[This post authored by FMC Legal Intern Joseph Silver]
The first sale doctrine within American copyright and trademark law has been getting a lot of attention in recent months. A number of federal circuit courts have touched upon this important copyright principle, which says that when a consumer purchases a good on the legitimate marketplace, the law affords them the right to lend, resell and dispose of that item (along with a number of other related uses). However, the first sale doctrine, also known as the exhaustion doctrine, does not permit a purchaser to reproduce, publicly display or perform the work, all of which are exclusive rights held by the copyright holder. Absent a “fair use” defense for consumers, those rules are pretty steadfast. Still, the first sale doctrine is an important limitation on copyright, which allows consumers who have lawfully purchased copyrighted goods to choose how the particular copy they purchased is distributed. This much remains settled. Yet two issues have recently arisen that aren’t so cut-and-dry: whether the first sale doctrine applies to digital goods and whether it applies to goods manufactured internationally.
Obviously, the reason we’re paying attention is because music is a type of expression that falls under copyright. But let’s take a moment to examine the bigger picture. First, we’ll look at the framework of property law, which informs the first sale doctrine.
Property Law and Proprietary Technology
In describing real property rights, lawyers often employ the metaphor of “a bundle of sticks,” where each stick represents a specific facet of tangible property ownership. This helps explain how property can be simultaneously “owned” by multiple parties. The bundle of rights over tangible property often consists of such related entitlements as the right to own, use, transfer, restrain others from using, destroy, possess, etc. Under federal copyright law, however, a purchaser of, say, a music recording will not possess the aforementioned bundle. This is because of the exclusive rights that reside with the owner of a copyrighted work.
Furthermore, while the right of first sale has historically enabled consumers to lend, resell, or dispose of goods they purchase, in recent months and years, some courts have read this right quite narrowly. One way they have done this is by distinguishing between the rights afforded to purchasers of physical and digital goods. This can be taken to mean that physical goods are covered by the doctrine while digital goods are not. Picture this scenario: Say you make two purchases, a vinyl copy of the Velvet Underground’s 1970 classic, Loaded, purchased on Amazon.com, along with an MP3 version of a track from that same album, say, the opener “Who Loves the Sun,” purchased at iTunes. Wouldn’t these purchases would be treated the same under the law, right? Not so much.
As the owner of the MP3, it appears that you would possess a much narrower set of to rights (limited by both copyright and the licensing agreement with the service provider) than the LP (limited by copyright alone). By agreeing to the lengthy and often byzantine terms and conditions of Apple’s proprietary software license, you are effectively signing away a number of permissions you would otherwise have with the LP version. This type of limitation on control over digital purchases arguably reached its peak in 2003, when Apple revealed its deceptively-named “Fair Play” Digital Rights Management (DRM) encoding technology that limited users’ ability to move music collections between devices. (Apple subsequently complained about DRM via an open letter from Steve Jobs, and the company later dropped the technology.)
But even absent the licensing agreement, Apple and others might argue that digital products are not subject to the first sale doctrine to begin with. While there was a strong consumer pushback against DRM, there isn’t yet a strong protest against the legal —rather than technology-based — restrictions that come from a narrow reading of the first sale doctrine with regard to digital products.
An Impossibly Brief History of First Sale
The first sale doctrine was first recognized in 1908 in the Supreme Court case of Bobbs-Merrill Co. v. Strauss and was officially codified as part of the Copyright Act of 1976. Despite its long and stable history, however, a number of recent court decisions have begun to chip away at the doctrine. This erosion may be problematic for a number of reasons, and might even have the unintended side effect of fueling unauthorized distribution if consumers become dissatisfied with what they perceive as limitations on legitimate offerings. Furthermore, the advent of a number of new digital technologies and platforms has brought these considerations to the fore in a manner previously unimaginable.
