January 05, 2011
Intellectual Property, Internet & E-Commerce, Media Law Alerts

Music Nerds Breathe Collective Sigh of Relief
by Cyrus Wadia

Music nerds breathed a collective sigh of relief yesterday when the United States Court of Appeals for the Ninth Circuit ruled that promotional CDs distributed by record labels for marketing purposes could be legally resold under the "first sale" doctrine.  UMG Recordings, Inc. v. Troy Augusto (9th Cir. 2011) Case No. 08-55998.
 
The "first sale" doctrine of the U.S. Copyright Act provides that once an individual acquires a lawfully-produced copy of a work, they are free to sell or otherwise dispose of copies without having to obtain the authorization of the copyright holder.  Record labels such as the plaintiff in this case, UMG Recordings, Inc. commonly send out promotional music CDs to music critics and radio DJs.  Their CDs contained statements such as: "Promotional Use Only--Not for Sale" or "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."   
 
Troy Augusto, who was not the original recipient of some promotional CDs distributed by UMG, sold some of these CDs through online auctions on eBay.com.  UMG argued that the language on the discs and how they were distributed granted only a license to each recipient, not a transfer of ownership (or sale) that would permit the recipient to resell those CDs. 
 
The Ninth Circuit disagreed.  It held that that UMG's particular method of distribution of the discs to the original recipients constituted a transfer of ownership and that recipients of those CDs were entitled to the protections of the first sale doctrine and thus free to sell or otherwise dispose of the copies without having to obtain UMG's permission.  The Court also held that "because the CDs were unordered merchandise, the recipients were free to dispose of them as they saw fit under the Unordered Merchandise statute."
 
The Ninth Circuit also noted that the licensing disclaimers on the promotional CDs were not valid licensing agreements that may have brought UMG's CDs within the ambit of protection that it recently afforded to software owners a few months ago in Vernor v. Autodesk.  There, the United States Court of Appeals for the Ninth Circuit ruled that a software user is a licensee rather than an owner pursuant to a Software License Agreement ("SLA") with a use and transfer restriction.  As such, a software user is not entitled to affirmative defenses of the "first sale doctrine" and "essential step doctrine," that secondary owners, not licensees, of copyrighted works can evoke against an infringement claim (see my previous summary here.)
 
Accordingly, because UMG transferred title to the promotional CDs, it could not maintain an infringement action against Augusto for his subsequent sale of those copies.  Oral arguments from the hearing are available here.
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