Losing Control - Ninth Circuit Examines Role of Distribution in Copyright Case

Like parents, copyright holders often reach a point when they must release their creations out into the big, bad world. Unlike parents, though, copyright holders can retain some control over their creations through licensing agreements. But simply labeling an arrangement as a license won’t ensure control. In UMG Recordings, Inc. v. Augusto, the U.S. Court of Appeals for the Ninth Circuit examined the role and nature of distribution of the work in determining whether a copyright holder retains control.

Unintended Recipient

UMG, one of the world’s largest music companies, regularly ships promotional CDs to a large group of recipients, including music critics and radio programmers. The recipients haven’t necessarily agreed or requested to receive the CDs, and UMG doesn’t seek payment. Troy Augusto wasn’t among UMG’s intended recipients but managed to obtain eight of these copyrighted CDs. After he sold them on eBay, UMG sued him for copyright infringement, claiming that it had granted the recipients licenses only to use the CDs and had retained ownership and the right to control distribution. Neither Augusto nor the recipients, therefore, were entitled to sell the CDs. Augusto argued that UMG’s distribution of the CDs represented a transfer of ownership of the physical CD to the recipients, making the CDs subject to the “first sale” doctrine. This doctrine allows one who has acquired ownership of a copy to sell or otherwise dispose of that copy without the copyright holder’s permission. The district court agreed and dismissed the case. UMG appealed.

Transfer of Power

On appeal, the Ninth Circuit explained that the first sale doctrine applies not only when a copy is first sold, but also when a copy is given away or title is otherwise transferred. Once a copyright owner transfers title in a particular copy, it loses its exclusive right to control that copy’s distribution and can’t prevent its resale. The court noted that not every transfer of possession of a copy transfers title; copyright holders can create licensing agreements that permit use of a copy without transferring title. UMG asserted that the “promotional statement” included on most of the CDs at issue created a license. Specifically, the statement said: 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. Some of the CDs were labeled only with “Promotional Use — Not for Sale.” But, as the court noted, merely labeling an arrangement a license rather than a sale doesn’t settle the issue.

Controlling Behavior

In determining whether UMG’s actions created a license with the recipients of its CDs or whether ownership of the CDs was transferred, the Ninth Circuit focused largely on the nature of UMG’s distribution of the CDs. For example, the CDs were sent to the recipients without any previous formal arrangement and weren’t numbered. In addition, no attempt was made to keep track of where each particular copy went or what use was made of it. The court also pointed out that the shorter version of the promotional statement didn’t even claim to create a license. The longer statement was flawed in how it purported to secure the recipient’s agreement: It is one thing to say … that “acceptance” of the CD constitutes an agreement to a license … but it is quite another to maintain that “acceptance” may be assumed when the recipient makes no response at all. The Ninth Circuit found no evidence that the recipients had agreed to a license and, thus, no evidence that the terms of the promotional statement established licenses. It also noted that UMG didn’t require recipients to return the CDs. The failure to require return alone may not establish a sale, but it’s another indication that UMG had no control over the CDs after shipment.

Transfer of Possession

The Ninth Circuit concluded that UMG’s transfer of possession of the CDs to the recipients — without meaningful control or knowledge of the status of the CDs after shipping — constituted a transfer of title. As a result, UMG lost its exclusive right to control distribution.

Sidebar: Unordered Merchandise Statute Also Favored Defendant

Along with its primary decision in UMG Recordings, Inc. v. Augusto (see main article), the U.S. Court of Appeals for the Ninth Circuit also held that, because the CDs distributed by UMG were “unordered merchandise,” the recipients could dispose of them as they desired under the federal Unordered Merchandise statute. The law provides that merchandise mailed without the prior express request or consent of the recipient may be treated by the recipient as a gift.

The recipient has the right to retain, use, discard or dispose of it in any manner it sees fit — without any obligation to the sender. (Although the statute refers to “mailed” merchandise, the Federal Trade Commission has applied it to other types of shipment.) Thereby, the statute granted UMG’s recipients the right to treat the CDs as their own without any obligation to UMG. As such, the statute is “utterly inconsistent” with the terms of the license UMG claimed. Therefore, shipping the unordered CDs to the recipients made them owners, not licensees, for purposes of the first sale doctrine. UMG contended that the statute didn’t apply because the company didn’t try to extract payment from the recipients. The court, however, found that the statute doesn’t require “bullying” for payment. Merely sending the unordered merchandise triggers the statute’s protections.

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