COPYCENSE

A. INTRODUCTION

This edition of CommuniK.™ features the third part of a series about copyright law exceptions that are available to libraries, schools, and archives. The article discusses Section 109(a) of the 1976 Copyright Act, otherwise known as the “first sale” doctrine. Generally, “first sale” allows anyone who rightfully and legal owns a copy of a protected work to resell, rent, or lend that copy to another person or entity. Many businesses — including libraries, used bookstores, used music and video resellers, and video rental stores — are able to conduct their operations legally because of the “first sale” doctrine.

Over the last decade, however, several changes have occurred that threaten first sale’s future viability. First, manufacturers increasingly are distributing content in digital formats, rather than analog formats. Second, digital content is being distributed as sheer content, rather than being wrapped in some media such as a disc or book. Third, digital content typically is not sold to consumers; instead, it is leased to consumers, with a license governing the terms and conditions of content use and access. Often, the copyright owner uses the license to reserve certain critical legal rights, and to curtail privileges that the consumer normally would enjoy under federal copyright law. Together, these changes have rendered “first sale” nearly irrelevant.

Still, it is important to recognize what the “first sale” doctrine says and how it applies. With such knowledge, a savvy information professional can recognize if the doctrine applies and whether a contract or other arrangement eliminates this limitation.

This article analyzes the traditional role of “first sale,” how digital technology and business practices have eroded its viability, and how information professionals can continue to leverage “first sale” to their advantage.

Portions of this article originally appeared in the May/June 2005 edition of Online magazine.

B. SCOPE OF THE FIRST SALE DOCTRINE

1. Statutory Language & Interpretation

The “first sale” doctrine is codified in the Copyright Act at Section 109(a), and reads as follows:

Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, 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.

(In 1994, Congress expanded “first sale” to include language that addresses the ability to resell copyrighted works that have been restored. I will ignore that provision because it is beyond the focus of this article.)

There are two ways to read the first sale doctrine, with both ways serving as different sides of the same coin. From a item owner’s perspective, the “first sale” doctrine says that once you own a copy of a protected, legally created (i.e. not a bootleg), you can “sell or otherwise dispose of” that copy without having to get the copyright owner’s permission to make that sale, gift, or loan. Read another way, “first sale” gives the rightful owner of a protected item the right to transfer that item to another person or entity in spite of the copyright owner’s exclusive distribution right (which is outlined in Section 106(3)).

From the copyright owner’s perspective, the “first sale” doctrine says that once you sell, give away, or transfer a copy of a protected work, you no longer have the right to control a bona fide owner’s further distributions of that work. In other words, the copyright owner’s exclusive distribution right pursuant to Section 106(3) is terminated once the owner releases a copy of the protected work to the public through a sale, gift, or loan.

This rule is best explained through example. Suppose you, Joe Consumer, go to your local video store and you purchase a DVD of the Shakespearean tragedy Othello featuring Laurence Fishburne. Suppose further there are no other facts that suggest the DVD is illegal. Question: Can Joe give that DVD to another person? Yes: the “first sale” doctrine allows Joe — a good-faith purchaser of a “copy [that is] lawfully made” — to “otherwise dispose of the possession of that” DVD by giving it permanently to another person or entity.

Question: May Joe lend that DVD to another person? Yes: the “first sale” doctrine allows Joe — a good-faith purchaser of a “copy [that is] lawfully made” — to “otherwise dispose of the possession of that” DVD by lending it to another person or entity. In fact, U.S. libraries rely on the first sale doctrine in order to lend the books it buys to others.

Question: May Joe resell that DVD to another person? Yes: the “first sale” doctrine allows Joe — a good-faith purchaser of a “copy [that is] lawfully made” — to sell that DVD to another person or entity. In fact, retail stores rely, in part, on “first sale” to sell new DVDs and CDs to the public. Further, retail stores rely on the first sale doctrine to sell used CDs and DVDs. In fact, had you chosen to rent Othello instead of buying it, the “first sale” doctrine would allow that exchange as well.

(Significantly, the typical retailer’s ability to sell new copyrighted items like DVDs to the public is governed not just by the “first sale” doctrine, but also a contract between the copyright owner and the retailer. This contract that addresses the “first sale” doctrine, but it also contains other terms and conditions. Later in this article, I will return to the affect contracts can have on the “first sale” doctrine.)

