Wednesday, June 11, 2008

First Sale Victories: Quanta v. LG, UMG v. Augusto

The last two days have delivered significant victories for the first sale doctrine. On June 9th, a unanimous Supreme Court, per Justice Thomas, decided Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937. The case has no direct application to copyright, and turned on two issues: does first sale apply to method patents, and did the license in question prohibit the combination of a licensed patent with non-licensed material? Reversing the Federal Circuit (yet again), the Court answered these questions, respectively, yes, and no. The significance of the opinion to copyright lays in the philosophy expressed in the opening of the final paragraph of the opinion:

The authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article.

Yesterday, Judge Otero of the Central District of California granted summary judgment in the a promo CD case, UMG Recordings, Inc. v. Troy Augusto, No. CV 07-03106. (SJO). Bravo to EFF and HT to Fred von Lohmann. Mr. Augusto acquired promo copies of CDs that Universal had given to "music insiders." The promos had this language on them:

This CD is the property of the record company and is licensed to the intended receipient 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.

Mr. Augusto put his copies up for sale on eBay. UMG complained through eBay's Verified Rights Program and had Augusto's auctions suspended, although they were later reinstated. Augusto asserted that his sale was privileged under the first sale doctrine, were a gift under 39 USC 3009, and that UMG had abandoned its rights. The court ruled for Augusto on the first two arguments.

On the first sale point, Judge Otero, following Microsoft Corp. v. DAK Industries, 66 F.3d 1091, 1095 (9th Cir. 1995), analyzed whether a sale or a license occurred by examining the economic realities of the transaction and not whether it was labeled a license. Under those realities, it was significant that UMG gave away the promos without any expectation that they would be returned and with no effort to have them returned. Nor did UMG receive any recurring benefit after it had mailed the promos. The only possible benefit was a prohibited one, an attempt to restrain transfer of the object, something the court noted "had been rejected 100 years ago by the Supreme Court." Accordingly, the transaction was deemed to be a sale not a license, UMG was deemed to have transferred title to the copy, and first sale applied.

The first sale ruling is correct all on fronts. The only question is why are such suits brought? With the record industry's relationship with consumers in tatters, and the economic value of stopping the sale of promos infinitesimal, why further alienate consumers, play into people's worst depictions of the industry, and waste so much money on attorney's fees and costs of monitoring eBay? Why not spend that money developing new acts?


MarcWPhoto said...

Incidentally, thanks to this extremely timely post, I was able to have a very fruitful discussion with external patent counsel today about some industry entry issues. Please accept my sincere thanks for the educational work that you do.


William Patry said...

My pleasure, thanks so much for the kind comment

Anonymous said...

Apart from the question of whether it is ethical or appropriate or not for a recipient of a free promo record to profit by reselling it at the expense of the artists and composers (who will not receive any royalties on such "free goods"), there is a legitimate problem with the resale of promo copies. Back in the old days, one common mechanism by which payola worked was by record labels giving boxes of singles to DJs, who would then re-sell those singles to a local distributor or store. It was essentially a money laundering scheme whereby they could compensate DJs without making direct cash payments. If record labels are now unable to prevent the resale of free goods, could they not inadvertently wind up breaking the anti-payola laws?

Joseph Gratz said...


I think DJs and radio stations might argue that promo CDs are exempt from the federal payola law (47 USC 317) because they are "for use on, or in connection with, a broadcast," since the CDs are to be played on-air. If DJs got more copies of a particular CD than were reasonably necessary for on-air use, it might be a different story, though.

Joe Gratz
(Counsel for Augusto, but speaking only for himself)

Anonymous said...

I was fascinated by the discussion of the Postal Reorganization Act (37 U.S.C. 3009), pursuant to which the unsoliciting mailing or whatever of the CDs was deemed a gift, and hence on this basis, too, downstream transfers of the copy transferred were held protected under the first sale doctrine. Who would have dreamt that the Postal Reorganization Act would contain provisions importantly ancillary to the Copyright Act?!