# Owning the Intangible/True Ownership

True Ownership
by Jason Campos

## Introduction

When a person buys a movie, software, or videogame do they really own it? An average person would say of course but the company they bought it from might disagree. Numerous incidents have arisen where the question of whether a person has the rights to resell the products they have bought has been questioned. And this question isn’t new, in 1908 a publisher demanded that all copies of the novel, Castaway, had to be resold for a dollar or more. In this case the judge ruled that those who bought the book had the right to sell it for whatever they wished and thus introducing the First Sale Doctrine. (Lee, 2007) This doctrine provides that a person can own and resell something they purchase. But in this new age of technology this doctrine is challenged but in the end the First Sale Doctrine should always preside over all.
In 2008 UMG recording sued a man, Troy Augusto, for copyright infringement in UMG v. Augusto. Augusto sold promotional CDs on eBay under the name Roast Beef Music. He acquired these CDs by purchasing them at used record stores in Los Angeles. The first sale doctrine without a doubt applies to product sold by UMG through standard retail channels. But these promotional products, on the other hand, were distributed free to individuals for various reasons and contain prominent notices that the use of the disc and content is licensed for promotional purposes and may not be resold or transferred. The labels say they retain ownership in the copy. The court held that the CDs were gifts, therefore UMG transferred first sale rights to whoever they gave the CDs too. And thus Augusto was doing nothing wrong. (Hodnicki, 2010)
    Unlike the use of software, which necessitates a license because software must be copied onto a computer to function, music CDs are not normally subject to licensing. Therefore, the benefits of a license for software do not exist under these facts.Looking to the economic realities of the transaction, UMG's distribution of Promo CDs provides the recipient with many critical rights of ownership, including the right to perpetual possession and the freedom from obligations to UMG. Accordingly, UMG's distribution of Promom CDs to the music industry insiders is properly characterized as a gift or sale, not a license, and title to the CDs transferred to the insiders. Augusto is thus protected by the first sale doctrine. (UMG Recordings v. Augusto, 2008)
Even when the CDs clearly stated they were not allowed to be resold the first sale doctrine still takes precedent.
In this new digital age, the first sale doctrine is constantly being challenged, should it still apply? Undoubtedly yes because no matter how advanced technology gets when a person buys something he or she then assumes ownership of the product and is entitled to do whatever they wish with that product.

## Background

Copyright is the right to copy a work of some form. If one resells or gives as a gift a book (or CD or DVD) that one has bought, a new copy has not been made, therefore it is legal under US copyright law. When it comes to tangible merchandise, such as the retailing of goods bearing a trademark, the "first sale" rule serves to immunize a reseller from infringement liability. The reseller has protection under the law as long as the merchandise is not altered. In 1909 the codification (the process of forming a legal code) originally applied to copies that had been sold (hence the "first sale doctrine"), but in the 1976 Act it was made to apply to any "owner" of a lawfully made copy or phonorecord (recorded music) regardless of whether it was first sold. (Copyright Act of 1976, 2010) So, for example, if the copyright owner licenses someone to make a copy, such as by downloading, then that copy may lawfully be sold, lent, traded, or given away.The doctrine of first sale does not include renting and leasing phonorecords and certain types of computer software, although private nonprofit archives and libraries are allowed to lend these items if a notice that the work may be copyrighted is on the copy. (First-sale Doctrine, 2010) The first-sale doctrine as it relates to computer software is an area of legal confusion. Some software publishers claim in their End User License Agreements (EULA) that their software is licensed, not sold, thus the first-sale doctrine does not apply to their works.
    The Record Rental Amendment of 1984 and the Computer Software Rental Amendments Act of 1990 both amended Section 109 to prevent all owners of software copies or phonorecords from distributing said copies through the acts of rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending unless authorized by the owners of the copyright, with an exemption for non-profit educational institutions and non-profit libraries.The acts specifically excluded: A computer program which is embodied in a machine or product and which cannot be copied during the ordinary operation or use of the machine or product; orA computer program embodied in or used in conjunction with a limited purpose computer that is designed for playing video games and may be designed for other purposes.The privileges to sell or otherwise dispose of the possession of any particular copy or phonorecord and to display that copy publicly one image at a time, including through projection, one image at a time where the copy is physically located do not, unless authorized by the copyright owner, extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, without acquiring ownership of it. (First-sale Doctrine, 2010).
These issues have been brought to court and dealt with by law.

