Opinion ID: 182134
Heading Depth: 1
Heading Rank: 4

Heading: The Distribution of the Promotional CDs Effected a Sale

Text: The first sale doctrine provides that the owner of a particular copy or phonorecord lawfully made under [the Act], or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. 17 U.S.C. § 109(a). Notwithstanding its distinctive name, the doctrine applies not only when a copy is first sold, but when a copy is given away or title is otherwise transferred without the accouterments of a sale. See 4 Patry on Copyright § 13:15; see also United States v. Atherton, 561 F.2d 747, 750 (9th Cir.1977) (The `sale' embodied in the first sale concept is a term of art.). [O]nce the copyright owner places a copyrighted item in the stream of commerce ..., he has exhausted his exclusive statutory right to control its distribution. Quality King, 523 U.S. at 152, 118 S.Ct. 1125. The seminal illustration of the principle is found in Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 341, 28 S.Ct. 722, 52 L.Ed. 1086 (1908), where a copyright owner unsuccessfully attempted to restrain the resale of a copyrighted book by including in it the following notice: The price of this book at retail is $1 net. No dealer is licensed to sell it at a less price, and a sale at less price will be treated as an infringement of the copyright. Id. The Court noted that the statutory grant to a copyright owner of the sole right of vending the work did not continue after the first sale of a given copy. Id. at 349-50, 28 S.Ct. 722. The purchaser of a book, once sold by authority of the owner of the copyright, may sell it again, although he could not publish a new edition of it. Id. at 350, 28 S.Ct. 722. The attempt to limit resale below a certain price was therefore held invalid. Id. at 351, 28 S.Ct. 722. The rule of Bobbs-Merrill remains in full force, enshrined as it is in § 109(a) of the Act: a copyright owner who transfers title in a particular copy to a purchaser or donee cannot prevent resale of that particular copy. We have recognized, however, that not every transfer of possession of a copy transfers title. Particularly with regard to computer software, we have recognized that copyright owners may create licensing arrangements so that users acquire only a license to use the particular copy of software and do not acquire title that permits further transfer or sale of that copy without the permission of the copyright owner. Our most recent example of that rule is Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir.2010). Others are Wall Data Inc. v. Los Angeles Cnty. Sheriff's Dept., 447 F.3d 769 (9th Cir.2006); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir.1995); MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir.1993). All of these cases dealt with the question whether arrangements with consumers amounted to sales of copies, or succeeded in awarding only licenses. They recognized that the mere labeling of an arrangement as a license rather than a sale, although it was a factor to be considered, was not by itself dispositive of the issue. See, e.g., Vernor, 621 F.3d at 1109 (construing United States v. Wise, 550 F.2d 1180, 1190-92 (9th Cir.1977)). The same question is presented here. Did UMG succeed in creating a license in recipients of its promotional CDs, or did it convey title despite the restrictive labeling on the CDs? We conclude that, under all the circumstances of the CDs' distribution, the recipients were entitled to use or dispose of them in any manner they saw fit, and UMG did not enter a license agreement for the CDs with the recipients. Accordingly, UMG transferred title to the particular copies of its promotional CDs and cannot maintain an infringement action against Augusto for his subsequent sale of those copies. 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. [3] We also hold that, because the CDs were unordered merchandise, the recipients were free to dispose of them as they saw fit under the Unordered Merchandise Statute, 39 U.S.C. § 3009, which provides in pertinent part that, (a) [e]xcept for ... free samples clearly and conspicuously marked as such,... the mailing of unordered merchandise... constitutes an unfair method of competition and an unfair trade practice.... (b) Any merchandise mailed in violation of subsection (a) of this section ... may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without any obligation whatsoever to the sender. ... Id. § 3009(a), (b) (emphasis added). The statute defines unordered merchandise as merchandise mailed without the prior expressed request or consent of the recipient but leaves merchandise itself undefined. Id. § 3009(d). Although the statute applies in terms to mailed merchandise, the Federal Trade Commission has applied its prohibitions to other types of shipment, as violations of § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. See 43 Fed.Reg. 4113 (Jan. 31, 1978). Augusto attempts to invoke this statute directly in his defense, but the statute in terms confers rights only on recipients of unordered merchandise. Augusto does not contend that UMG shipped the promotional CDs to him, nor does he show that any of his sources in fact treated the CDs as gifts. [4] The significance of the Unordered Merchandise Statute is not that it applies to Augusto, but that it confers on the recipients the right to retain, use, discard, or dispose of [the CDs] in any manner that [they] see[ ] fit, without obligation to the sender, UMG. 39 U.S.C. § 3009(b). This provision is utterly inconsistent with the terms of the