UMG Can’t Enforce “Not for Sale” Restrictions on Promo CDs — UMG v. Augusto

[Post by Venkat Balasubramani with additional comments from Eric]

UMG Recordings, Inc. v. Augusto, No. 08-55998 (9th Cir.; Jan 4, 2011)

The Ninth Circuit issued the third of its three opinions dealing with the first sale doctrine. (Vernor v. Autodesk was the first, followed by MDY v. Blizzard.) The three cases have arisen in varying contexts, but all engaged the same underlying question of whether a transaction involving copyrighted material should be treated as a sale or a license. Autodesk involved a high(er) end transaction between commercial players, Blizzard involved a consumer transaction where money changed hands, and in this case, UMG sent out promo CDs for free.

As the court describes it, UMG sends out CDs to select individuals (e.g., critics or radio programmers). There is no agreement in place, and the recipients do not request to receive the CDs. The CDs contain a statement indicating that the CDs should not be sold or transferred. Augusto acquired several promo CDs from the original recipients and resold them on eBay. UMG tried to prevent the sales of the CDs through eBay, and ultimately filed a copyright infringement lawsuit against Augusto.

With respect to the key question of whether the initial transfer by UMG was a license or resulted in the transfer of title, the court looks to the circumstances surrounding the distribution of the CDs and concludes that the transactions cannot be characterized as licenses (to the extent they can be characterized as transactions at all!):

Our conclusion . . . is based largely on the nature of UMG’s distribution. First, the promotional CDs are dispatched to the recipients without any prior arrangement. . . 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.

The court also notes that purported licensing arrangement is contrary to the terms of the “unordered merchandise” statute (39 USC 3009), which allows people to freely dispose of unsolicited/unordered merchandise. Finally, the court looks to the language of the “promotional use only” text and notes that the language does not even “purport to create a license.” The court also trots out the Restatement of Contracts for the proposition that in the context of contract law, “acceptance by silence” is not the norm.

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It’s tough (for me at least) to glean a uniform rule from Autodesk, Blizzard, and Augusto. Blizzard and Autodesk involved software, and it’s unclear as to whether the Ninth Circuit thinks that transactions involving software warrant different treatment than say, those involving music. The key distinction the court focuses on in this case is that the UMG transaction wasn’t a transaction in the conventional sense of the term.

One question is – how will this affect the ability of sellers of books and other media to characterize sales as licenses, which allows them to, among other things, disappear this content and restrict its transfer? (See, e.g., “Amazon Clarifies When It Will Remove Kindle Books,” in the aftermath of Amazon’s deletion of copies of 1984 which had been downloaded.) Would it have mattered in this case if UMG provided a code where recipients can download promotional tracks (of course, after having agreed to online terms)? Here’s the current version of Amazon’s Kindle license agreement (the provisions relating to content):

Upon your payment of the applicable fees set by Amazon, Amazon grants you the non-exclusive right to keep a permanent copy of the applicable Digital Content and to view, use, and display such Digital Content an unlimited number of times, solely on the Device or as authorized by Amazon as part of the Service and solely for your personal, non-commercial use. Digital Content will be deemed licensed to you by Amazon under this Agreement unless otherwise expressly provided by Amazon.

Restrictions. Unless specifically indicated otherwise, you may not sell, rent, lease, distribute, broadcast, sublicense or otherwise assign any rights to the Digital Content or any portion of it to any third party, and you may not remove any proprietary notices or labels on the Digital Content. In addition, you may not, and you will not encourage, assist or authorize any other person to, bypass, modify, defeat or circumvent security features that protect the Digital Content.

I’m inclined to think the court’s opinions in these three cases leave enough room for the Amazons of the world to argue that they license content to users (and I think many of these battles will be fought along DRM lines anyway), but it wasn’t immediately obvious from reading the three Ninth Circuit opinions.

Related posts:

“Ninth Circuit’s Mixed Opinion in Glider/WoW Bot Case — MDY Industries v. Blizzard”

“Software Vendor Trumps First Sale Doctrine via License–Vernor v. Autodesk”

Other coverage:

Techdirt: “Court Rules That It’s Legal To Sell Promotional CDs”

Ars Technica: “Appeals court upholds first sale doctrine for promo CDs”

paidContent: “Appeals Court Kills Universal’s Lawsuit Over Re-Selling Promo CDs”

EFF: “EFF Wins Landmark Ruling Freeing Promo CDs for Resale”

IPDuck/Michael Barclay: “From the Ninth Circuit: Giving CDs Away for Free Is a “Sale,” But Selling Software for Money Isn’t a “Sale””

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Eric’s comments:

This opinion has at least three pieces of good news and one piece of not-so-good news.

Let’s start with the not-so-good news. Collectively, the troika of 2010 9th Circuit First Sales cases (Vernor, MDY and Augusto) have not given us a clean snapshot of First Sale law in the Ninth Circuit. For the most part, I continue to believe that the Ninth Circuit gives low deference to its own circuit rulings, so each panel effectively makes up the law as they go along. This might actually be good news in the sense that bad rulings have potentially short shelf lives, but overall it’s not-so-good news because there really is no way to predict the outcomes in future cases. That’s an unfortunate reality because there probably would be even more entrepreneurial activity around secondary resales of IP-protected physical goods if the rules were clearer.

Despite my bearish outlook for legal certainty, one legal point has emerged with some clarity:

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

OK, let’s turn to the good news in this case.

Good news #1: Although the court doesn’t say it outright, the court makes numerous references implying that the First Sale rules for software differ from other copyrighted materials. On this point, I think the case is more definitive than Venkat thinks. As a result, one way to read the case is that Vernor and MDY restricted the consumers’ First Sale rights only because they involved software.

Good news #2: The court rejects UMG’s attempts to impose a label license. One label license was farcically brief (“Promotional Use Only—Not for Sale”). However, the court also rejected a more carefully crafted label license:

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.

I’m not 100% confident that the next 9th Circuit panel will toss aside such a well-crafted label license so quickly. Nevertheless, here, the label license failed, and this gives us some reason to believe that other label licenses should similarly fail.

Good news #3: Combining the first two points of good news, the Augusto case indicates that except for software vendors, copyright owners may not be able to restrict buyers’ First Sale rights on initial sales of physical books, CDs, DVDs or other copyright-containing physical media. Thus, some of the doomsday scenarios initially floated in response to the Vernor opinion–e.g., every physical book, CD and DVD will be slapped with a label licensing waiving First Sale rights–seem unlikely now.

Although I think that’s the right rule both normatively and descriptively, this opinion did involve the Unordered Merchandise rule (3009). The court’s opinion doesn’t rely solely on 3009, but that provides future panels with a way to distinguish this opinion if they want.

Even so, there are other situations beyond promotional CDs where this case almost certainly provides a useful answer. For example, many casebook publishers send unsolicited review copies to law professors. Starting in the past year or two, publishers have put anti-First Sale label licenses onto the books (in some cases engraved onto the cover; in other cases, as a sticker slapped on the cover). As an example, West’s label license reads “Professor Review Copy//Not for Resale.” I’m pretty sure this opinion means that those label licenses stuck onto unordered review copies are ineffectual, making the review copies freely resellable. (I note that law professors have had extensive discussions about the non-legal considerations of reselling review copies).

Despite the good news for chattel sales, as Venkat notes, to the extent copyrighted content is distributed electronically, vendors will successfully eliminate or control any “First Sale” rights for the digital bits.