CopyOwner

Universal Music Group (UMG) has taken steps calculated to exercise control over copies (”phonorecords”) it may not own. In one case, Universal Republic is said to be threatening music retailers selling imported copies of the album it plans to release this fall. The basis for the threat is not clear to me, given that press reports suggest that it may not own any copyright in the imports but is merely protecting its exclusive right to distribute in the U.S. under license from the copyright owner. Moreover, I have grown increasingly doubtful that the import right should be permitted to trump first sale rights when applied to copies lawfully made abroad in a country that is a signatory to and in substantial compliance with the applicable copyright treaties. (The Supreme Court has held that the first sale doctrine applies to copies lawfully made in the United State, exported, and subsequently imported, but expressly left open the question whether the first sale doctrine applies to copies lawfully made abroad and imported, one Justice suggesting that “lawfully made under this title” (the Copyright Act) must mean “lawfully made in the United States America. I disagree, but I leave that to another day.

The case that I bring to your attention today is UMG v. Augusto, Case No. 2:07-cv-3106 SJO (AJWx) in the U.S. District Court for the Central District of California, Western Division. In that case, it is attempting to suppress the sale on eBay of “Promo CDs”.

The Complaint alleges that the first sale doctrine (codified in Section 109 of the Copyright Act) does not apply because “‘Promo CDs’ are never sold, only licensed.” UMG points to the language printed on the CDs stating:

“This CD is the property of the record company and is licensed for 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.”

The Answer and Counterclaim was filed yesterday, and denies any contractual obligation, resting on the first sale doctrine. Augusto claims to be the true owner of the copies at issue, having acquired them from previous owners other than UMG. The case may, therefore, turn on the question of who owns a CD labeled as a “Promo CD” with the above language. But the court should take care to distinguish between product labeling and the substance of the transaction. Surely, no copyright owner should be permitted to nullify legal limitations Congress imposed on the distribution right by merely applying a self-serving label. On the other hand, if the court were to determine that UMG does indeed still own the copies in question, the first sale doctrine would not apply.

Hopefully, the court will conclude that merely labeling a CD as a “Promo CD” or “Not for Sale” does not impair the right of the owner of a lawfully made copy to sell it. Rather than look at the label, the court should look to the substance of the transaction (for which the label is but one bit of evidence to be weighed). First, there is no dispute that the CDs in issue are “lawfully made.” These are not infringing reproductions. Second, there is no question that UMG voluntarily parted with possession. UMG must part with possession to realize the promotional value of them. The only remaining issue, then, is whether UMG parted with title, for once title passes, so does the right of the new owner to sell them over UMG’s objection, regardless of the “not for sale” warning. That is, UMG’s distribution right over lawfully made CDs exists only so long as it remains the owner.

If I were advising a copyright owner on how to preserve title, I would insist that the transfer of possession itself make clear that only possession, and not title, is passed. For example, ideally, a promotional CD sent to a music critic should include a self addressed postage prepaid envelope and a request that the reviewer return it after reviewing it. The disc should go beyond mere self-serving declarations that try to re-characterize the transaction. The wording should say something like “This disc is the property of UMG. It is being distributed by lending for promotional purposes. Please return it to UMG at the address below as soon as your promotional use has ended. If you are unwilling or unable to return it, please destroy it and notify UMG that you have done so by calling [toll free number] or sending an e-mail to ‘promoCD@umg.com’. UMG reserves the right to demand the return of this CD at any time.” (Better yet, UMG should require that the party in possession insure it against loss, but that is pushing a bit too far!)

But my experience suggests that most promotional discs are in fact given away. If possession is transferred with no indication that UMG intends to exercise any right to obtain its return, or to obtain reimbursement in the case of loss, the substance of the transaction is more likely to be determined to be a gift, whereby ownership is transferred and the new owner has every right to sell it. The defendant may well be able to show that the “Promo CD” label is intended more to avoid paying a royalty for the reproduction and distribution (where contracts exclude such royalties for reproduction and distribution of promotional copies) than to assert any continued ownership control over the disc.

Examining UMG’s label, above, there are some pesky terms that may undermine the claim of ownership. First, there is the total lack of any provision for its return to UMG. Courts have determined that the lack of any obligation to return it to the alleged owner is evidence that the transaction passed title, not just possession. Second, the UMG label contains meaningless fluff, in copyright terms. There is no basis in copyright law to claim that something is “licensed for the intended recipient for personal use only.” That is because the copyright grant of exclusive rights to the author does not include the right to exclude “personal use” and, therefore, there is no more basis for UMG licensing “personal use” than to license the retailer the right to breath fresh air. Finally, UMG may be haunted by the prohibition against “resale” because, quite simply, there can be no “re” sale without a “first” sale. The argument would be that UMG implicitly recognized that it had “sold” it (even if for nothing).

UMG also claims that resale may violate state laws. If UMG were resting on copyright alone, state laws would not apply. For state laws to be applicable, UMG would have to be resting on the validity of the purported license rather than on copyright. But the license provision suffers from two flaws. First, it may be construed as a license under state law in derogation of federal copyright law, and therefore preempted by federal copyright law. (And, to the degree that it attempts to limit rights of owners granted by Congress under the Copyright Act, it may be void and unenforceable as against public policy.) Second, there is a serious question whether UMG could obligate a party to “accept” the terms of its agreement by mere acceptance of the CD. Even if the first “intended recipient” could be bound by those terms, downstream owners who had no direct dealings with UMG may not be.

If the case resolves itself solely on the basis of proof whether, as a substantive matter, UMG retained ownership of the CD following transfer of possession, this would be consistent with the first sale doctrine. If, on the other hand, the court were to allow the form of UMG’s claim of continued ownership (”This CD is the property of the record company”) to trump the substantive gift transaction, or were to allow the purported “license” language to extend the copyright reach beyond the limits established by Congress, such a ruling would set an awful precedent for all retailers of lawfully made copies of books, magazines, CDs, DVDs, video games and any other copyrighted works. Copyright owners would be tempted to place all sorts of supra-copyright restrictions upon the retailers, who are the best line of defense against pirates.

This entry was posted on Friday, August 10th, 2007 at 4:42 pm and is filed under Copyright, Competition. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.