Thursday, August 16, 2007

Promos CDs and First Sale

Of all the things to occupy record labels’ time, I wouldn’t have thought any would be devoted to tracking down the sale of lawfully made Promotional CDs on eBay. I’m wrong. There have been a number of such suits (two of whom are against the same individual), but in one the EFF has taken up defendant’s cause. Here is a link to EFF’s site, which contains a press release, the complaint, and the answer.

It is not only Promo CDs that are getting cracked down on; inexplicably, there has been an increase on so-called state “pawn shop” laws, most recently in Florida. In Florida, stores buying second-hand merchandise for resale must apply for a permit, thumb-print CD sellers and get a copy of the seller’s driver's license. Stores are limited to issuing store credit, and furthermore must hold the merchandise for 30 days before re-selling them. Not surprisingly, this has resulted in the closure of a number of such stores or in stores ceasing the sale of used CDs. (See this article in Ars Technica). And copyright owners wonder why they have a bad reputation among consumers.

In the promo CD case, the first sale doctrine will be a key element of the defense. The record label does not dispute that the promo CD was lawfully made but contends that a legend stating it was given under a license prevents application of that doctrine since the license terms prohibited resale. I have a few of these promo CDs, bought in second hand stores (in NYC, not Florida). I have always regarded efforts to make a sale (or in the case of promos, a gift), into a license just by saying so, is legally deficient. Putting a license label on something but treating in every other way as a sale, doesn’t seem to me to represent the strongest position, as the 2001 Softman/Adobe case showed. Yet, there is the Seventh Circuit’s ProCD versus Zeidenberg going the other way. Perhaps the promo CD case will distinguish ProCD by considering the effort to make the promo a license to be ineffectual in comparison, but all such analyses point out an Achilles heel in first sale: a federal defense is subject to the vagaries of state law.

26 comments:

Anonymous said...

I agree that it is quite a problem, and that some clearer preemption (e.g. banning adhesive contracts in the copyright sphere) would be nice. OTOH, it has an up side: if you pay strict attention to what state law calls a sale, as opposed to a rental, it's possible to circumvent § 109(b)(1)(A) which is a bad law anyway.

I'm curious, even though it's really a UCC issue, whether you favor ProCD or Klocek v. Gateway, 104 F. Supp. 2d 1332 (D. Kan. 2000).

Lincoln Bandlow said...

Bill,

Isn't this simply about the basic difference between lending and selling? I get a car from Hertz, I know I can't resell it - I just get to use it for a limited time/purpose. I get a screener copy for Oscar purposes, I know I can just watch it, I can't sell it. Section 109 just provides an exemption for the "owner" of a copy - isn't is simply the case that the person provided with a promo cd is not the "owner" of it?

Crosbie Fitch said...

It's a sale. An exchange of physical good for money or other consideration.

For it not to be, would require bilateral agreement that it was a loan or rental.

The recipient of the CD has a choice of accepting the licence as a rental contract, or rejecting the licence and receiving a CD subject to unadulterated copyright (first sale preserved).

It may depend whether infringement can be demonstrated, e.g. broadcast or public performance of the CD only permitted by licence.

Dean C. Rowan said...

This new trend, so described by the Ars Technica article, has a slighter deeper legacy. I recall purchasing used promotional LPs back in the '70s and '80s, and pausing briefly at the imprinted notices. Later, a buddy of mine who runs a huge used CD operation on eBay (since long before Augusto began in 2000) was threatened by an attorney in Los Angeles who ran his own small music CD company for reselling his promos. As I recall, this attorney had no connections to the big shot labels of the music industry. He intimidated my friend with threats of a suit under California's much abused unfair competition law, not copyright, maintaining that he rigorously issued his promotional copies to disk jockeys, promoters, and the like, under license agreements reflected by the notice affixed to the disks.

All of this prompts me to wonder, though, why this problem wasn't resolved during the age of vinyl.

Colin said...

In the complaint, UMG says that they gave these CDs to "select influential people" and claim that the recipients have accepted a "licence" not to sell the CDs or transfer them to anyone else.

Should UMG not, therefore, be suing the people they actually "licensed" the CDs to? Of course, if this meant suing all of the DJs and music journalists in the land then it might not be too good for business.

William Patry said...

Touche! The Strand bookstore in NYC is filled with books solf by select influential people not too proud to make a few bucks here and there on resale of free goods

Anonymous said...

So, per Crosbie's analysis, a "sale" of a disk containing a computer program would immutably be a sale ("an exchange of physical good for money or other consideration") subject to unfettered alienation under 109(a), notwithstanding the prohibitions contained in the shrink wrap and/or click thru license?

I don't think so. And it's been a while since I checked this issue, but I believe the caselaw bears out this point.

If indeed the use of the copyright owner distributed the promo copies under an equivalent license that prohibited further distribution, the mere fact that a copy wound up in someone's hands doesn't make it subject to the first sale doctrine. See CTA5 decision in American International Films v. Foreman for an example of such holdings.

LKB in Houston

Ken K said...

Committee notes for Section 109 recognized that the purpose was to “preserve the traditional privilege of the owner of a copy to display it directly, but to place reasonable restrictions on the ability to display it indirectly in such a way that the copyright owner's market for reproduction and distribution of copies would be affected.” What bothers me about not seeking to limit the sale of these promotional discs is how that the artists, both performers and writers, never see a dime from these discs and the CD is then passed into the market by sellers and the sale will replace the sale of an authorized copy. Unlike first sale, which presumes a sale and therefore at least one ring of the cash register, these discs are given away and are typically excluded from the artist’s royalties. Seems pretty contrary to the purpose of copyright to allow at least two other parties (original seller, and reseller) to profit from the work of an artist, while denying any profit from the reproduction to the artist. I find it odd that the EFF ignores that the these CD’s were not purchased (“When a consumer buys a CD, he gets certain rights, including the right to resell it.” . . . said Fred von Lohmann, EFF Senior Intellectual Property Attorney.). see http://www.eff.org/news/archives/2007_08.php#005393. While it is easy to beat up on the labels (I’m glad to do it myself) this seems to me a case of the EFF going overboard.

Crosbie Fitch said...

A unilateral licence can't abrogate a sale, it is merely available as an invitation to contract.

If the original recipients of the promo CDs accepted such licences as contracts that consequently forfeited ownership of the CDs, then perhaps those CDs remain the property of the licensor, and despite apparent sale can be regarded as stolen goods.

It all depends, as Colin indicated, upon whether the DJs accepted the licences (which requires more than unwrapping cellophane).

Anonymous said...

Regarding Crosbie's dismissal of shrink wrap and click thrus as unenforceable "unilateral licenses" that purportedly "cannot abrogate a sale," suffice it to say that all of the appellate decisions I've seen on this issue flatly contradict him. See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1450 (7th Cir. 1996)(opinion by Easterbrook); and similar cases.

While are a couple of lower court decisions that have gone the other way, it is hazardous at best to ignore the reality of reported, circuit level decisions by pretty well-respected jurists. While there are intellectually honest attacks that can be made against various incarnations of EULA's, they have not been warmly received by the courts, and no competent copyright attorney would advise a client that all shrink wraps and click thrus can be safely ignored.

Crosbie, while your profile makes quite clear your position of what copyright law *ought* to be (and you are certainly entitled to such opinions and to express them), do you have any training or demonstrable expertise on what US copyright law *actually* is? I ask this not as an ad hominem attack but as a caveat to lay readers of this blog: this area of the law can have *very* significant consequences. As a copyright attorney, I've had to deal with too many messes where parties based their actions on various "urban legends" about copyright law they had read online -- often to their great detriment.

LKB in Houston

Crosbie Fitch said...

Dear anonymous, of unknown repute and learning,

Since when have I made a claim to relate the egregious precedent established by judicial fallibility?

A licence can only grant permission to things otherwise not permitted (such as copyright infringment), and while it may make that permission conditional, and may even constitute the indefinite offer of a contract where the licensee surrenders further rights and liberties in order to enjoy such conditional permissions, it can only bind by consent, not by decree nor by dint of exchange.

If you accept a good in exchange or as a gift, you accept that good, no more. Unwrapping its packaging or breaking its seal may constitute acceptance of the exchange or gift, but it cannot constitute agreement to more than that, irrespective of any writing that purports to claim consequential acceptance of further conditions by doing so.

Even if the recipient takes liberties only permitted by the licence this still does not constitute acceptance of the licence. The recipient always has the choice of taking the liberty or accepting the licence.

Thus, unless a DJ explicitly countersigns the contract offered by the licence, they always have a retrospective choice of infringing copyright through their use of the CD (and enjoying first sale), or accepting the licence (and breaking its terms by selling the CD).

Dean C. Rowan said...

I don't see how Ken's remarks about display have any bearing on the rest of his concern, namely, that promo copies do not correspond to profits accruing to the artist. That concern--that "the sale will replace the sale of an authorized copy"--is weakened by an empirical matter. Purely anecdotally, I can assure Ken that had I not purchased many of the promo copies of LPs and CDs I own, I would never have purchased their "authorized" counterparts. If that's the case, then my purchase removed these potential replacement copies from the market.

