The First Sale Doctrine

The first sale doctrine was established by the Supreme Court in Bobbs-Merrill Co. v. Straus where a book publisher printed the following note on its copyright page: “The price of this book at retail is $1 net. No dealer is licensed to sell it at a less [sic] price and a sale at a less [sic] price will be treated as an infringement of the copyright.” The Supreme Court held that, under existing copyright law, copyright holders have the exclusive right of distribution over the “first sale” of their works, but further distributions are outside of their control.  The first sale doctrine was later codified in the Copyright Act.

As a legal principle, first sale strikes a balance between the rights of copyright holder and the rights of the owner of a copy of said material. The doctrine also embodies the general principle in property law that unreasonable constraints on alienation (gifting, selling, etc.) are void.

First sale also promotes the value of free access to information by making out of print copyrighted works widely available and lowering prices through the existence of secondary markets.

Many copyright owners justifiably dislike the first sale doctrine because it prevents them from maintaining a monopoly on their copyrighted works, and it enables secondary markets which tend to drive down prices.

The Vernor Decision and the Sale/License Distinction

The essential facts of Vernor are straightforward. Vernor purchased used software at a garage sale and attempted to sell it on eBay. The copyright holder, Autodesk, filed several DMCA take-down notices with eBay. After some back and forth, Vernor brought a declaratory action in Federal District Court to establish that his resale was protected by first sale doctrine.

The primary legal issue was whether the transfer of Autodesk’s software to the customer who had sold it to Vernor constituted a sale or a licensing. This is the legal hook: if all that was transferred was license, the “first sale” has not occurred and the doctrine does not apply.

The licensee/owner distinction was not clear law prior to Vernor. The District Court in Vernor, determining that there were conflicting precedents on point, applied the 9th Circuit case United States v. Wise and found that the critical factor in the sale/license distinction was whether the purchaser had a right to possess the copyrighted work perpetually or whether he was required to return it to the copyright holder. The court found the right to perpetual possession and thus held that Vernor was covered by the first-sale doctrine.

On appeal, the 9th Circuit held that the license/ownership distinction depended on only three factors: (1) whether the copyright owner specifies that a user is granted a license (2) whether the copyright owner significantly restricts the user’s ability to transfer the software (3) whether the copyright owner imposes notable use restrictions. Applying this test to Autodesk, the court found that the transfer in question was a mere transfer of license and, thus, that Vernor was not protected by the first sale doctrine.

Criticism of the Vernor Test

The problem with the Vernor test is clear: a copyright holder can completely avoid the first sale doctrine by using the term “license” coupled with the “significant” transfer and use restrictions. Thus, under Vernor the application of first sale doctrine depends solely on the discretion of the copyright holder and what “magic words” he chooses to place in the license agreement.

The Vernor test completely undermines the first sale doctrine and all of its underlying policies. First sale is meant to balance between the rights of copyright owners and the rights of owners of copies; Vernor undermines that balance by making its applicability contingent on a copyright holder’s preference. Under the Vernor test, if Bobbs-Merrill Co. had written its note slightly differently, referring to the purchaser as a licensee, and imposing more use and transfer restrictions, the case would have come out the other way—an absolutely preposterous result.

And finally, Vernor effectively negates the principle against unreasonable restrictions on alienation as they apply to copyrightable works. A copyright holder only has to write the “magic words” in a licensing agreement to prevent resale. Thus, there is little standing in the way of copyright holders from unilaterally destroying secondary markets—the used software, book, DVD, CD and videogame market—and maintaining a monopoly on its work.

Currently, the plaintiffs in Vernor are petitioning for an en banc rehearing in the 9th Circuit. If denied, they will likely take it to the Supreme Court. Vernor as it stands today has the potential to fundamentally change not only the legal relevance of the first sale doctrine, but the entire economic, social and legal landscape for copyrightable works.

• Authorities in San Mateo, California, contemplate filing criminal charges in connection with the sale of an Apple prototype (of a new iPhone), lost by and possibly stolen from an Apple software engineer and bought for $5,000 by the website Gizmodo.com, the New York Times reports.

• From the San Francisco Chronicle: citing a desire to help fight censorship, Google has launched a tool that discloses requests the company receives from governments for content removal and user data.

• India’s new copyright proposals, which include both fines and jail time for offenders, are still not strict enough for the RIAA, MPAA, and other organizations that lobby for greater intellectual property enforcement, Ars Technica explains.

• From CNET, a summary of the recent Supreme Court decision declaring unconstitutional a law banning Internet videos of animal cruelty, while leaving open the possibility that a narrower law would be permissible.

• A new study funded by net neutrality opponents claims that the FCC’s proposed net neutrality rules would cost the telecommunications industry over 340,000 jobs in the next ten years, PC World reports.

• PatentlyO notes that the Supreme Court has decided to hear a case on international copyright exhaustion, and gives a summary of the case.

• Also from PatentlyO, links to videos of patent attorney Kevin Noonan defending genetic patents on 60 Minutes and the Colbert Report.

