to insiders in the music business
in hopes they will listen to the CDs
and thereafter promote the music by
spreading positive buzz about it. The
CD packaging typically states: “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
Augusto buys promotional CDs
from music stores and online auctions
and advertises them on eBay. When
UMG found out about this practice, it
sent Augusto a cease and desist letter,
asserting that selling these CDs would
infringe its copyrights. UMG made a
similar claim to eBay and asked it to
suspend Augusto’s account. EBay initially did so, but later reinstated the
account after Augusto asserted that
his sale of these CDs was lawful under
the first sale rule.
UMG then sued Augusto for copyright infringement, alleging that the
eBay sales infringed its exclusive right
to control distribution of its works. The
first sale rule did not apply, in UMG’s
view, because the CDs had been licensed, not sold, to recipients.
Characterizing a transaction as a
license does not, however, automatically make it so. The judge in Augusto
looked to economic realities to see if
the transaction was more like a sale or
One important incident of ownership is a right to an unlimited duration
of possession, whereas an incident of a
license is an expectation that the prop-
one can generally
not obtain broader
property rights in
an artifact than had
the person from
whom you got it.
industry will likely
weigh in heavily on
the Augusto and
Vernor cases, for the
erty will be returned to its owner when
the license expires or is breached. Recipients of the CDs seemed to be entitled to keep the CDs, and UMG produced no evidence that it expected to
repossess the CDs. UMG could do nothing, moreover, if recipients destroyed
these CDs, even though this would
extinguish UMG’s claimed property
rights. Nor were insider recipients of
the CDs under any obligation to UMG
to promote the music.
The judge concluded that UMG’s
shipment of the CDs was a gift to the
recipients, not a license. The recipients were, therefore, entitled to transfer their ownership interests in the CDs
to Augusto under the first sale rule, and
Augusto was free to resell the CDs on
Vernor v. Autodesk
CTA is an architectural firm that
bought 10 copies of AutoCAD software.
Some years later, it sold four copies of
this software to Vernor at an office sale.
Vernor has sold some of them already
on eBay. Each time Vernor has tried to
sell used AutoCAD software on eBay,
Autodesk has contacted him and eBay
to assert that the sale would infringe its
copyrights because the software had
been licensed, not sold, to CTA.
Although eBay initially suspended
Vernor’s account, Vernor told eBay that
the resales were lawful under the first
sale rule. Autodesk ultimately acquiesced to some earlier resales by Vernor,
but after it objected to his most recent
effort to sell a copy of AutoCAD, Vernor
sought a declaratory judgment that his
resale of the software was lawful under
the first sale rule. Autodesk moved to
dismiss the complaint, arguing that
the first sale rule did not apply.
The judge concluded that Vernor
could resell the Autodesk software on
eBay because the economic realities
of the transaction rendered it a “sale.”
CTA, after all, had made a one-time
payment for permanent use of the software, which is typical of sales transactions. Unlike typically licensed property, Autodesk had no interest in return
of the software.
The judge relied on the Ninth Circuit’s ruling U.S. v. Wise. It held that
an actress was the owner of a copy of
a film, not a licensee, because she had
obtained the right to possess it for an
indefinite period and without an obligation to return it, even though she had
also agreed not to transfer it and to use
it only for personal use.
Applying Wise, the judge held that
Autodesk had sold the software to CTA,
and because of this, the first sale rule
protected Vernor’s resale of the software on eBay.
What Will the ninth circuit Do?
Augusto is an easier first sale case because the restrictive legend printed on
the CDs resembles one that was printed in a book that the Supreme Court refused to enforce in Bobbs Merrill Co. v.
Straus, which established the first sale
rule in copyright law.
Recipients of the CDs cannot reasonably be understood to have agreed
to UMG’s restrictive legend. Indeed,
they demonstrated their lack of assent
to it by selling or giving the CDs away.
Because they were free to transfer the
CDs to anyone, so was Augusto.
Consumers Union is submitting
an amicus curiae (friend of the court)
brief in Augusto pointing out that if the
Ninth Circuit enforces UMG’s restrictive legend and rules that Augusto infringes copyright by reselling the CDs
on eBay, this precedent would encourage manufacturers of all types of goods
embodying some patented or copyrighted innovation to adopt similar restrictive legends. Such a ruling would
substantially undermine competition
in the marketplace for used goods.
Enforcing UMG’s restrictive legend also seems inconsistent with
the Supreme Court’s recent decision
in Quanta v. LGE Enterprises. As I ex-