What Counsel Would You Have Given: UMG Recordings v. Augusto?

When asked in polite company what this Kat does for a living, he tries his best to explain what IP is all about. Not infrequently, there is a retort at some point by the interlocutor about the exotic nature of IP practice. Contrast that with a discussion about contracts and contract law. Generally speaking, everyone has a rough idea about what a contract is all about--the parties agree and there is a written contract that sets this out, such that the parties more or less have a reasonable expectation what they can expect from each other. IP is esoteric, even inpenetrable, while contracts are part and parcel of our daily lives.

I have found that, in reality, the situation may sometimes be quite the opposite. People have an instinctive notion of what is protected by copyright, namely, you cannot copy the work of someone else with that person's permission. If you do so, or try to make some changes without altering the basic character of the underlying work, there is little uncertainty about what you are doing. You are simply prepared to take the risk of copyright infringement. On the contrary, contracts are often a lot more uncertain about what they allow or forbid. In part this is due to the indeterminacy of language, in part it is due to the absence of a clear legal position on multiple provisions of the contract. Both uncertainty and risk must be taken into account. The upshot is that, from the point of view of risk, persons may sometimes have a better sense of when they are taking the risk of copyright infringement than breach of contract.

I reflected on this while reading a virtually fresh-off-the-press copy of a judgment rendered by the (IP)-influential United States Circuit Court of Appeals for the Ninth District in the case of UMG Recordings, Inc. v Troy Augusto, No. 08-55998 (January 4, 2011) here. In brief, the Court describes the case as follows:

"UMG Recordings appeals the district court’s grant of summary judgment in favor of defendant Troy Augusto on UMG’s claim of copyright infringement in violation of § 501 of the Copyright Act, which entitles copyright owners to institute an action for infringement of the exclusive right to distribute copies of the copyrighted work. See 17 U.S.C.§§ 501(a), (b), 106(3) (2006). The copies in issue comprise eight specially-produced compact discs, each embodying a copyrighted sound recording. UMG, the copyright owner, used the discs solely for marketing purposes, sending them unsolicited to individuals such as music critics and radio disc jockeys. Although Augusto was not one of those individuals, he managed to obtained the discs from various sources. He later sold them at auction [via eBay.com--NJW], an act which UMG contends infringed its exclusive right to distribute the discs."

Augusto argued that the initial distribution of the promotional copies constituted a transfer of ownership in the discs; as a result, the first sales doctrine applies. This doctrine provides that a person who acquires ownership of a copy of a work is permitted to dispose of that copy as he sees fit without requiring the permission of the copyright owner. UMG (being Universal Music Group, described as being among the world's largest music companies, here ) countered with the argument that the distribution of promotional copies was a mere grant of of licence and, as such, the first sale doctrine did not apply in favour of Augusto. The Court of Appeals agreed with the ruling of the district court and affirmed the decision that a transfer of ownership of the discs had taken place.

What I want to focus on is the promotional statement that accompanied the discs in, more or less, the following language:

"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."

Some of the CDs bore a more succinct statement, such as “Promotional Use Only—Not for Sale.”

Put yourself in the position of counsel for a recording company and that you are presented either form of the promotional statement. You are asked: "Will one or both of these forms of promotional statement provide us with a reasonable basis to claim that a licence, and not a sale of the disc, has taken place?" Assume that you are not given a $50,000 budget to research the question and that you are requested to give your advice by the end of the day. Hand over heart, how many of you would advise that the more reasonable construction is that a licence has been created?

You recall the cases on shrink-wrap licences and the various decisions that have
held that a transaction to use mass-distributed software has been construed as a licence (even, as I recall, when language referring to "sale" may sometimes appear). You even reach out to offer a bit of policy by analogy: just as the courts are loathe to apply the copyright law in such a way as to competely overturn the manner in which mass-market software is commercialized, so too will they avoid overturning 'business as usual' in the musical disc business, battered as it is by the challenge of the digital world. Yes, you might consider some or all of these points--and you would, in the eyes of the Ninth Circuit, be wrong.

Consider the court's reasoning, as it noted as follows:

"Our conclusion that the recipients acquired ownership of the CDs is based largely on the nature of UMG’s distribution. First, the promotional CDs are dispatched to the recipients without any prior arrangement as to those particular copies. The CDs are not numbered, and no attempt is made to keep track of where particular copies are or what use is made of them. As explained in greater detail below, although UMG places written restrictions in the labels of the CDs, it has not established that the restrictions on the CDs create a license agreement."

Further on, the Court adds additional observations:

"There are additional reasons for concluding that UMG’s distribution of the CDs did not involve a consensual licensing operation. Some of the statements on the CDs and UMG’s purported method of securing agreement to licenses militate against a conclusion that any licenses were created. The sparest promotional statement, “Promotional Use Only—Not for Sale,” does not even purport to create a license. But even the more detailed statement is flawed in the manner in which it purports to secure agreement from the recipient.... It is one thing to say, as the statement does, that “acceptance” of the CD constitutes an agreement to a license and its restrictions,but it is quite another to maintain that “acceptance” may be assumed when the recipient makes no response at all. This record reflects no responses."