license that UMG sought to impose on the recipients. Because the statute grants to the recipients the right to treat the CDs as their own, shipping the unordered CDs to the recipients rendered the recipients owners, not licensees, of the CDs for purposes of the first sale defense. This effect of the Unordered Merchandise Statute distinguishes this case from those involving computer software, where the software consumers clearly ordered and paid for the software licensed to them. See, e.g., Wall Data, 447 F.3d at 774. UMG contends that the Unordered Merchandise Statute clearly does not apply to its distribution of free promotional CDs, because the main purpose of the Statute was to `control the unconscionable practice of persons who ship unordered merchandise to consumers and then trick or bully them into paying for it.' Kipperman v. Acad. Life Ins. Co., 554 F.2d 377, 379 (9th Cir.1977) (quoting 116 Cong. Rec. 22,314 (June 30, 1970) (statement of Sen. Warren Magnuson)). Because UMG is not trying to extract payment from the recipients, it argues that the statute does not apply. But the terms of the statute do not require bullying for payment; it is enough that unordered merchandise is sent. The recipient is then free to treat it as a gift without any obligation whatsoever to the sender. 39 U.S.C. § 3009(b). In sending its promotional CDs, UMG attempts to obligate the recipient to confine the use of the CDs to promotional purposes. It serves the purpose of the statute to permit a recipient who does not wish to be so obligated to treat the unordered CD as a gift. We also have no difficulty concluding that the CDs fall within the meaning of merchandise. UMG's attempt to prohibit their sale is an indication. [5] 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. The more detailed statement provides: 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. 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. Even when the evidence is viewed in the light most favorable to UMG, it does not show that any recipients agreed to enter into a license agreement with UMG when they received the CDs. [6] Because the record here is devoid of any indication that the recipients agreed to a license, there is no evidence to support a conclusion that licenses were established under the terms of the promotional statement. Accordingly, we conclude that UMG's transfer of possession to the recipients, without meaningful control or even knowledge of the status of the CDs after shipment, accomplished a transfer of title. 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 CDs. In this ruling, the district court relied upon our decision in United States v. Wise, 550 F.2d 1180 (9th Cir.1977). In Wise, we dealt with several contracts, each denominated as a license, by which motion picture studios conveyed films to various recipients. The issue was whether any of these licenses actually constituted a sale for purposes of the first sale doctrine. [7] We held all but one of the conveyances to be licenses, pointing out that they were designated as licenses, reserved title in the studio, and provided for return or destruction of the prints after use. See id. at 1191-92. We held one purported license to be a sale, however, because in addition to the payment of a cost price (which did not alone establish a sale), there was no provision for return of the print to the studio; permanent possession was granted to the recipient. See id. Return of possession is not invariably required in a license, however. We have since read Wise and our software licensing cases to prescribe three considerations that we may use to determine whether a software user is a licensee, rather than an owner of a copy. First, we consider whether the copyright owner specifies that a user is granted a license. Second, we consider whether the copyright owner significantly restricts the user's ability to transfer the software. Finally, we consider whether the copyright owner imposes notable use restrictions. Vernor, 621 F.3d at 1110-11 (footnote omitted). This formulation, however, applies in terms to software users, and software users who order and pay to acquire copies are in a very different position from that held by the recipients of UMG's promotional CDs. As we have already explained, UMG has virtually no control over the unordered CDs it issues because of its means of distribution, and it has no assurance that any recipient has assented or will assent to the creation of any license or accept its limitations. UMG also does not require the ultimate return of the promotional CDs to its possession. Although the failure to require return of the CDs may not, by itself, conclusively establish a sale under our precedent, it is one more indication that UMG had no control over the promotional CDs once it dispatched them. UMG thus did not retain sufficient incidents of ownership over the promotional copies to be sensibly considered the owner of the cop[ies]. Krause v. Titleserv, Inc., 402 F.3d 119, 124 (2d Cir. 2005). Because we conclude that UMG's method of distribution transferred the ownership of the copies to the recipients, we have no need to parse the remaining provisions in UMG's purported licensing statement; UMG dispatched the CDs in a manner that permitted their receipt and retention by the recipients without the recipients accepting the terms of the promotional statements. UMG's transfer of unlimited possession in the circumstances present here effected a gift or sale within the meaning of the first sale doctrine, as the district court held.