To prevent Beltronics from discovering that Midwest’s inventory had been supplied by the two distributors, the distributors either replaced each radar detector’s original
serial number label with a phony label or removed the original label altogether
before shipping equipment to Midwest.  On rare occasions, when the distributors
supplied Midwest with a radar detector bearing an original serial number label,
Midwest removed the label prior to resale.

In September 2007, Beltronics filed suit against Midwest alleging (1) counterfeiting and federal trademark infringement under 15 U.S.C. § 1114; (2) false designation or origin under 15 U.S.C. § 1125; and (3) trademark infringement, unfair competition, and passing off in violation of state law.  Beltronics also sought a preliminary injunction.  The preliminary injunction was granted and Midwest appealed.

On appeal the 10th Circuit rejected the argument that “material” differences should be limited to physical differences.    The absence of manufacturer warranty service was material difference enough.   While affirming that adequate disclosure could insulate the sale, the 10th Circuit affirmed the lower court’s rulling that the disclosure placed on the product listing by Midwest was insufficient.  Midwest’s disclosure stated:

WARRANTY – WE PROVIDE A 1 YEAR DEFECTIVE
REPLACEMENT WARRANTY.  THE MFG WILL NOT HONOR
THE WARRANTY IF PURCHASED OFF EBAY.  SINCE WE
HONOR THE WARRANTY, THE SERIAL NUMBER HAS BEEN
REMOVED AND RETAINED BY US.

The district court rejected this disclosure as insufficient because no notice was provided on the products themselves and the disclosure failed to address software updates and other support elements.  Evidence of actual confusion by consumers contacting Beltronics for warranty service further sealed the decision.

UMG Recordings, Inc. (“UMG”) owns the copyright to numerous songs and produces CDs containing those songs. As a pre-release promotional item, UMG often creates and distributes by unsolicited mail promotional CDs which may contain different art work or songs. These promotional CDs are labeled with the following language:

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.

Augusto purchased a large collection of promotional CDs. He then sold them on the online auction site eBay as rare collectibles not available in stores. UMG sent Augusto a cease and desist letter accusing Augusto of copyright infringement. When Augusto continued to sell the CD’s UMG filed suit for copyright infringement. Augusto brought a counterclaim against UMG for violation of section 512(f) of the Digital Millenium Copyright Act (“DMCA”) alleging that UMG knowingly misrepresented to eBay that Augusto’s auctions infringed UMG’s copyrights in order to induce eBay to stop Augusto’s auctions. The parties filed cross-motions for summary judgment in the lawsuit.

The Court rejected the existence of a license and held that the sales were protected by the first sale doctrine on two independent grounds. First the Court analyzed the nature of the alleged license. One hallmark of a license is the owner’s intent to regain possession. In this case UMG did not intend to regain possession of the promotional disks. Another Hallmark of a license is a recurring benefit to UMG from the CDs. The absence of a recurring benefit suggested a gift rather than a license. Finally, the only apparent benefit to UMG from the alleged license is to restrain trade, a purpose contrary to law and public policy. Although the promotional CDs were distributed for free, the Court noted that the first sale doctrine applies after the “first authorized disposition by which title passes.” 2 Nimmer § 8.12[B][1][a]. Based on these grounds, the language on the CDs did not constitute a restrictive license and its conveyance to the initial recipient exhausted UMG’s rights to the CDs.

As a second ground for finding that the first sale rule applied, the Court also ruled that the promotional CDs constituted a gift under federal postal law since they were distributed by mail. The Postal Reorganization Act prohibits “the mailing of unordered merchandise” without “the prior expressed request or consent of the recipient.” 39 U.S.C. § 3009(a), (c).5 This merchandise “may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without obligation whatsoever to the sender.” 39 U.S.C. § 3009(b).

Notwithstanding its finding that the promotional CDs were gifts and that their sale was protected by the first sale rule, the Court rejected Augusto’s counterclaim. The Court stated that 9 under § 512(f) of the DMCA, a copyright owner may be held liable for damages caused by an erroneous invocation of the notice and takedown provision only if the owner did not possess a subjective good faith belief that its copyright was being infringed. The Court found that UMG had a subjective good faith belief that Augusto was infringing its copyrights. This belief was buttressed by consent judgment which Augusto had signed in a prior case accepting that selling promotional CDs constituted copyright infringement.