• The New York Times discusses the increasingly complex battle over e-book publishing rights.

• True/Slant reports on Facebook CEO Mark Zuckerberg’s glitch with his social network’s new privacy settings, and asks whether the changes might violate FTC regulations.

• Misbehaving in the jury box: jurors researching on Wikipedia led to an overturned murder conviction, and jurors friending each other on Facebook is the subject of mistrial challenge, reports the ABA Journal.

• Former state representative and convicted pederast Ted Klaudt claims his name is covered by “common law copyright” and says news organizations that use it in coverage have to pay him $500,000 in licensing fees, blogs The Legal Satyricon.  That’s TED KLAUDT making the claim.  TED KLAUDT.

• Wired’s Threat Level reports on a new hacker application that deletes traces of illegal computer activity when it detects a commonly used suite of police forensic tools beginning to run.  If it doesn’t work perfectly, this could be a godsend for prosecutors looking to indict on obstruction of justice charges.

• Microsoft dips its toes a little deeper into open-source waters with Moonlight 2, the Linux version of its web application framework Silverlight.  With the new version, Microsoft extends its Patent Covenant to End Users of Moonlight to users who get the framework from any third-party, including distributors like Red Hat or Ubuntu.

• Apple-Psystar, the final chapter, on Gizmodo.

• Fake Steve Jobs rallies iPhone users to DoS attack AT&T today, reports Gizmodo.

• The FTC sues chipmaker Intel for antitrust violations, everyone reports.

• Europe drops its antitrust case against Microsoft after the software giant agreed to offer consumers a choice of web browsers installed with copies of Windows, says the New York Times.

• Video sharing site Vimeo is sued by Capitol Records over user-posted lip dubs, reports NewTeeVee.

• The Supreme Court will review employers’ access to employees’ text messages on company-owned mobile devices, reports the Wall Street Journal.

• Judges and Facebook – Is it ok to be FB friends with lawyers?  The Florida Judicial Ethics Advisory Committee says no, reports the New York Times.

• Michael Arrington and Crunchpad sues JooJoo for the joint tablet venture that so publicly went wrong, says Gizmodo.

• The Environmental Protection Agency announces that greenhouse gases pose a danger to human health and environment.  New federal and possibly international regulation are expected to follow, according to the New York Times.

• Who will protect us from the robot invasion?  Maybe lawyers will, a pair of scholars at Stanford University tells the San Francisco Chronicle.

• The legal implications of new technology aren’t all covered in intellectual property classes – Andrew Breitbart’s Big Government blog looks at the possible use of eminent domain to take the “wind rights” of farmers and build green-friendly windmills.

• Text messages are the new “digital lipstick on the collar” and are increasingly showing up as critical evidence in divorce cases, writes the New York Times.

• The EU drops its antitrust case against memory-maker Rambus in exchange for concessions, according to the Associated Press.

• A federal judge finalizes a $675,000 verdict against a Boston University student for sharing 30 copyrighted songs online, Wired’s Threat Level reports.

• Apple countersues Nokia for patent infringement – this is getting ugly, says All Things Digital’s Digital Daily.

• A payroll and credit card payment processing company’s failure to protect itself from massive data breach was not grounds for a securities fraud case by shareholders.  Law.com discusses the New Jersey District Court ruling.

The Exclusive Rights of the Artist

Copyright law in the United States is authorized by Article I, Section 8, Clause 8 of the United States Constitution and codified in Title 17 of the United States Code. Copyright applies to “original works of authorship fixed in any tangible medium of expression,” “musical works, including any accompanying words,” and “sound recordings,” among other things.³ The bifurcation of “musical works” and “sound recordings” can be confusing for copyright novices. For the purposes of copyright, composing music, i.e. coming up with a melody and accompanying lyrics and committing them to paper entitles one to a right in that composition. When the song is played and recorded, a separate copyright is created that applies to the recording itself, distinct from the underlying composition. The same person may have the copyright to the composition and the recording, or they could be held by a separate composer and performer.

These two copyrights bestow slightly different sets of rights on the holders. Composers of musical works have the right to a fee (set by statute) for every copy of a recording of their work produced⁴, and an exclusive right to public performance of their work, whether live or on a recording.⁵ Copyright holders for sound recordings have the exclusive right to control reproduction⁶ and distribution⁷ of their recording, but not over the public playing of the recording.⁸ There is an exception – if the public performance involved a digital audio transmission, then the performer needs to clear rights for the sound recording pursuant to 17 U.S.C. § 106(6).⁹

So how does all this apply to John McCain? Let’s start with the rallies. If we assume that McCain’s campaign legally obtained a copy of “Barracuda,” then no rights pertaining to the recording itself are infringed when it’s played at a rally. However, the campaign is on the hook for publicly performing the underlying musical composition: it is the Wilsons’ exclusive right to grant the campaign a license. Had McCain’s aides or a cover band performed the music live, he still would have needed to get the permission of the songwriters. This is the same right your high school chorus and college a capella groups had to (ostensibly) clear before adding a copyrighted song to their repertoires. Based on the artists’ after-the-fact reactions, it seems likely that had the McCain campaign approached each one of the aforementioned artists to seek a license to publicly perform their work, the answer would have been no. But the McCain campaign secured permission through another route: a license from ASCAP, as explained below.