2. Limiting the Copyright Owner’s Distribution Right

One last hypothetical: May Joe make a copy of that DVD and then give it to another person? No, because the “first sale” doctrine does not allow the owner of a protected work to copy (or “reproduce”) that work. The opening parenthetical to Section 109(a) says “[n]otwithstanding the provisions of section 106(3) …” Section 106(3) says in pertinent part

The owner of copyright … has the exclusive rights to do and to authorize any of the following … (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (Emphasis added)

Simply put, the “first sale” doctrine in Section 109(a) is an exception only to Section 106(3), which addresses a copyright owner’s exclusive right to “distribute copies … to the public.” “First sale” does not limit any of the copyright owner’s exclusive rights in any way. Put yet another way, the rest of the copyright owner’s other exclusive rights in Section 106 — reproduction, preparing derivative works, public performance of certain types of works, public display of certain types of works, or digital transmissions of sound recordings — are not limited by the “first sale” doctrine. This critical point cannot be overstated.

Another critical point that cannot be overstated is the distinction between a copyright owner and the owner of a copy. The Copyright Act outlines a statutory basis for this distinction, and I will address this important issue later in this article. But in order to understand this distinction, we first must determine what a “copy” is.

3. Defining A “Copy”

“First sale” applies to “copies” and “phonorecords.” Section 101, the Copyright Act’s definitions section, defines “copies” as

material objects … in which a work is fixed by any method now known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.

As is the case with most of the Copyright Act, this definition is much more complicated than it needs to be. There is no need to get twisted into knots over this definition. One of my English dictionaries defines a “copy” as “an imitation, reproduction, or transcript of an original.” For our purposes, the common, non-legal definition is sufficient.

Applying the simple definition to the “first sale” doctrine, Section 109(a) says that despite the copyright owner’s exclusive distribution right (which is outlined in Section 106(3)), the owner of a legal, copyrighted reproduction of an original, copyright work is entitled to sell, lend, loan, or otherwise dispose of that copy.

“First sale” also applies to “phonorecords.” Section 101 defines “phonorecords” as

material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.

Again, this definition is much more complicated than it needs to be. Practically speaking, “phonorecords” means any item upon which we normally expect to play music: vinyl records, compact discs, and audio cassettes. (It is important to note that sounds that accompany a motion picture or other audiovisual work do not qualify as “phonorecords.”)

Applying the simple definition to the “first sale” doctrine, Section 109(a) says that despite the copyright owner’s exclusive distribution right (which is outlined in Section 106(3)), the owner of a legal copy of a copyrighted album, CD, or audio tape is entitled to sell, lend, loan or otherwise dispose of that copy.

As with most of the copyright law, the first sale doctrine can be used only by those who engage in legal activities. Specifically, a person or entity can use the doctrine only if it owns a legally made item. This means, for example, that the doctrine cannot be used by someone on a street corner who has made bootleg copies of Othello.

C. LEGAL OWNERSHIP VS. ITEM OWNERSHIP

The first sale doctrine is predicated upon the theory that title over the physical item transfers from the copyright owner to another party, yet the copyright remains with the owner. This concept is critical to understanding not only first sale, but the entire copyright system as well.

Typically, when somebody mentions “copyright” or the “copyright owner,” that person refers to legal copyright: in other words, one or more of the bundle of rights in Section 106. In fact, Section 101 defines the “copyright owner” as the owner of any one of the exclusive rights comprised in a copyright.

In contrast, an individual or entity can own a copyrighted item, yet a separate person or entity owns or controls the copyright (i.e. the legal right). Section 202 addresses this distinction.

Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object, including the copy or phonorecord in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object; nor, in the absence of an agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object. (Emphasis added)

Why is this distinction important? It is important because “first sale” deals only with the ability of the “[bona fide] owner of a material object” to transfer that object to another party. On the other hand, “first sale” does not affect the exclusive legal rights of the copyright owner — except to the extent that “first sale” limits the copyright owner’s exclusive right of distribution under Section 106(3). Hopefully, another example will clarify this important point.

A person can legally own the copy of the Othello DVD, and “sell or otherwise dispose” of that DVD (i.e. the item or object) pursuant to the first sale doctrine. That same person, however, would be unable to reproduce the DVD or its contents, because

(a) the reproduction right is an exclusive Section 106 legal right that is not affected by the “first sale” limitation; and

(b) according to Section 202, the legal rights in Section 106 are distinct from the item/object rights that are affected by “first sale.

Further, according to Section 202, the person’s ability to “sell … or otherwise dispose of” the DVD via “first sale” does not mean that he receives any copyright rights because “[ownership] of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied.”

Thus, any mention of a “copyright owner” refers strictly to the owner of one or more of the legal rights articulated in Section 106. A person or entity that owns only the item should be referred to as “owner of a copy.” The following graphic will help illustrate this concept.

D. EXCEPTIONS TO FIRST SALE

Most of copyright law offers a rule, then an exception to that rule, then an exception to that exception. We have thoroughly discussed the “first sale” rule. Now, we will analyze some of the exceptions to the rule, and the exceptions to the exceptions.

1. Phonorecords Cannot Be Rented or Leased

The first exception to the rule is outlined in Section 109(b)(1)(A). This exception states that

1. the “owner of a particular phonorecord”
2. cannot “dispose of, or authorize the disposal of”
3. any phonorecord
4. “by rental, lease, or lending”
5. “for the purposes of direct or indirect commercial advantage”
6. unless such action is allowed by the copyright owner.

Said another way, a person or entity cannot rent records. The following story helps put this exception into context.

As recently as the early 1980s, anyone could walk into a retail store, rent a record or cassette tape for two or three days, take it home, listen to it, and return it to that store in exchange for a modest fee. This same service, of course, was available for free through your local library, but as a general rule, the retail outlets had a broader and more timely collection of music (particularly popular music). For this reason alone, renting a record for a fee from the retail store was preferable to borrowing a record from the library.

Sometime during the mid-1980s, I recall entering my local record store to rent a copy of Michael Jackson‘s Thriller album. The sales clerk told me that they could no longer rent albums or pre-recorded cassette tapes. (Compact discs were not yet widely available.) Nearly 15 years later, I found out why: Congress had passed the Record Rental Amendment of 1984.

The Record Rental Amendment curtails “first sale” by barring individuals or entities from renting phonographic material “for the purposes of direct or indirect commercial advantage.” (In contrast, a person can still lend, share, rent or give away a copyrighted work to another person or entity if there is no “purpose[] of direct or indirect commercial advantage.”)

According to Nimmer on Copyright, the rationale behind the Amendment was simple: In 1983 the increase in phonorecord rentals was accompanied by an increase in the sales of blank audio cassette tapes. The record industry reasonably presumed that customers were renting the records, buying blank tapes, recording the album onto a blank tape at home, and then returning the record to the store. This action, the industry presumed, cut sales for that particular record. Congress passed the Amendment to inhibit this potentially huge sales loss.

(To add some context to this tale, this also was the period during which the music industry was promoting compact disc technology. CDs, of course, rely on digital (rather than analog) files of audio content; digital content can be copied much more easily than analog content. Given the confluence of the rentals and the development of digital audio, I suspect the industry also was concerned that digital technology, if rented, would allow perfect, multiple reproductions, and it was seeking to preempt that possibility. The industry successfully preempted that form of digital reproduction, only to encounter file sharing and peer-to-peer networks beginning in the late nineties.)

(a) What About Videos?

Of course, videocassettes and similar materials may be rented, leased or lent. Blockbuster Video, for example, has grown into a multibillion dollar business partly by leveraging “first sale” as the foundation for its business model. So why the rental distinction between phonorecords and videos?

David Nimmer rationalizes that “those who rent videocassettes generally do so merely for the purpose of viewing the motion picture contained therein, and not in order to make a taped reproduction; having viewed a motion picture once, most viewers … are not inclined to see it again and hence, are not even tempted to make a reproduction. By contrast, hearing a musical performance on an audiocassette once only whets the appetite to hear the same recorded performance repeatedly in the future.”

Perhaps this is true, but it seems just as likely that a confluence of business and legal forces made this issue moot for the movie industry. In January 1984, the U.S. Supreme Court ruled in the Sony v. Universal Betamax decision that the sale of videocassette recorders (VCRs) did not contributorily infringe the copyrights of the movie studios. Sales of videocassette recorders, blank video tapes, and pre-recorded video tapes all were in the midst of a sharp increase, according to “Circulating Libraries and Video Rental Stores,” a 1996 study conducted by Richard Roehl and Hal Varian.

By August 2003, the Video Software Dealers Association reported that combined consumer spending on sales and rentals of VHS cassettes and DVDs reached $22.2 billion dollars. In contrast, the Record Rental Amendment crushed the possibility that the music industry could similarly benefit from a boom in the rental of music.

(b) Library Exemption

But, I can hear you say, What about libraries? They rent records; are they infringing copyright?

No; herein lies the exception to the exception. Section 109(b)(1)(A) allows nonprofit libraries (and schools) to lend nearly all types of copyrighted works, including phonorecords, “for nonprofit purposes.” The law is unclear about what constitutes a “nonprofit purpose,” but I believe it is possible for libraries to charge an administrative, or other, fee in order to recoup lending costs such as shipping, packaging, and cataloging. Any fee that exceeds cost recovery, however, may be considered as a “profit purpose.”

2. Software Cannot Be Rented or Leased

There is a second exception to “first sale”: computer software cannot be rented or leased. Since December 1990, the Computer Software Rental Amendments Act of 1990 bars any person who possesses a computer program from renting, leasing, or lending that program “for the purposes of direct or indirect commercial advantage.” (Outright re-sales of software remain legal under the first sale doctrine, as do person-to-person lending or sharing.)

(a) Nonprofit Exemption

Nonprofit schools enjoy an exemption for computer software similar to the one they enjoy for phonorecords: Section109(b)(1)(A) allows these schools to lend or lease software to another nonprofit school. It is important to note, however, that the statute does not explicitly extend this exemption to nonprofit libraries (even though in a practical sense, it is likely that the software being shared may be housed in the school’s library).

Instead, libraries must look to Section 109(b)(2)(A), which says that a library may lend or lease computer software so long as the software program packaging contains a copyright warning that substantially complies with requirements articulated by the Register of Copyrights.

Given prevalence of digital technology, it is possible that this entire discussion about first sale could soon be rendered moot. Increasingly, the manufacturers and developers of digital information do not sell or otherwise transfer title to that information; instead, they license it. The move toward licensing information threatens to kill the first sale doctrine. We will now analyze why.

WILL LICENSING DESTROY THE FIRST SALE DOCTRINE?

1. Digital Music Licenses & Affect on First Sale

Apple Computer’s iPod is arguably the most popular consumer electronics device to hit the market since Sony introduced the Walkman in the United States in 1980. According to iPodlounge, an online publication dedicated to reporting information about the iPod, Apple introduced the iPod in October 2001, just months after releasing iTunes, a software program “that converts audio CDs into compressed digital audio files, organizes digital music collections, and plays Internet radio.”

As iTunes has developed, Apple has added an online music store component that allows customers to legally purchase music over the Web. The core music file is encoded in a format called AAC, which includes a digital rights management protocol that keeps the file from being transferred as easily as an unprotected MP3 file.

In order to load music onto the iPod, buyers must install and use iTunes on their personal computer. Further, if you want to purchase music from the iTunes Music store, you must agree to all of the terms in Apple’s “Terms of Service” agreement (“TOS”). The TOS includes the following clause:

9. Purchase of Apple Content …

b. Use of Products. You acknowledge that Products contain security technology that limits your usage of Products to the following Usage Rules, and you agree to use Products in compliance with such Usage Rules.

Usage Rules

Your use of the Products is conditioned upon your prior acceptance of the terms of this Agreement.

You shall be authorized to use the Products only for personal, noncommercial use.

You shall be authorized to use the Products on five Apple-authorized devices at any time.

You shall be entitled to export, burn (if applicable) or copy Products solely for personal, noncommercial use. You shall not be entitled to burn Video Products.

You shall be authorized to burn an audio playlist up to seven times.

You shall be able to store Products from up to five different Accounts on certain devices, such as an iPod, at a time.

Any burning (if applicable) or exporting capabilities are solely an accommodation to you and shall not constitute a grant or waiver (or other limitation or implication) of any rights of the copyright owners in any audio or video content, sound recording, underlying musical composition, or artwork embodied in any Product.

You agree that you will not attempt to, or encourage or assist any other person to, circumvent or modify any security technology or software that is part of the Service or used to administer the Usage Rules.

The delivery of Products does not transfer to you any commercial or promotional use rights in the Products. (Emphasis added.)

Through this clause, Apple’s TOS limits what customers can do with items they have “purchased.” The real question, though, is whether an iTunes transaction constitutes a purchase or a license. This distinction is critically important to whether or not “first sale” applies. And the legal question that helps determine whether “first sale” applies is whether federal copyright law trumps (or preempts) a license contract that is governed by state law.

2. Federal Copyright Law vs. State Contract Law

A license is a contract between two parties that allows one party to access or use another’s information. As contracts, licenses are governed by state contract law. As I noted in the Introduction, as information increasingly is offered in digital formats, manufacturers are deciding to protect that digital information with a license. With a license, the terms and conditions of the contract govern the parties’ actions. In this way, the terms and conditions act as a sort of private law. In contrast, public law (such as the Copyright Act) seems to have little importance.

This, of course, begs the following question: Where there is a valid license contract between two parties, and the terms of that license seem to affect rights, privileges, or limitations under Federal copyright law, what rules govern? Increasingly, federal courts are giving priority to the license.

This means that in order to use iTunes — and by extension, your iPod — you must agree to all of the terms in the license that Apple offers. You cannot modify any of those terms. You cannot hack the software to use it without agreeing to the license terms (that would violate the Digital Millennium Copyright Act, among other things). You cannot change the jurisdiction so that any of the disputed terms are adjudicated in your home town (as opposed to California, where Apple is incorporated). And you cannot amend or eliminate any arbitration clauses that may bind you in the TOS.

Most importantly, you cannot do anything with the software (or make any use of that software) that is inconsistent with the license contract — even if federal copyright law would allow that use. (In order to keep this as simple as possible, I purposely have avoided discussing the important, but complicated constitutional doctrine called preemption, which is central to the tension between federal copyright law and state contract law.)

Further, it is possible that Apple’s TOS could negatively affect each and every copyright limitations available to an information professional, from Section 110 through fair use in Section 107. In the end, license agreements can — and do — substantially “alter the balance of rights and defenses available under contract [and copyright law],” leading to what a research team at Harvard Law School’s Berkman Center for Internet & Society called a “re-allocation of copyright entitlements” that effectively “override[s] rights consumers would otherwise enjoy under copyright.”

Clear resolutions to this problem (including how to negotiate the best license terms) are best left for another day, but information professionals should recognize that license agreements often hamper the “first sale” doctrine. Further, the trend toward using licensing agreements instead of copyright law to govern how digital information is used, accessed, and distributed will continue to be a challenge for which information professionals must prepare.

RESOURCES

K. Matthew Dames. Using Copyrighted Works in the Classroom. CopyCense. Jan. 16, 2006.

K. Matthew Dames. Copyright Limitations Risk Analysis. CopyCense. Jan. 9, 2006.

The Patry Copyright Blog. First Sale, Hard Copies, and Digital Copies. Oct. 25, 2005.

Ed Foster’s Gripe Log. Last Stand for First Sale. Aug. 22, 2005.

Hal Varian. Reading Between the Lines of Used Book Sales. The New York Times. July 28, 2005.

A Copyfighter’s Musings. More on eBay Music and First Sale. July 15, 2004.

The Patry Copyright Blog. Is There A Whole In The First Sale Doctrine? May 31, 2005.

Digital Media Project, Berkman Center for Internet & Society at Harvard Law School. iTunes: How Copyright, Contract, and Technology Shape the Business of Digital Media – A Case Study. (.pdf, 743 KB) January 15, 2004.

Evan Hansen. eBay Mutes iTunes Song Auction. News.com. Sept. 5, 2003.

R. Anthony Reese. The First Sale Doctrine in the Era of Digital Networks. Boston College Law Review. 2003.

Laura Gasaway. Copyright Office Issues First Sale Report. Information Outlook. January 2002.

Duke Law & Technology Review. iBrief: Copyrights & Trademarks — The First Sale Doctrine and Digital Phonorecords. May 31, 2001.

Anne Klinefelter. Will the First Sale Doctrine Disappear? Information Outlook. May 2001.

Brad King. Why You Can’t Sell What You Buy. Wired News. Jan. 16, 2001.

Mitchell D. Kamarck. Exceptions Consume The Rule: DVD & The First Sale Doctrine. Rosenfeld, Meyer & Susman, LLP. March 1997.

I. Trotter Hardy. Contracts, Copyright and Preemption in a Digital World. The Richmond Journal of Law & Technology. April 17, 1995.

METADATA



Author: K. Matthew Dames

Title: CommuniK.: First Sale in the Digital Age

URL: http://www.copycense.com/2006/01/communik_first_.html

Publisher: CopyCense, a division of Seso Group LLC

Copyright: 2006, Seso Group LLC

Contact: copycense at g mail dot com

CopyCense™: K. Matthew Dames on the intersection of business, law and technology. A business venture of Seso Digital LLC. CopyCense™ and CommuniK.™ are trademarks of Seso Digital LLC.