Significant First Sale Doctrine Cases Before the Ninth Circuit

There are two cases pending decision at the Ninth Circuit Court of Appeals that affect consumer rights (and potentially those of libraries) under the first sale doctrine.  The two cases are UMG v. Augusto, and Autodesk v. Vernor.  Each case involves resale of items the copyright owner attempted to restrict.  Augusto involves promotional copies of CDs, and Vernor involves professional graphic and engineering design software.  The defendants won in both trials.

Vernor's case arose when he purchases two copies of AutoCAD on eBay.  Vernor attempted to resell these copies on eBay, meeting with a DMCA takedown notice from Autodesk.  Vernor filed counter declarations and the sales ultimately proceeded.  Vernor then sued Autodesk for a declaratory judgment that Autodesk could not restrain the sales.  Autodesk's motion to dismiss was denied.

Autodesk claimed that the software could not be resold as it was licensed originally, and the license forbade transfer to third parties.  The Court, however, held that the license placed onerous restrictions on the transfer of the software.  It applied the first sale doctrine limiting Autodesk's rights to control distribution of the software once it was in the hands of a third party. 

The implication in this case is tremendous.  It affects the viability of shrink wrap licenses, which is the bedrock of software sales in the United States.  In theory, no one owns software.  It's merely licensed under terms written by the manufacturer.  A user violating the license could be directed to terminate the use of the software or face less severe sanctions.  The problem for Autodesk is that the software is embodied in physical disks which can be passed around.  Even authorized downloads can be fixed and transferred between parties, essentially selling the rights to use the software.  Piracy is not an issue in the case.

The Augusto case raises similar, but not identical issues.  Agosto sold promotional CDs on eBay under the name Roast Beef Music.  He acquired these CDs by purchasing them at used record stores in Los Angeles.  The first sale doctrine without doubt applies to product sold by UMG through standard retail channels.  Promotional product, on the other hand, is distributed free to individuals for various reasons and contain prominent notices that the use of the disc and content is licensed for promotional purposes and may not be resold or transfered.  The labels say they retain ownership in the copy.  The District Court held that the distributions were gifts and as such, the first sale doctrine applies to these discs no matter how they are labeled.

One side note about the music business is worth mentioning.  Promo copies have existed since the time the labels began selling product, whether in the form of vinyl albums, compact discs, and DVDs.  They were handed to DJs, radio stations, stores, and any number of entities who the label thought could help push an artist.  Not all of those who received these copies thought enough of them to keep them.  Hence they dumped them in used record stores and resale shops.  The labels never took a strong position on the practice until the Internet and online auctions came along.  There is anecdotal evidence that members of the music industry used these copies to make a little side money without drawing the ire of their employers.

What's really going on here is a fight to establish a principle that would limit application of the first sale doctrine in circumstances where it would normally apply.  These two cases apply to physical items transferred between parties.  Calling a sale a license once music and software (and ebooks) become purely creatures of the Internet implies that, absent legislation to the contrary, the right of the purchaser/licensor to redistribute goes away.  Copyright holders would love for that to happen.

Both cases were argued last week before the Ninth Circuit Court of Appeals. Audio recordings of the arguments presented to the Court for the Vernor case are here, and here for the Augusto case.  These are in .wma format, so Microsoft Media player is required.  [MG]