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.

2 Responses to “First Sale Doctrine Victory for Promotional CD Reseller”

• First Sale Doctrine Victory for Promotional CD Reseller | Online Secure Shopping 22June2008

  [...] Jed added an interesting post today on First Sale Doctrine Victory for Promotional CD ResellerHere’s a small readingThe 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. … [...]

• LIKELIHOOD OF CONFUSION® » Blog Archive » License revoked 25June2008

  [...] it to you?  Sounds pretty ridiculous, and sooner or later someone had to test it.  Someone has.  Jorge Espinosa reports, and I excerpt a tad too much here, but where to cut when it’s all this good?: In an [...]

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