I flatly disagree with the remark that it "[s]eems pretty contrary to the purpose of copyright to allow at least two other parties (original seller, and reseller) to profit from the work of an artist, while denying any profit from the reproduction to the artist." Copyright is (at least was) all about producing wealth by limiting the rights of an owner so as to foster new, profitable creations by "other parties." No profits are being denied the artist; these copies are by definition intended to promote the artist's work. Promotion entails a cost.

Finally, I think Crosbie has it right when it comes to the unilateral nature of the so-called licenses imprinted on these packages. These aren't shrink wrap licenses in the ProCD sense. They're mere assertions and threats. A prospective purchaser of a promo has no opportunity to accept or reject their terms by, e.g., unwrapping the package or clicking on an "Agree" button.

Anonymous said...

Re: Dean's reading of ProCD, I disagree.

Judge Easterbrook's opinion focuses not on whether the act of unwrapping / clicking through constitutes acceptance, but instead on (1) the restrictions were reasonably conspicuous to the buyer (even though they were not visible on the outside of the package), and (2) by electing not to return the copy after having the chance to see the restrictions, the purchaser was deemed to have accepted the contract.

Assuming that the restrictive license on the promo CD's was reasonably conspicuous, I don't think the analysis of ProCD and similar cases can be dismissed so easily, especially if you're in the Seventh Circuit.

LKB in Houston

Anonymous said...

LKB,

I do not agree with your reading of AIP v. Foreman. Unless I misundertand you, you seem to be claiming that a first distribution that includes a contractual restriction on further distribution renders the copy outside the scope of Section 109. But AIP holds directly to the contrary: "Even if the copyright holder places restrictions on the purchaser in a first sale (such as specifying the permissible uses of the article), the buyer's disregard of the restrictions on resale does not make the buyer or the person who buys in the secondary market liable for infringement. (citations omitted) fn The copyright holder is limited to a suit against the original buyer for breach of the contract containing the restrictions."

I think this puts it quite nicely (and correctly if you look at the language of Section 109(a)).

AIP does hold that a defendant must show that title to a copy of the work actually passed with the permission of the copyright holder, so if a copy is only leased, lent or truly licensed, (or stolen for that matter), then that is a different story. But merely putting a sticker on an album or CD stating that further distribution is prohibited does not turn a distribution into a pure license.

Paul

Dean C. Rowan said...

The license in ProCD began, "By using the discs and the listings licensed to you, you agree to be bound by the terms of this License. If you do not agree to the terms of this License, promptly return all copies of the software, listings that may have been exported, the discs and the User Guide to the place where you obtained it." I could be wrong--I don't have an imprinted CD or LP at hand at the moment--but I believe the language imprinted (yes, conspicuously) on promos gave no indication that a license was in the offing. It was purely prohibitory: "You may not resell this recording," or some such, which begs the first sale question.

Crosbie Fitch said...

"by electing not to return the copy after having the chance to see the restrictions, the purchaser was deemed to have accepted the contract"

There are only two possibilities:

1) Purchase/receipt of what is clearly a CD.
Somewhere inside the CD case may be a little piece of paper on which is written "Special offer - you can obtain a few more exciting privileges if you sign and return the attached contract that signifies your consent to accept certain conditions and restrictions in exchange"

2) Purchase/receipt of what is clearly a voucher/contract.
"This voucher when countersigned by you to indicate acceptance of its terms, entitles you to the indefinite use of a CD that we will loan to you by return of post."

2 is then distorted into something very similar to 1. A disposable CD in brown envelope is affixed to the voucher, e.g. "Not to be opened until voucher is signed". It then becomes a conventional CD case and a little piece of paper on which is written "The CD to which this voucher is attached must be returned unless you sign this voucher agreeing to terms and conditions that restrict your use of the CD - the CD remains the property of XYZ Corp."

The critical issue is this: is the sale of a voucher being misrepresented as the sale of a CD? If so, the voucher must be void, and it is a sale of a CD.

Anonymous said...

Paul raises an excellent point regarding the first sale doctrine and American International Films v. Foreman: if in fact there has been a sale of a lawfully made copy, then the copyright owner cannot purport to restrict the subsequent resales of the copy. I agree that this is the law, and to hold otherwise would facially violate 109(a).

However, my citation of American International Fims v. Foreman was for a slightly different point, which in rereading my post I recognize was not unambiguous. The case also recognizes that the burden of proof of establishing the first sale doctrine is on the defendant. The mere fact that the defendant has a copy is not enough: he bears the burden of proving that the specific copy in his possession was in fact subject to 109(a). If he cannot do so with competent evidence, he loses. And a shrink wrap / click thru that establishes the transaction as a license (i.e., title to the copy never actually passed) would make it impossible for a defendant to do so.