## Case Law

One of the first cases that dealt with the issue of resale happened when Bobbs-Merrill Company sold a copyrighted novel, The Castaway by Hallie Erminie Rives, with the notice, "The price of this book at retail is $1 net. No dealer is licensed to sell it at a lower price, and a sale at a lower price will be treated as an infringement of the copyright" printed immediately below the copyright notice. The defendants, R.H. Macy & Co., purchased large lots of books at wholesale and sold copies of the book at retail at the price of 89 cents a copy. The court held first that the copyright statutes protect an owner's right to "multiply and sell" the work on their own terms. The statutory right to sell, however, did not also create a right to limit resale. The court did not hold that a contract or license imposed on the first sale could not create an obligation. In this case, there was no contract between the owner and the original purchaser, and there was not privity of contract between the owner and any third party (BOBBS-MERRILL CO. v. STRAUS, 1908) The Supreme Court established early on that individuals have the right to resale a copyrighted good as long as it is not claimed to be original work.
In 1979 Sony Corp. of America v. Universal City Studios, Inc. (often called "The Betamax Case"), determined that because the VCR was capable of substantial noninfringing uses, copyright owners objecting to infringement could not prevent its sale. The ruling, coupled with the high price of the first few movies on VHS and Betamax tapes ($50 each) created a large market for home video rental. Retailers purchased the expensive tapes and rented them to consumers at an affordable price, while studios earned considerable revenue from volume sales to rental stores. First-sale doctrine excused these merchants from seeking permission from the copyright holders. (SONY CORP. OF AMER. v. UNIVERSAL CITY STUDIOS, INC., 1983) Because of the First-sale Doctrine video stores were able to be created and protected by law because they purchase videos and then have the right to use them as they wish.
In 1997 in Novell v. Network Trade Center a purchaser is an "owner" by way of sale and is entitled to the use and enjoyment of the software with the same rights as exist in the purchase of any other good. These software transactions do not merely constitute the sale of a license to use the software. The shrinkwrap license included with the software is therefore invalid as it pertains to maintaining the title to the software by the copyright owner. Under the first sale doctrine, NTC was able to redistribute the software to end-users without copyright infringement. Transfer of a copyrighted work that is subject to the first sale doctrine extinguishes all distribution rights of the copyright holder upon transfer of title. (First-sale Doctrine, 2010)
The decision in the 1997 Novell v. NTC was upheld in a more recent case the federal district court in California issued a decisions applying the First-sale Doctrine to bundled computer software in Softman v. Adobe (2001), even if the software contains an EULA prohibiting resale. Softman bought a bundled pack of Adobe software and then resold each software program individually. The court ruled that Softman could resell the bundled software, no matter what the EULA stipulates, because Softman had never agreeded to the EULA. The ruling specifically said that software purchases will be treated as sales transactions, rather than explicit license agreements. In other words, the court ruled that California consumers should have the same rights they would enjoy under existing copyright legislation when buying a CD or a book. (SOFTMAN PRODUCTS COMPANY vs ADOBE SYSTEMS INC., 2001) Because Softman did not agree to a licensing agreement for use of the software with Adobe he was legally allowed to resale the product because he was protected by the First-sale Doctrine.
In a case involving software EULAs and the First-sale Doctrine, Davidson & Associates v. Internet Gateway Inc (2004), the first sale ruling of the Softman court was challenged, with the court ruling "The first sale doctrine is only triggered by an actual sale. Accordingly, a copyright owner does not forfeit his right of distribution by entering into a licensing agreement." However, the point was disputable as the court found the plaintiff's EULA, which prohibited resale, was binding on the defendants because "The defendants expressly consented to the terms of the EULA and Terms of Use by clicking 'I Agree' and 'Agree.'” (First-sale Doctrine, 2010) By agreeing to a licensing agreement the buyer forfeits their right to use the first sale doctrine.