If that is not clear enough for the reader, consider that the district court granted the summary judgment motion on different grounds. As the Court of Appeal itself states:

"The district court based its decision in favor of Augusto in part on somewhat different grounds from those we have adopted. The district court first held that the licensing language in the detailed promotional statement did not create a license because it lacked any provision for UMG to regain possession of the CD", 

relying on a prior decision of the Ninth Circuit (United States v Wise, 550 F.2d. 1180 (9th Cir 1977). No problem here for the Court. Wise and its progeny apply to software users who pay for to acquire products; that is "a very different position from that held by the recipients of UMG's promotional CD's." Indeed, one wonders how the lower court did not see this "obvious" distinction (the Court also found that the recipients could freely distribute the discs under an indiosyncratic piece of U.S. legislation, the Unordered Merchandise Statute, but let's leave that discussion for legal salons in San Francisco and New York.)


When all of this is said and done, this Kat renews his question: how many of you lawyers out there, faced with a similar siutation and requested to give advice in real time, would have counselled your client in accordance with the decision of either of these courts? Copyright law, except perhaps at the margin of giving a view on issues of infringement when non-literal copying is involved, may be a more certain excercise than the challenge of applying contractual provisions of sale and licensing to the disposition of IP rights.

Costco shoot-out ends in 4-4 draw

Here's just a quick note on Monday's US Supreme Court ruling in Costco Wholesale Corp v Omega SA, which ended in a 4-4 draw (Justice Kagan sat this one out).  tytoc collie is hugely impressed with the commendable brevity of the Court's ruling (here) and wishes that all the cases he had to read were so short: the entire text of the per curiam judgment is shorter than "Office for Harmonisation in the Internal Market (Trade Marks and Designs) (OHIM)" ...

If you want to know what this dispute was all about, the AmeriKat summarized it here and reviewed the arguments on appeal here.

In essence, the story goes like this: retailers Costco bought a consignment of Omega watches outside the US which they imported and sold in California.  Each watch had an Omega globe design engraved on its back, this design being registered as a copyright work in the US. Omega sued Costco, saying that the sales of its watches constituted an unauthorised infringement of its importation and distribution rights.  Costco said it was entitled to import and sell the watches without Omega's permission: since the watches were genuine and had been put on the market by Omega, subsequent trade in them was permitted under the first sale doctrine (the US term for that Europeans call exhaustion of rights).

The trial judge held in favour of Costco, but Omega appealed successfully to the Ninth Circuit, which held that the first sale rule in the US copyright statute did not apply to foreign sales as a matter of law, since that statute lacked extraterritorial application. The Supreme Court agreed to hear Costco's appeal.  The rest is history.

It appears to tytoc collie that, while there are respectable bodies of opinion both in favour of the Ninth Circuit's ruling and against it, the IP community on the other side of the Atlantic has not warmed to this non-result or its consequences. James L Bikoff, David K Heasley and Michael T Delaney (Silverberg Goldman & Bikoff LLP, Washington DC), writing for World Trademark Review, observe:

" ... [The ruling] creates uncertainties and disparities in copyright protection. Under the Ninth Circuit’s reasoning, which is left standing, “lawfully made under this title” ... limits the first sale exhaustion doctrine to goods sold in the United States. A copyright owner who uses a US company to manufacture its goods cannot, after the first sale, prohibit the re-importation of those goods into the United States. But a copyright owner who uses a foreign manufacturer can prohibit US distribution indefinitely. The disparity not only encourages the foreign manufacture of goods bearing US copyrights, it may also impair the ability for US-manufactured goods to compete in foreign markets that do not sustain US prices, because discounted goods sold abroad can be freely imported back into the United States and drive down the value of the product domestically. ...

With the United States importing more than $1 trillion of goods annually, Costco could affect global trade in any good bearing a copyrighted work. The affirmance of the Ninth Circuit’s approach could also affect the way foreign manufacturers prevent the importation of their goods in practice. Until the Supreme Court rules definitively on the subject, and resolves the uncertainties and disparities now pervading this area of the law, purveyors of foreign-made goods should adopt the mantra: caveat vendor".

Writing from Canada, Excess Copyright blogger and internationally respected commentator Howard Knopf suspects that legislative intervention may be on the way:

"This is a big setback for American retailers and consumers. It will be interesting to see if there is a push for Congress to weigh in here. However, given the maximalist mood in the USA, one cannot predict what Congress will do here. The lobbying would be intense on both sides. The USA might want to look at what we have in Canada - which is a separate regime for books that allows for exclusivity in order to protect Canadian publishers for cultural reasons".

Merpel adds, sadly, what it is a shame that international exhaustion of rights -- the most trade-related aspect of IP rights you can imagine -- is the bit that is explicitly excluded from the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Article 6 of which pathetically whimpers

"Exhaustion

For the purposes of dispute settlement under this Agreement, ... nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights".