First Sale Doctrine Gets Multiple Views in Ninth Circuit

The first sale doctrine generally gives “the owner of a particular copy or phonorecord lawfully made under [the Copyright Act], or any person authorized by such owner” the right “without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” See, 17 U.S.C. '109(a). Recently, there has been a spate of Ninth Circuit rulings on the doctrine ' all of which have implications for the entertainment industry ' from application of '109(a) to computer software buyers, to imported goods, and to promotional CDs that record companies send to disc jockeys and music critics.

Software Buyer Is Licensee

In Vernor v. Autodesk Inc., 621 F.3d 1102 (9th Cir. 2010), the Ninth Circuit ruled that, for purposes of the first sale doctrine, a computer software buyer was a licensee, rather than an owner, of the software copies. Autodesk produces computer software for architects and engineers. Timothy Vernor purchased several used copies of Autodesk's AutoCAD Release 14 that had been initially acquired by an authorized buyer. Vernor filed suit in the U.S. District Court for the Western District of Washington for a declaratory ruling that his resale of the used copies on eBay was non-infringing. The district court ruled in Vernor's favor. Vacating and remanding, the Ninth Circuit noted that “a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restrictions.”

(See also, MDY Industries LLC v. Blizzard Entertainment Inc., 09-15932 (9th Cir. 2010), in which the appeals court held that players of the World of Warcraft online virtual-world game are licensees of the game creator's client software. MDY Industries also dealt with the distinction between ”1201(a)(2) and (b)(1) of the Digital Millennium Copyright Act. On that issue, the Ninth Circuit decided: “A violation of '1201(a)(2), which prohibits trafficking in devices that facilitate circumvention of access control measures [of a copyrighted work, and therefore is an independent claim, and] will not always be a violation of '1201(b)(1), which prohibits trafficking in devices that facilitate circumvention of measures that protect against copyright infringement.”)

In Vernor, the Ninth Circuit explained that when Autodesk originally sold the new copies to its authorized buyer: “Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is nontransferable, the software could not be transferred or leased without Autodesk's written consent, and the software could not be transferred outside the Western Hemisphere. The SLA [software license agreement] also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee's unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to Release 14 copies and imposed significant transfer and use restrictions, we conclude that its customers are licensees of their copies of Release 14 rather than owners.”

(Vernor also argued an “essential step” defense, under which the “owner of a copy” of a software program may lawfully make a new copy “created as an essential step in the utilization of the computer program in conjunction with a machine and ' in no other manner.” See, 17 U.S.C. '117(a)(1). But the Ninth Circuit found the essential step defense didn't apply on the ground that “[b]ecause Vernor was not an owner, his customers are also not owners of Release 14 copies.”)

Promotional Music Copies

Since Vernor, the Ninth Circuit has ruled that the first sale doctrine does apply when it comes to promotional CDs that record companies mail out unsolicited to disc jockeys and music critics. UMG Recordings v. Augusto, 08-55998. UMG sued Troy Augusto in the U.S. District Court for the Central District of California for selling such promotional copies on eBay. UMG's packaging stated the CDs were for “Promotional Use Only ' Not for Sale” or that UMG was giving the intended recipient a license for personal use only and not for transfer of possession. Augusto obtained his copies from third parties.

In January 2010, the Ninth Circuit ruled in favor of Augusto. The appeals court explained: “First, the promotional CDs are dispatched to the recipients without any prior arrangement as to those particular copies. 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 appeals court added: “UMG has virtually no control over the unordered CDs it issues because of its means of distribution, and it has no assurance that any recipient has assented or will assent to the creation of any license or accept its limitations. UMG also does not require the ultimate return of the promotional CDs to its possession. Although the failure to require return of the CDs may not, by itself, conclusively establish a sale under our precedent, it is one more indication that UMG had no control over the promotional CDs once it dispatched them.”

The Ninth Circuit then distinguished Vernor by noting that case involved “software users, and software users who order and pay to acquire copies are in a very different position from that held by the recipients of UMG's promotional CDs.” But the Augusto case may offer record companies some comfort when it comes to digitally sending promotional copies of sound recordings, in that some recipients may be amenable to click-through licenses and that the path of digital transmissions can be tracked.

Gray Market Goods

Another important first-sale-doctrine question is whether '109(a) may be raised as a viable defense for goods imported into the United States. In December 2010, the U.S. Supreme Court issued a 4-4 vote in litigation involving the issue. The tie vote let stand a Ninth Circuit decision on the interplay of the first sale doctrine and '602 of the Copyright Act, which gives copyright owners the right to bar unauthorized imports of their goods into the United States. (Associate Justice Elena Kagan, who as U.S. Solicitor General had asked the Supreme Court to not review the case, didn't participate in the court's deliberation.)

The case involves Omega watches, manufactured in Switzerland and obtained by Costco as what are known as “gray market” goods, that is through a foreign pipeline other than Omega for sale by Costco in the United States. Omega filed a copyright infringement action against Costco based on a design for the watch that Omega has registered with the U.S. Copyright Office. The Ninth Circuit decided that the first-sale doctrine didn't apply because “the application of '109(a) to foreign-made copies would impermissibly apply the Copyright Act extraterritorially in a way that the application of the statute after foreign sales does not.” Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008).

The Omega litigation continues on remand to the U.S. District Court for the Central District of California, including on Costco's copyright misuse defense.

Stan Soocher is Editor-in-Chief of Entertainment Law & Finance, a sister publication of this newsletter, and a tenured Associate Professor of Music & Entertainment Industry Studies at the University of Colorado's Denver Campus. He can be reached at [email protected] or via stansoocher.com.

