders received the promotional CDs subject to a license and were mere licensees, there was no “first sale” and Augusto could not obtain the protection of the first sale doctrine.
A copy of UMG’s opening brief, along with more information about the case, can be found on the Electronic Frontier Foundation’s website here. UMG’s reply brief can be found here. Augusto’s appellate brief can be found here. The appeal also spawned two amicus curiae briefs: one from the Recording Industry Association of America in support of reversal (found here) and one from the Consumers Union in support of affirmance (found here). You can listen to the oral argument before the Ninth Circuit on the appeal here.
The Ninth Circuit affirmed the District Court's grant of summary judgment to Augusto, concluding that he was entitled to the protections of the first sale defense.
Initially, the Ninth Circuit recognized that it was an open question whether plaintiff or defendant bore the burden of proving the applicability of the first sale defense but declined to answer the question because its decision would be the same regardless of who had the burden.
The Ninth Circuit readily concluded that UMG's distribution of the promotional CDs effected a sale rather than a license and therefore the first sale doctrine applied to UMG's copyright infringement claims against Augusto. The Court's conclusion was based "largely on the nature of UMG's distribution." The CDs were sent to the recipients without any prior arrangements, no attempt was made to keep track of them, and UMG had not established that the language on the CD labels created a license agreement.
In particular, the Ninth Circuit appeared offended by the idea of attempting to create a license agreement where there was no method to secure agreement from the recipient of the CDs:
It is one thing to say, as the statement [on the CD] 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.
The Ninth Circuit also found that the Unordered Merchandise Statute of the Postal Reorganization Act supported its conclusion that no license was created by UMG's distribution of the promotional CDs. The Court pointed out, however, that it was not suggesting that the act applied to Augusto:
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. Section 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 purpose of the first sale defense.
A copy of the Ninth Circuit's opinion can be found here.
