(C): First Sale Doctrine Pt. 2
by Howie Cockrill
In Part 1 of this article, I explained the First Sale Doctrine, and we saw how it was first applied in the U.S. and then became part of federal copyright legislation.
The First Sale Doctrine has been in the news lately due to a recent California federal district court ruling.
So in Part 2, I'll explore a 2008 application of the First Sale Doctrine in Universal Music Group v. Augusto.
Here's what happened:
UMG v. AUGUSTO
Universal, like most record labels, puts out promotional CDs in advance of the general commercial release of their albums.
Promo CDs can function like mini-albums, featuring a few tracks all from one artist, or they can function like samplers, featuring tracks from multiple artists on the label.
The point is, labels give these promo CDs away to "industry insiders" - radio stations, managers, booking agents, film music supervisors, magazines, newspapers, blogs, attorneys, and anyone else who can help build a buzz for the recording artist, the album and the label.
Quick side note: Because the promos are given away instead of sold, artists do not see royalties on them.
If you've ever been to a used record store, you've probably seen these promo CDs mixed in the stacks.
On their covers, they usually say something along the lines of:
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.
Of course, the practice of promo CDs being bought and sold in used record stores has been going on for years.
And a substantial number of those industry insiders who have received promo CDs from labels have also either sold these CDs to used record stores, or given them to someone who has.
No one has really paid much attention to this practice, or at least copyright owners have turned a blind eye, as it used to be limited only to brick and mortar stores.
But as with so many other mildly contentious issues, internet commerce has turned up the volume of the debate.
Take Troy Augusto for example.
He bought lots of promo CDs from not just used record stores, but also from online auctions. He then turned around and sold them on eBay as "rarities."
Universal Music Group (UMG) sent Augusto a cease & desist letter, stating that Augusto's sales on eBay violated UMG's copyrights. UMG also notified eBay, which in turn suspended Augusto's account.
eBay later reinstated Augusto's account, and Augusto went back to selling promo CDs.
UMG then filed a copyright infringement lawsuit against Augusto. Augusto counter-sued UMG, stating that UMG had acted unlawfully when it got eBay to suspend Augusto's account for unsubstantiated copyright infringement.
UMG's Claim
To establish its initial burden of proof for copyright infringement, UMG had to prove 2 things:
- It is the valid owner of copyrights in the sound recordings.
- Augusto violated one of UMG's exclusive rights as the copyright owner.
It was easy for UMG to prove the 1st requirement, as it had registered its copyrights in the sound recordings at issue. (related MELON article: Copyright Registration 101)
As for the 2nd requirement, Augusto himself agreed that he had sold the promo CDs through eBay in violation of UMG's exclusive right to sell those copies to the public.
Augusto's Defense
However, Augusto's defense was that he was exempt from infringement because of the First Sale Doctrine.
For this defense to be successful, Augusto had to prove the following:
- the promo CDs were made with UMG's permission
- UMG transferred ownership of the promo CDs
- Augusto was the lawful owner of the CDs
- Augusto distributed the CDs but did not copy them
UMG agreed that the promo CDs were lawfully manufactured and that Augusto distributed the CDs but didn't copy them.
Thus, the primary issues of this case focused on whether UMG transferred ownership of the promo CDs and whether Augusto was the lawful owner.
As the court so aptly stated it,
The remaining two elements hinge on one question:
Did UMG transfer title to the music industry insiders when it mailed them the promo CDs?
If the answer is yes, then UMG transferred ownership of the CDs and Augusto lawfully owned the CDs at the time he sold them, which permitted Augusto to sell the CDs under the first sale doctrine.
If the answer is no, then UMG retained title to, and ownership of, the CDs and Augusto was not the lawful owner of those CDs at the time he sold them, which excludes Augusto's actions from the protection of the first sale doctrine.
Augusto's defense was made of 3 parts:
- 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)
Check back for Part 3 of this article to see what the court thought about each of these arguments. What a cliff hanger!
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