The first sale doctrine generally gives “the owner of a particular copy or phonorecord lawfully made under [the Copyright Act], or any person authorized by such owner” the right “without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” See, 17 U.S.C. '109(a). Recently, there has been a spate of Ninth Circuit rulings on the doctrine ' all of which have implications for the entertainment industry ' from application of '109(a) to computer software buyers, to imported goods, and to promotional CDs that record companies send to disc jockeys and music critics.

Software Buyer Is Licensee

In Vernor v. Autodesk Inc. , 621 F.3d 1102 (9th Cir. 2010), the Ninth Circuit ruled that, for purposes of the first sale doctrine, a computer software buyer was a licensee, rather than an owner, of the software copies. Autodesk produces computer software for architects and engineers. Timothy Vernor purchased several used copies of Autodesk's AutoCAD Release 14 that had been initially acquired by an authorized buyer. Vernor filed suit in the U.S. District Court for the Western District of Washington for a declaratory ruling that his resale of the used copies on eBay was non-infringing. The district court ruled in Vernor's favor. Vacating and remanding, the Ninth Circuit noted that “a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restrictions.”

(See also, MDY Industries LLC v. Blizzard Entertainment Inc., 09-15932 (9th Cir. 2010), in which the appeals court held that players of the World of Warcraft online virtual-world game are licensees of the game creator's client software. MDY Industries also dealt with the distinction between ”1201(a)(2) and (b)(1) of the Digital Millennium Copyright Act. On that issue, the Ninth Circuit decided: “A violation of '1201(a)(2), which prohibits trafficking in devices that facilitate circumvention of access control measures [of a copyrighted work, and therefore is an independent claim, and] will not always be a violation of '1201(b)(1), which prohibits trafficking in devices that facilitate circumvention of measures that protect against copyright infringement.”)

In Vernor, the Ninth Circuit explained that when Autodesk originally sold the new copies to its authorized buyer: “Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is nontransferable, the software could not be transferred or leased without Autodesk's written consent, and the software could not be transferred outside the Western Hemisphere. The SLA [software license agreement] also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee's unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to Release 14 copies and imposed significant transfer and use restrictions, we conclude that its customers are licensees of their copies of Release 14 rather than owners.”

(Vernor also argued an “essential step” defense, under which the “owner of a copy” of a software program may lawfully make a new copy “created as an essential step in the utilization of the computer program in conjunction with a machine and ' in no other manner.” See, 17 U.S.C. '117(a)(1). But the Ninth Circuit found the essential step defense didn't apply on the ground that “[b]ecause Vernor was not an owner, his customers are also not owners of Release 14 copies.”)

Promotional Music Copies

Since Vernor, the Ninth Circuit has ruled that the first sale doctrine does apply when it comes to promotional CDs that record companies mail out unsolicited to disc jockeys and music critics. UMG Recordings v. Augusto, 08-55998. UMG sued Troy Augusto in the U.S. District Court for the Central District of California for selling such promotional copies on eBay. UMG's packaging stated the CDs were for “Promotional Use Only ' Not for Sale” or that UMG was giving the intended recipient a license for personal use only and not for transfer of possession. Augusto obtained his copies from third parties.

In January 2010, the Ninth Circuit ruled in favor of Augusto. The appeals court explained: “First, the promotional CDs are dispatched to the recipients without any prior arrangement as to those particular copies. 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 appeals court added: “UMG has virtually no control over the unordered CDs it issues because of its means of distribution, and it has no assurance that any recipient has assented or will assent to the creation of any license or accept its limitations. UMG also does not require the ultimate return of the promotional CDs to its possession. Although the failure to require return of the CDs may not, by itself, conclusively establish a sale under our precedent, it is one more indication that UMG had no control over the promotional CDs once it dispatched them.”

The Ninth Circuit then distinguished Vernor by noting that case involved “software users, and software users who order and pay to acquire copies are in a very different position from that held by the recipients of UMG's promotional CDs.” But the Augusto case may offer record companies some comfort when it comes to digitally sending promotional copies of sound recordings, in that some recipients may be amenable to click-through licenses and that the path of digital transmissions can be tracked.

Gray Market Goods

Another important first-sale-doctrine question is whether '109(a) may be raised as a viable defense for goods imported into the United States. In December 2010, the U.S. Supreme Court issued a 4-4 vote in litigation involving the issue. The tie vote let stand a Ninth Circuit decision on the interplay of the first sale doctrine and '602 of the Copyright Act, which gives copyright owners the right to bar unauthorized imports of their goods into the United States. (Associate Justice Elena Kagan, who as U.S. Solicitor General had asked the Supreme Court to not review the case, didn't participate in the court's deliberation.)

The case involves Omega watches, manufactured in Switzerland and obtained by Costco as what are known as “gray market” goods, that is through a foreign pipeline other than Omega for sale by Costco in the United States. Omega filed a copyright infringement action against Costco based on a design for the watch that Omega has registered with the U.S. Copyright Office. The Ninth Circuit decided that the first-sale doctrine didn't apply because “the application of '109(a) to foreign-made copies would impermissibly apply the Copyright Act extraterritorially in a way that the application of the statute after foreign sales does not.” Omega S.A. v. Costco Wholesale Corp. , 541 F.3d 982 (9th Cir. 2008).

The Omega litigation continues on remand to the U.S. District Court for the Central District of California, including on Costco's copyright misuse defense.

Stan Soocher is Editor-in-Chief of Entertainment Law & Finance, a sister publication of this newsletter, and a tenured Associate Professor of Music & Entertainment Industry Studies at the University of Colorado's Denver Campus. He can be reached at [email protected] or via stansoocher.com.