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>>First Sale, First Principles – Part II

First Sale, First Principles – Part II

Prof. Doug Lichtman, UCLA School of Law
June 16, 2010

Section 109 of the Copyright Act states that the owner of a particular copy of a copyrighted work “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”  This is the “first sale” doctrine, and, as I wrote last time, that doctrine today raises many more questions than it answers. For instance, what happens when the copy at issue is merely a digital copy, and hence Section 109 does not by its own terms apply?  Or what happens when the party invoking the first sale doctrine does not outright “own” the copy at issue but instead holds possession of it subject to (say) a contract or some other type of license?

Motivated by these issues last time, I talked through a handful of policy justifications that might to varying degrees explain the first sale rule.  But I warned there that, even if the first sale doctrine arguably makes sense when applied to a consumer who wants to resell his used textbook — and I am far from convinced of that — the doctrine makes no sense at all as applied to more sophisticated business transactions, as where a book publisher sells books to a retailer, who in turn will then sell them to individual consumers.  To bolster that latter claim, I noted that modern antitrust law is on my side of the fight; that is the theme I want to develop further here.

Under modern antitrust law, the seller of a non-copyrighted work like shampoo would very much be free to tell its downstream partners not to sell, where to sell, how to sell, and so on.  That is, as applied to shampoo, there is no first sale doctrine lording over the relevant commercial relationship.  If a wholesaler wants to give his associated retailer a free hand in disposing of any purchased products, fine.  If a wholesaler instead wants to limit resale in almost any way, that “vertical restraint” is fine, too.  The idea is to give wholesalers and retailers the freedom to establish a business relationship that works given the unique challenges they might face when marketing, pricing, and selling their particular wares.

Consider in this light car dealerships.  Ford obviously wants its downstream partners to put on a nice show for customers, answering questions, giving test drives, and in other ways investing in the customer relationship.  Ford could accomplish that goal by making a rule that every partner must do those things.  But then Ford would have to police the rule, and Ford’s partners would have all sorts of incentives to shirk.  But suppose instead that Ford were to forbid its dealers from selling cars outside of specified local sales regions.  Such a restriction is in obvious tension with a “first sale” rule.  Yet look at what that restriction would accomplish.  Knowing that I’m the only Ford dealer in town, I would have great incentives to invest in the product.  If I gave good service, if I offered generous test drives, and if I had a nice showroom, I would sell more cars, and both Ford and I would make more money.

Without geographic restrictions, by contrast, Ford’s downstream partners would be understandably reluctant to make those very same investments.  If I ran a great Ford dealership and spent real money demonstrating the product and taking care of customers, I would need to build that cost into the price at which I ultimately sell my cars.  But I can’t raise prices if some other Ford dealer is sitting across the street, offering no such service, but targeting my customers with a lower price.  Indeed, that would be a nightmare for me: Customers would come to me for the test drive and free donuts, but then they would buy from him.  A geographic constraint that stopped this form of free-riding would thus benefit the overall Ford ecosystem.  Interference from a doctrine like the first sale doctrine, by contrast, would ruin the plan.

In telling this story, I of course do not mean to imply that every restriction on resale is good for consumers.  As I will detail below, there are situations where a restriction on resale is and ought to be viewed with skepticism.  My point is only that, across a wide range of non-copyright examples, antitrust law today recognizes that “vertical restrictions” can be pro-competitive, yet copyright law has not to date embraced a comparable realization.

As for situations where even antitrust law gets nervous, there are two primary categories to consider.  The first comes when a wholesaler requires its retailer to work with the wholesaler exclusively.  For instance, suppose that Coke were to tell its associated grocery stores that, if they want to sell Coke, they have to agree not to sell any other carbonated beverage.  Antitrust law would here grow nervous because a restriction like that could significantly reduce overall market competition.  Pepsi, after all, needs to sell its wares in the grocery stores in order to remain a viable competitor to Coke.  And, even if an exclusive arrangement would somehow better align incentives between Coke and its grocery store partners, the costs in terms of lost competition between Coke and Pepsi would likely swamp the benefits in terms of any increased promotional effort for Coke itself.

The second situation where antitrust law gets nervous is a situation where the downstream restriction might help competitors collude.  Suppose, for instance, that Ford were to tell its downstream partners that they are not allowed to resell a particular type of car at any price below x.  That restraint could well have two implications.  Within the Ford family, those downstream partners would be forced to compete along some other dimension.  So my Ford dealers would vie to provide better service, offer a better showroom experience, and the like.  Between brands, however, the minimum price might facilitate unlawful collusion.  In essence, Ford would be announcing that Ford cars would not be sold below a certain price.  And if Honda were to make that same announcement about its fleet, all of a sudden two firms in the same industry would have used resale restraints to coordinate with respect to price.

There is one more piece to the antitrust story, and an important piece that further emphasizes the difference between the copyright and antitrust approaches: Even when antitrust law is worried about something like collusion or exclusive dealing, the law might still allow the vertical restraint.

One reason is that an accused bad actor might not have market power.  It’s not plausible to accuse a seller of (say) bullying its downstream partners into an exclusive deal if the seller is actually just some bit player without sufficient clout to make that sort of worrisome demand.  Another reason is that even firms with market power face problems like Ford’s promotion problem.  Thus, while a restraint imposed by a monopolist might truly be the lynchpin to some anti-competitive scheme, it might also be some pro-competitive promotion strategy — and antitrust law in general allows courts to look at the facts and, on a case-by-case basis, figure that out.

All that, then, leads me to worry about copyright law’s first sale doctrine.  Last time, I could barely come up with a few policy stories that would justify the doctrine as applied to small-scale consumer interactions.  This time, the analogy to antitrust law suggests that, whatever the merits as applied to small-scale consumer interactions, the doctrine ought not be extended beyond that to include larger-scale business settings.

By |2018-07-03T12:42:15+00:00June 16th, 2010|Intellectual Property Issues|Comments Off on First Sale, First Principles – Part II