The Gray Blog

In an important opinion regarding the first sale doctrine, judge James S. Otero of the United States District Court for the Central District of California has ruled in UMG Recordings v. Augusto, No. CV 07-03106 (C.D.Cal.June 28, 2008), that the first sale doctrine protects the sale of promotional music CDs originally distributed with alleged restrictive licenses.

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.

In non-gray market news, the Court of Appeal for the Tenth Circuit has held that a computer wireframe model that is unadorned and lacks any creative context, one that merely reproduces the image of a car without shading lighting or surrounding objects, does not constitute copyrightable content. In Meshwerks, Inc. v. Toyotta Motor Sales U.S.A., Inc. No. 06-4222 (10th Cir. June 17, 2008) the Court affirmed a ruling from the lower court denying copyright protection to such works. The Court nonetheless denied a motion claiming that the suit had been frivolous and seeking attorneys fees and stated that “[f]ar from being frivolous, this suit presents a novel and consequential question focused on the copyrightability of images in a relatively new technological medium.”

As part of its 2003 advertising campaign, Toyota decided to use digital models of some of its vehicles on its website and on various other media. Through its advertising agency Toyota hired Meshwerks, a Utah corporation to do the digital modeling. “Digitizing involves collecting physical data points from the object to be portrayed. In the case of Toyota’s vehicles, Meshwerks took copious measurements of Toyota’s vehicles by covering each car, truck, and van with a grid of tape and running an articulated arm tethered to a computer over the vehicle to measure all points of intersection in the grid. Based on these measurements, modeling software then generated a digital image resembling a wire-frame model. In other words, the vehicles’ data points (measurements) were mapped onto a computerized grid and the modeling software connected the dots to create a “wire frame” of each vehicle.” At this point further manual shaping had to be done to accurately map every element and shape of the vehicle.

Meshwerks completed the project and delivered the work to Toyota for use in its advertising campaign. The dispute arose when Toyota and its advertising company tried to use the digital models for new advertisements. Meshwerks claimed that they had only authorized a single use of the works. Furthermore, Meshwerks sought and obtained copyright registration for the models. Presumably a work made for hire agreement was not executed as part of the engagement.

Much of the decision was devoted to a comparison with photography related copyright cases. In that respect the Court stated that “the photographer is entitled to copyright solely based on lighting, angle, perspective, and the other ingredients that traditionally apply to that art-form.” quoting Nimmer on Copyright § 3.03[C][3]. By contrast “Meshwerks had nothing to do with designing the appearance of Toyota’s vehicles, distinguishing them from any other cars, trucks, or vans in the world. That expressive creation took place before Meshwerks happened along, and was the result of work done by Toyota and its designers; indeed, at least six of the eight vehicles at issue are still covered by design patents belonging to Toyota and protecting the appearances of the objects for which they are issued.” To the extent that the wiremesh models were later placed in ads which showed lighting, angles, colors and other creative context, those were creative additions which would follow but where not inherent in the original wireframe models. Those were creative additions by those “who came after Meshwerks left the scene.”

The Court concluded that merely copying a copyrighted work without adornment does not create a new copyrighted work. To the extent that the copy is adorned, the only that which is added is apt to be protected. “[A] putative creator who merely shifts the medium in which another’s creation is expressed has not necessarily added anything beyond the expression contained in the original.”

The House of Representatives has passed the Prioritizing Resources and Organization for Intellectual Property (PRO IP) Act (H.R. 4279) a bill which creates a new position of “copyright enforcement czar” in the executive branch called, the Intellectual Property Enforcement Representative. The position is established in the White House to represent and advise the president on IP issues. The bill was introduced by House Judiciary Committee chairman John Conyers Jr. last December and passed the house with a strong vote.

Amongst the other features of the bill, it creates a special IP police with the right to seize property from alleged copyright infringers. The bill would also amend other laws as follows: (1) provide a safe harbor keeping minor errors in a copyright registration from preventing judgment for infringement; (2) allowing criminal prosecution of non-registered copyrights; (3) require courts to basically issue gag orders preventing disclosure of evidence in copyright infringement cases; (4) revise guidelines for civil damages in copyright infringement and counterfeiting cases; (5) enhanced civil and criminal provisions (including restitution) and (6) prohibit importing and exporting of infringing copies of copyrighted works.

While this law is heralded as providing additinal protection to copyright owners, it seems to ignore the experience of the accused in similar areas of law. In the drug area, for example, the accused are often deprived of their property through seizure for months or years while litigating cases which may, if the accused has the funds to support the litigation, be ultimately overturned without any remediation to the wrongly accused. Provisions in the law extending criminal protection to unregistered works and the mandated judicial gag order create potential dark holes of into which the inocent might wander.

The law provides no requirement that the consumer be provided with adequate notice of copyright or with publicly discernible methods for identifying infringing works. No companion bill has been introduced in the Senate.

Sorry for the long hiatus but the it has been quite a year. I hope to make time to keep the blog updated again with the new developments in the Parallel Market.
On the personal front I am pleased to announce that I have formed my own firm Espinosa | Trueba PL. With my partner William Trueba, a registered patent attorney and our staff of professionals and of-counsel we hope to provide the highest quality domestic and international intellectual property services.
You can reach us at our temporary offices:
Espinosa | Trueba PL
3001 SW 3rd Ave.
Miami, Fl. 33129
Tel. 305-854-0900
Fax 305-285-5555
jespinosa@etlaw.com
Our temporary web page is located at www.etlaw.com.
I remain enormously grateful to my previous firm Kluger Peretz Kaplan and Berlin PL and its excellent attorneys and hope to work with them in the future. We also owe a debt of gratitude to our friends at De la O, Marko, Magolnick & Leyton for providing us with a temporary home.
To my friends at INTA whom I missed seeing this year, all the best and I hope to see you next year.