Therein lies the rub, as our good professor points out. Under ProCD and similar cases, a shrink wrap or click thru *can* (contrary to Crosbie's protestations) effectively convert what one might think to have been a sale into a mere license -- depending on whether or not the language employed works under state law.

If, as I indicated before, the restriction on the promo CD's contained language comparable to that used in ProCD, then Crosbie's blanket claim that "it's a sale" is questionable at best. However, if the language was, as Dean suggests may be the case, just a bald claim that resale was not permitted, then 109(a) may well be in play.

LKB in Houston

Crosbie Fitch said...

Many apologies, but it seems that I have been less than clear.

Understanding the situation simply requires understanding the sequence of transactions.

Either:
A) The transfer of ownership of a copy (or any other good) occurs first.

Or:
B) The signing of a contract occurs first, and a copy (or other good) is loaned/exchanged (for some consideration) as a consequence of the contract.

A licence made by the copyright holder may accompany a copyrighted work, but its benefits can only be enjoyed by the owner of the copy. It may unilaterally restore some of the copy owner's intellectual property rights (otherwise suspended by copyright), and/or it may form a pre-signed contract to restore further rights in exchange for additional constraints or considerations of the recipient should they wish to agree to such a contract (at any indefinite time in the future).

So, either there is a contract, and a copy may be provided as a consequence (the benefit of any attached licence dependent upon whether the contractee is the owner of the copy), or there is a sale/gift of a copy and a licence may be provided to the copy owner as a consequence.

A licence can only benefit the owner of the copy - the licensee.

A licence can ONLY be made into a contract by consent of the licensee.

So, in the case of a promo CD, either:
1) the DJ entered into a contract with someone in order to obtain the use of a CD provided on loan. OR
2) A promo CD was sold/gifted to the DJ, and the DJ has the option of enjoying the CD subject to unadulterated copyright and any IP rights unilaterally restored by licence, or accepting the license as a contract if it so permits (with possible conditions preventing sale).

Now if the DJ has sold the promo CD then either:
1) The DJ broke the terms of the contract by selling a CD on loan.
2a) The DJ enjoys right of first sale (though may have previously infringed copyright in their use of the CD), or
2b) the DJ, having accepted the licence as contract, has broken its terms.

One might think that the DJ gets to decide which of 2a or 2b has occurred, however whilst they may have that choice at any time during their ownership of the copy, once they have sold the copy they can no longer be a beneficiary of the licence, and so unless they consummated their acceptance of the licence as contract whilst they owned the copy they must have sold the CD via 2a, and will be subject to any liability for any copyright infringement.

Any 3rd party purchaser in 2a enjoys a simple sale of copy, and may in turn benefit from the licence and the option to accept it as contract (if it so permits).

So, if you buy a second hand promo CD you have to decide whether 1, 2a or 2b has occurred. If 2a then you are the proud owner of a CD, if 1 or 2b, then things aren't so clear.

John Noble said...

> It's a sale. An exchange of physical good for
> money or other consideration.
>
> For it not to be, would require bilateral
> agreement that it was a loan or rental.

Sales, loans, and licenses all require bilateral agreement. Your conclusion that the exchange of money for a "physical good" constitutes a sale, rather than a license, is just a matter of convention, reflecting the presumed intention of the parties when the transaction includes payment and delivery, without more. But software is conventionally distributed under license, which at least casts doubt on any presumption that the exchange of money for software is a sale.

> The recipient of the CD has a choice of
> accepting the licence as a rental contract, or
> rejecting the licence and receiving a CD subject
> to unadulterated copyright (first sale preserved).

The rejection of a proposed license cannot transform the transaction into a purchase agreement. It only demonstrates, unambiguously, that there is no meeting of the minds as is required to establish any agreement at all.

> A unilateral licence can't abrogate a sale, it is
> merely available as an invitation to contract

A rejected invitation to contract doesn't manufacture a sale. The proposed license defeats any inference that the distributor intends, by delivery, to transfer title.

William Patry said...

A similar issue to that raised by John Noble is with check endorsements for work for hire. The commissioning party, without telling the commissioned party, stamps on the back of the check the following: "By endorsing this check, you hereby agree the work is a work for hire." The commissioned party crosses the check out, cashes the check and alleges sole authorship.

Crosbie Fitch said...

"A rejected invitation to contract doesn't manufacture a sale. The proposed license defeats any inference that the distributor intends, by delivery, to transfer title."