## Counter-arguments

Although the First-sale Doctrine is clear in providing consumers with rights to products some would argue that this is wrong and use certain cases to help their argument. In Vernor v. Autodesk Timothy Vernor made his living from selling items including software on eBay. Vernor had picked up some old copies of AutoCAD from an architect's office sale, complete with their serial numbers, and he put them up on eBay noting that they were not currently installed on any computer. But there's a catch. Autodesk, the software's developer, forced all users to accept an agreement before using AutoCAD. This agreement made clear that AutoCAD was merely licensed, never sold, and that one's license was non-transferable. Further, a licensee could not rent, lease, or sell the software to anyone else; you couldn't even physically transfer the discs out of the Western Hemisphere. Finally, if you upgraded to a new version, the old version had to be destroyed. In its view, US "first sale" protections don't apply to Vernor, because he didn't buy the software from a legitimate "owner." That, in turn, is because the architecture firm had only "licensed" the software, and that license could indeed allow a software company to prevent resale, lending, and even removal from the Western Hemisphere. (Anderson, No, you don't own it: Court upholds EULAs, threatens digital resale, 2010) In this case the court ruled against the First-sale Doctrine saying that it did not apply to the licensing agreement that the consumer agreed to. Another argument that is used against the First-sale Doctrine especially with regards to modern technology is the reselling of mp3 files bought off of iTunes or Amazon. Through the First-sale Doctrine this would be fine. And a company called Bopaboo is operating under this premise. They buy previously owned mp3’s and resell them. But here is where opponents argue against the First-sale Doctrine because Bopaboo has no way of knowing the original origin of the mp3 files. They could be buying and selling copies of mp3’s that were illegally downloaded or shared P2P (person to person).
    But digital resale shops would pose new challenges. Put simply, the product they offer is simply too good. "Used" versions of songs aren't actually "used" at all; they're perfect copies, as good as the day they traveled through the tubes and onto a user's machine the first time. So, if used copies of digital goods are sold at a lower price, consumers have no reason at all to use higher-priced services like iTunes or Amazon. If used copies are sold at the same price, the store doing the selling is now in direct competition with those other stores, even though it doesn't have to split any profit with labels or creators. (Anderson, "Can I resell my MP3s?": the post-sale life of digital goods, 2008)
Because the resold copies are perfect the same as the day they were originally purchased some feel that this is unfair competition to other mp3 stores and the First-sale Doctrine should not apply because there is no “degradation of the product.” (Anderson, "Can I resell my MP3s?": the post-sale life of digital goods, 2008)
But these arguments are flaccid and irrelevant. In Vernor v. Autodesk the First-sale Doctrine is not being ruled against. The court ruled against Vernor but only because the original owner was forced to accept and agreement to use AutoCAD. “This agreement made clear that AutoCAD was merely licensed, never sold, and that one's license was non-transferable. Further, a licensee could not rent, lease, or sell the software to anyone else; you couldn't even physically transfer the discs out of the Western Hemisphere (!). Finally, if you upgraded to a new version, the old version had to be destroyed.” (Anderson, No, you don't own it: Court upholds EULAs, threatens digital resale, 2010)
Vernor was ruled against because he was not protected by the First-sale Doctrine. “He didn't buy the software from a legitimate ‘owner.’" (Anderson, No, you don't own it: Court upholds EULAs, threatens digital resale, 2010) The product he bought was licensed and not sold therefore making it illegal for Vernor to resell them.
The second argument about reselling mp3’s is worse than the first. The quality and condition a product is in has nothing to do with the First-sale Doctrine. As long as a good is purchased the owner is now protected and can sell the item as they wish. If a jacket can be bought and resold brand new why should music files be any different. Opponents might argue that this example is irrelevant because it is obvious the seller no long has the jacket and with technology today it only takes seconds to make a copy of the song file. But what they fail to realize is that this is the case for anything with regards to technology. A CD or DVD can be ripped and ready to be resold in minutes. But the ease of making duplicates should not diminish the law so it should not exist. People have been able to make copies of things for centuries but that does not mean a buyer should forfeit their rights to their own property because of advancements in technology.
Also it is said that reselling of the mp3’s is bad for the industry. ”The carpenter who built your dining table doesn't get a cut when you eventually hawk it on Craiglist, and Best Buy makes no money when you resell one of its computers to a friend” (Anderson, "Can I resell my MP3s?": the post-sale life of digital goods, 2008) But there is also a solution to the problem. Digital resale shops may also offer some benefit to the industry. Because the business model of stores like Bopaboo ("great name," says Bengloff) may be dodgier than stores trafficking in physical goods, the labels have an opportunity to get a piece of the market in exchange for legal security. Bopaboo's decision to seek licenses for its behavior is (pun intended) music to the ears of the music industry. (Anderson, "Can I resell my MP3s?": the post-sale life of digital goods, 2008) Not only should it not matter that the record labels do not receive income for the reselling of songs but now they have a possibility of getting a cut of the profit. This did not happen with the reselling of CDs or records.

## Closing

The First-sale Doctrine should clearly apply to all cases of purchasing items. Even in today’s new technological age with mp3’s and software. If a person purchases, not leases, an item the First-sale Doctrine should clearly apply. Just because technology has gotten more advanced does not mean the First-sale Doctrine should no longer apply. In fact the First-sale Doctrine protects buyers from the companies who sell products and assures the buyer that what they bought is now their property to do what they please with. Without the First-sale Doctrine we would have things we take for granted. One of these things is a library. Libraries operate under the premise of the first sale doctrine because they buy or receive books as gifts and then are entitled to do what they wish with them. The same can be said for movie and video game rental stores such as Redbox and Gamestop. What would we do when we wanted to watch an old movie once but did not want to purchase. A world in which libraries and video stores could not exist is a world of which I do not want to be a part of.