Pushing the Envelope
One such service that tests the limits of the first sale doctrine is ReDigi, a cloud-based music service that allows its users to store, stream, and, most importantly, sell their legally purchased digital music files, as well to purchase “pre-owned” digital music through the site, According to the terms and conditions, when you download Media Manager (the tool that allows you to access the full range of ReDigi’s offerings), ReDigi’s so called “forensic verification engine” analyzes your library to tell you exactly which songs you can store and sell on ReDigi — specifically those that were purchased legitimately through iTunes. The company’s business model is firmly rooted in an expansive understanding of the first sale doctrine. Basically, ReDigi is premised upon treating physical and digital music sales more or less alike. The thinking goes like this: since consumers are allowed to sell CDs and records (and other physical storage media) that they have purchased, they should also be able to sell their “used” digital songs in an open marketplace. (If thinking of a digital file as “used” or having “physicality” strikes you as an odd mental exercise, you’re not alone.) This question of whether we “own” digital musical files or if we are mere licensees of iTunes or other software providers (as is the case with most proprietary computer software) is a hotly contested issue in copyright law. In fact, ReDigi has become something of a test case for how to classify digital music.
In January, Capitol Records filed suit against ReDigi, seeking a preliminary injunction (a legal maneuver that prohibits a party from continuing an activity in dispute) on all Capitol content from the site, as well as the maximum statutory damages of $150,000 per track for willful copyright infringement. A federal district court denied Capitol’s request and set a trial date for this coming August. While ReDigi tracks sell for less than the traditional digital price point of 99 cents, under ReDigi’s terms, artists are entitled to 20 percent of each sale, which sounds like an improvement over the 0% that artists receive when their album is sold in a second-hand record store. (We aren’t exactly sure how that money actually makes it to the artist, however.) Whether ReDigi is a lawful — or even viable — business model remains to be seen, but we do think it raises important questions about protections for rightsholders and access for consumers.
It Ain’t Just Redigi: Meet Omega v. Costco
In addition to the ReDigi case and the question of whether digital tracks should be considered property or licenses, there is also the question of whether the first sale doctrine should apply to copyrighted goods produced outside of the U.S. A few years back, in the case of Omega v. Costco, watchmaker Omega sued to stop Costco wholesalers from importing Omega watches from abroad and selling them at a lower price point to U.S. consumers than Omega wished — in the process creating a so-called grey market. Omega convinced the Ninth Circuit Court that because the watches had the company’s copyrighted globe logo on the back of the goods, and since they were manufactured and sold outside of the U.S., the first sale doctrine does not apply to these goods. In a 4-4 split (Justice Kagan recused herself), the Ninth Circuit ruling in favor of Omega was affirmed by the Supreme Court. However, because there was not a majority, the holding lacks nationwide precedential power.
As a result, there is still an open question regarding grey markets and the first sale doctrine with regard to internationally produced goods. One example is the pending case of Kirtsaeng v. John Wiley and Sons. Here, the question is whether the purchaser of the international goods — in this case, used textbooks manufactured outside the United States — is subject to the first sale doctrine. The Second Circuit held in favor of the book publishers, finding that the first sale doctrine should not apply to this particular grey market. Given the previous judicial split, the case seems ripe for Supreme Court review. Should the highest bench find in favor of the book publishers, the practical effect would be that consumers will need to actively determine in which country their purchased goods were manufactured before selling or trading them. As explained in this article, this could mean that if you try to sell used iPod or iPad, you would be violating copyright law, based on the fact that the device was made in a factory in China.
Striking the Balance
We at FMC believe copyright plays a crucial role in artist compensation but we also take a pragmatic view when it comes to how these rights can best serve creators in today’s marketplace. To our view, the first sale doctrine strikes an appropriate balance between consumer access and rightsholder control. And if ReDigi somehow allows artists to monetize sales of “used” digital recordings, we think that’s good. Again, we have no idea how such payments would be facilitated, as there isn’t a public performance right for downloads in the US, and label-owned content is all contract-based (not to mention the company is currently being sued by a major label).
With regard to the other conundrum: we see no reason why goods produced abroad should be treated differently than domestic products under the first sale doctrine. If the court upholds this distinction, it could produce the undesirable result that consumers will not know which of their purchases can lawfully be resold, an unnecessary complication that would result in further consumer confusion in a field of law that already has too many grey areas.
What do you think? Let us know in the comments.
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