I agree that sales are not manufactured by rejecting invitations to contract. However, neither are sales abrogated by the existence of such invitations, irrespective of the intentions of those who make them, especially as such invitations can only apply in the case of a sale.

That the copyright holder aspires to abrogate sales of their works by affixing a licence that purports to achieve this may well indicate intention, but intention does not constitute 'effective and legitimate mechanism'.

Firstly, the licence can only apply to purchasers or other owners of the copy. It cannot reach out like some spectral robber baron to coerce passers by as subject to its constraints (even if it appears to bestow liberties in exchange), nor can it demonstrate consent by its victim to be so bound by specifying that should the victim perform an action they are inclined and free to do anyway (entitled or able to do without licence) that they are therefore signifying acceptance of the licence to mutate into an agreed contract.

Secondly, a licence is a 'licence'. For it to start off as a contract it would have to term itself a 'contract' (deposit-paid), and the accompanying contingent good clearly marked as such (subject to contract).

Thirdly, a licence is a copyright holder's moderation of the privileges they've received via copyright. It does not empower the copyright holder to create their own legislation governing use and sale of copies of their work.

So, the moment before a licence can have any significance, we must have an owner of the copy (to which the licence is affixed). The owner of the copy can ignore the licence (possibly, even in ignorance, benefitting from liberties unilaterally provided by the licence), or they can choose to observe the terms and conditions of the licence as a potential contract in exchange for benefits, or they can consummate the licence's mutation into a contract by explicit and special agreement (performing an action that could have no other purpose than to express voluntary agreement).

However, none of this is to say that someone cannot agree to a contract in order to use or come into possession of a copy that they do not own, and have no property rights to. In such a case, the contractee is subject to the terms of the contract (which, without authorisation from the copyright holder, cannot violate copyright, or the licence of the copyrighted work - if valid), and cannot otherwise benefit from, or be bound by, any affixed licence.

So, either a DJ has a pre-existing contractual arrangement with a record label regarding demo CDs, or they agree to a specific contract for specific demo CDs (on loan say), or they receive demo CDs as copies to become their property (and can choose to ignore or observe any licence, or, if they want, accept any licence as a contract - which may revert ownership).

CopyLeftie said...

I wonder if any of these CDs were mailed via USPS?

Unsolicited material that is sent by US mail is considered a gift without cost by US Postal regulations. I wonder if such would trump any shrink wrap license attempt that came with the presumptively free CD?

If any of the CD's of a certain title were ever mailed to DJ's via USPS, it would seem that the plaintiffs would have to prove that the individual CD being sold was not one of those CDs in order to be subject to a shrink wrap license.

Dean C. Rowan said...

I rummaged through a few LPs at home this weekend and discovered at least two tiers of language: one flatly and merely prohibitory (as I've characterized the "Resale not allowed" message) and another a more explicit account of license terms. So even in days of yore, when men were men and sound recordings were vinyl, promoters finessed the terms of disposition of their wares. The point about proving the applicability of first sale is a good one, too. Would some sort of estoppel defense have been allowed? Record companies surely were well aware that the DJs, promoters, etc., to whom they distributed promo copies were unloading them to the record stores.

William Patry said...

Thanks, Dean. And if you go to the Strand bookstore in NYC, for decades books have had similar restrictions.

recordjackethistorian said...

One issue that hasn't come up yet, is that promotions is a category in every artists contract with their label. Mostly the artist is at least (if not wholly) responsible for these costs. The label must be able to account for what it distributes as promotional copies. Though something tells me its more a matter of control and the mere idea that they might not have lost a sale.

Recording label mark their promo copies in many different way, some simply punch a hole in the cover, others stamp "For promotional Use Only" across the CD itself, or stamp or deface the insert in some way. One company distributed the promotional copy without the insert.

The common wisdom in the Industry is that its for promotional use only. So, if that's the case, when I'm finished with it, shouldn't I return it to the label? Some labels even stamp: "Property of ..." on it.

If you try to return a promotional copy to a label, in all likelihood they will refuse to take it. So what do you do with the things when you don't want to keep these promotional copies? I never found a company willing to take back the promotional product it distributes.


Certainly the distributor and the music retailer would be forbidden to sell these copies, because they are in the direct chain which began with the artist contract. But what of the other people who receive promotional copies? What do they do with them when they are sick of seeing them or simply do not have room for them if the labels will not take back what they regard as their property (I'm assuming its their property if they control what can be done with it). There's a problem in the flow of logic surrounding promotional product to say the least!

The gift you dare not dispose of, it may be the gift from hell!

Cheers,
RJH

William Patry said...

Thanks RJH for great insight about how things actually work