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 state laws.”

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 a license.

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.
the software
industry will likely
weigh in heavily on
the Augusto and
Vernor cases, for the
decisions challenge
a long-standing
industry practice.

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 eBay.

 

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-