Prof. Randal C. Picker, The University of Chicago Law School
January 19, 2011
The U.S. Court of Appeals for the Ninth Circuit opened the New Year by revisiting a copyright classic, namely, is a legend stamped on a copyrighted work effective to control it? In UMG Recordings, Inc. v. Augusto, the Ninth Circuit concluded that legends stamped on promotional CDs were ineffective to prevent their subsequent sale. The copyright world had eagerly been awaiting the decision in Augusto, especially so given the Ninth Circuit’s recent decision regarding the first-sale doctrine and software licenses in the Vernor case. (I blogged about that decision in this space here.) And if you are a first-sale person, you really wanted something to get the taste of Costco out of your mouth (the Supreme Court’s recent 4-4 non-decision is here).
To promote new music, UMG has routinely shipped specially produced promotional CDs to music critics and radio stations. This is easy to do when we are talking about intellectual property and much harder to do when we switch to physical property. Samples of physical property – free Priuses for all – runs into real money quickly. But for intellectual property, the first copy is expensive and subsequent copies are relatively inexpensive. Whether we are discussing movies, where first copy costs can be incredibly high (the generally panned Green Hornet cost well in excess of $100 million to produce the first copy) – or music, where first-copy costs can be four or five figures rather than nine – producing a second copy may cost almost nothing. You can send the work to taste makers to get them to promote it and that is exactly what UMG was doing here.
But UMG also wanted to control what happened to the promotional CDs after they were distributed. It did this through a legend on the CDs – two actually. The short and sweet version stated that the CD was for “Promotional Use Only – Not for Sale.” The longer version tried to frame the situation in the language of offer and acceptance: “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 this license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.”
The question before the Ninth Circuit was whether those legends should be effective. Augusto had gone into the business of reselling the promotional CDs on eBay. UMG contended that the sales by Augusto violated its exclusive distribution rights under Section 106(3) of the copyright statute. Augusto in turn contended that copyright’s first sale doctrine – set forth in Section 109 – had attached when UMG distributed the CDs to the radio stations. The radio stations would then be free to dispose of their particular copies of the CDs and that in turn would make it possible for Augusto to sell them on eBay free of copyright risks.
If you are a copyright person, you instantly recognize that this issue is a copyright golden oldie. The Supreme Court considered it in 1908 in Bobbs-Merrill Co. v. Straus, 210 U.S. 339 , where the issue before the Court was the effectiveness of a legend in The Castaway. You can download The Castaway for free at Google books, as it is now in the public domain, or pay $28.84 for a paper copy from Amazon – you can sell the public domain too – but our interest is in the notice set forth on the copyright page: “The price of this book at retail is one dollar net. No dealer is licensed to sell it at less price, and a sale at a less price will be treated as an infringement of the copyright.” The Supreme Court held that purely as a matter of then-effective copyright law the notice was ineffective, though expressly left open the question as to how contract law might apply to this situation. Bobbs-Merrill was memorialized as the first-sale doctrine in the 1909 amendments to the copyright statute.
The dawn of radio brought another appearance of legends. RCA attempted to limit the extent to which records could be played on the radio by stamping them with the legend “Not Licensed for Radio Broadcast.” Judge Learned Hand rejected this restriction in his opinion in RCA Mfg. Co. v. Whiteman, 114 F.2d 86 (2nd Cir. 1940).
Back to the Ninth Circuit in Augusto. In September 2010, the Ninth Circuit decided Vernor v. Autodesk . That is a complicated decision but to simplify, the court recognized the effectiveness of software licenses and held that the first-sale doctrine did not attach when software had been licensed and not sold. Augusto distinguishes Vernor on the ground that commercial CDs “are dispatched to the recipients without any prior arrangement as to those particular copies.” Yes, the UMG legends contain restrictions, just like the Autodesk software licenses contained restrictions, but the recipients of the CDs had never agreed to those restrictions. At least in the long version of the legend, UMG tried to shoehorn acceptance from the recipient’s use of the CD, but in an extended footnote considering the Restatement of Contracts, the Ninth Circuit rejected deemed acceptance as a basis for forming a license here.
And there is an additional wrinkle here in the form of the Unordered Merchandise Statute, 39 USC 3009. That statute seems to have addressed the problem of devious providers attempting to stick consumers with the burden of returning unordered merchandise. The statute solves that problem by allowing consumers to simply take ownership of things they haven’t ordered. Here that would benefit the radio stations and thereby derivatively someone taking through the radio stations such as Augusto.
What should we make of all this? Were I the record companies, I might seek to sidestep the result in Augusto by getting some sort of acknowledgment from radio stations before sending them promotional CDs. Get them to agree to the terms of the distribution and we have avoided the deemed acceptance problem.
But there is a more basic point: Media matters and technology may change opportunities. As we move from distribution by pieces of plastic such as CDs and DVDs to downloads, it is much more straightforward to interpose something that looks like the licenses found to be effective in Vernor. Five years from now, if promotional music is distributed over the Internet, it will almost certainly come with a license and a requirement to click that license before using it.