(C): First Sale Doctrine Pt. 3

by Howie Cockrill

In Part 1 of this article I explained what the First Sale Doctrine is, how the it was first applied in the U.S. and how it became part of federal copyright law.

In Part 2 I began looking at Universal Music Group v. Augusto, the most recent application of the First Sale Doctrine in federal courts.

Part 3 focuses on Augusto's particular arguments, and what the court thought of each. 

Here's a quick review.  Augusto had 3 main arguments: 

• Argument 1:  Invalid License (the license language on the promo CDs is invalid)
• Argument 2:  Gift (UMG transferred ownership of the promo CDs to insiders by giving a gift)
• Argument 3:  Abandonment (UMG abandoned ownership of the promo CDs because UMG never intended to get them back)

ARGUMENT 1:  INVALID LICENSE

UMG’s position was: 

• that it retained ownership of the promo CDs after providing them to industry insiders, and
• that the license language on the promo CDs created a license between UMG and the industry insiders receiving them.

Augusto’s 1st argument was that UMG’s distribution of the promo CDs qualified as a gift or a sale, not a license, and accordingly that UMG did not retain ownership of the CDs.

Thus, the court had to decide:

• whether UMG retained ownership and simply gave insiders permission for personal use of the CDs, or
• whether UMG actually transferred ownership via a gift or a sale.

The court said that one strong indicator of whether a transaction is a sale/gift or a license is whether the owner intends to later regain possession of the work.

If the owner intends to regain possession, that’s an indication that the transaction was a license. 

If the owner does not intend to regain possession, that indicates a sale or gift.

Here, the court determined that UMG never intended to regain possession of the promo CDs. 

Further, the court found that the licensing language on the CD itself did not require the industry insider to ever return the CD. 

The court also noted that UMG does not keep any records regarding who it has given promo CDs – so even if it did want to regain possession, it couldn’t.

Another strong indicator in distinguishing a sale/gift from a license is “recurring benefit.”

A license tends to provide the licensor with a recurring benefit from the licensee’s continued possession or use of the licensed work.

As applied here, UMG was not guaranteed any benefit, recurring or otherwise, from providing insiders with promo CDs. 

Insiders are not required to promote the CD.  In fact – because of the “for personal use only” language on the promo CD, insiders would technically be barred from professional uses of the CD. 

According to the court, the only benefit UMG could have received from the “license” was to restrain further transfer of the promo CDs, and this notion was struck down 100 years ago in Bobbs-Merrill.

In fact, music industry insiders appeared to be receiving all of the benefits of ownership – including perpetual possession and freedom from obligations to UMG.

Thus, the court ruled

1. that UMG transferred ownership in the promo CDs to the music industry insiders,
2. that the “license” language on the promo CDs was invalid and
3. that Augusto was protected by the First Sale Doctrine.

Augusto won on Argument 1, and therefore was not liable for copyright infringement.

ARGUMENT 2:  GIFT

The court didn’t stop there though, and went on to rule on Augusto’s claims that the transfer of ownership was in the form of a gift, not a sale. 

The Postal Reorganization Act Section 3009 prohibits mailing unordered merchandise without the prior express request or consent of the recipient. 

If someone does mail unordered merchandise, under federal law the recipient can treat it as a gift. 

Accordingly, the recipient has the right to “retain, use, discard or dispose of it” however he or she wants, according to 39 USC Sect. 3009(b). 

Obviously, the purpose of this law is to prevent someone from mailing you something without your permission, and then demanding payment for it.

UMG argued that Section 3009 didn’t apply to them because that law only applies to merchandise sent to “consumers” and for which payment was later requested.   

UMG also argued that Section 3009 did not override agreements between the mailer and the recipient, say in the form of licensing language on a promo CD.

The court disagreed, stating that:

• music industry insiders are also “consumers,” and
• the actual language of Section 3009 does not require that the sender later demand payment. 

And regardless, an insider receiving a promo CD with “license” language is put in the same subjective position as a recipient from whom a sender demanded payment – they either have to return the CD, or keep it and face some affirmative obligation to the sender. 

Lastly, the court rejected UMG’s argument that by keeping the promo CDs, the insiders were agreeing to the license and that Section 3009 did not invalidate that license.

Thus, because UMG sent “unordered merchandise” in the form of promo CDs to music industry insiders without their prior consent – the promo CDs were deemed “gifts” to those insiders under federal law. 

Because the CDs are gifts, UMG has transferred ownership in them and can no longer control what happens to them. 

Insiders are allowed to dispose of them as they wish, including selling them at used record stores or online, or giving them to someone who does so.

Augusto thus won on Argument 2 as well.

ARGUMENT 3:  ABANDONMENT

Finally, Augusto argued that, under California law, UMG had abandoned its rights in the promo CDs.

To do so, he had to prove that:

• UMG did not possess the promo CDs, and
• UMG intended to abandon the promo CDs.

Of course UMG was not in possession, so the only issue was intent to abandon.

The court noted that to prove intent to abandon, there must be more than “mere passivity.”  There must be some clear act or series of acts indicating an intent to give up ownership.

Here, UMG simply did not try to regain possession – it never affirmatively disavowed its rights in the promo CDs. 

Thus, Augusto lost on Argument 3. 

Nevertheless, either one of his other 2 successful argument would have been sufficient to seal his defense. 

The result:  Troy Augusto’s sale of promotional CDs on eBay was protected by the First Sale Doctrine. 

As for Augusto’s counter-claim that UMG filed a bad faith notice with eBay to suspend Augusto’s account, the court found for UMG, stating that UMG filed the notice with a good faith belief that Augusto’s actions were infringing.