In the case of television or web-hosted videos, the campaign would also have to clear sound recording rights (because the recording is being reproduced in their motion picture work), in addition to the public performance license they would have already secured from ASCAP.

ASCAP and Copyright Collectives

ASCAP (American Society of Composers, Authors and Publishers) and BMI (Broadcast Music Incorporated) are the largest copyright collectives in the United States. A copyright collective serves two primary functions: it assists the copyright holder in monitoring violations and enforcing their copyrights, and it assists an entity wishing to use copyrighted material in identifying copyright holders and negotiating licenses with them.¹⁰ Copyright holders give authority to the collective to licenses their works, enforce their copyrights, collect royalties, and redistribute those royalties to the copyright holders. One type of license, the kind that the McCain campaign presumably obtained from ASCAP, is a “blanket license”, which gives the licensee the right to perform any work from their entire catalog.¹¹

Assuming McCain’s campaign obtained the correct license for the venue, it has the right to play any song in ASCAP’s catalog. Generally, once a copyright holder signs with ASCAP, ASCAP must grant a license to whomever pays the appropriate fee, without regard to whether the copyright holder themselves would choose to grant a license to a potential licensee.¹²

This kind of licensing is not the same as playing a song under a claim of “fair use.” Under “fair use,” no license is sought.Instead, the user of the copyrighted work claims that he or she should not need to seek permission, based on a four-factor test in the Copyright Act.¹³ In contrast, the McCain campaign has purchased rights to the music it wishes to use—rights which the copyright holders, like the Foo Fighters, placed in the hands of ASCAP.

While the McCain campaign’s decision to obtain an ASCAP license has allowed them to keep playing “Barracuda” and “My Hero” over the objections of their composers, it exposes a deficiency in the law. The rationale behind ASCAP was to reduce transactional costs for broadcasters like radio stations who would otherwise have to obtain rights from every artist they played – a time consuming and expensive process. By paying ASCAP, the McCain campaign avoided negotiating with each artist whose work they wanted to use. Assuming the campaign plays enough music to justify paying for a license to ASCAP’s entire catalog, an additional benefit is that this gets around the fact that the artists themselves won’t give a license. This privileges deep-pocketed parties by creating a de facto compulsory license for licenses bought in bulk, while a party with limited resources has no recourse if rebuffed by the individual copyright holder. If the intended policy benefit of this system was to create public access to artists’ works, it does so only on a limited, expensive basis.

Back to the case at hand: if a court ruled that McCain had violated the copyright of the artists (let’s say one of the songs the campaign used wasn’t in the ASCAP catalog), what would he be liable for? Copyright holders can sue for damages, encompassing either the profits made through the infringement or (more relevant here) statutory damages.¹⁴ Statutory damages range between $750 and $30,000 per infringement, at a judges discretion, and can be raised to $150,000 if the infringement is “willful.”¹⁵ Costs and attorney’s fees can also be awarded to the successful filer of an infringement suit.¹⁶ Thus, if McCain did not hold a license to use the works in question, his campaign could be held liable for as little as $750, or as much as $150,000 for each work infringed.

YouTube and the DMCA

McCain’s woes with copyright law didn’t end with music. The campaign also picked a fight with Google over the removal of campaign videos and ads from YouTube. At issue are Google’s responsibilities and McCain’s rights under the Digital Millennium Copyright Act (DMCA). The DMCA, passed in 1998, amended Title 17 of the US Code. One of the most significant provisions of the act, and the one at issue here, was the creation of “safe harbors” from liability for Online Service Providers that hosted infringing materials so long as they abided by certain notification guidelines.¹⁷

The statute provides that a service like YouTube will be safe from liability for hosting infringing content if, upon receipt of a takedown notice, they remove the challenged material in a timely fashion. In order to protect uploaders from abusive takedown notices, the service provider can reinstate the challenged content after a waiting period of 10 business days after receiving a counter-notice from the content uploader if the uploader hasn’t been sued for infringement.¹⁸

The McCain campaign took exception to Google’s removal of campaign ads from YouTube, complaining that the notice-and-takedown regime that YouTube complied with stifled free speech. The campaign requested that YouTube carry out “a full legal review of all take-down notices on videos posted from accounts controlled by (at least) political candidates and campaigns,”¹⁹ including an analysis of whether the challenged material would be covered by a fair use limitation on copyright. McCain’s ads featured excerpts of televised debates and music that drew notices from rights holders, like Warner Music Group, which demanded that YouTube remove a popular McCain ad that featured Frankie Valli’s “Can’t Take My Eyes Off You.”²⁰ Warner is likely the owner of the specific sound recording used in the ad, and asserting its right over the reproduction of the recording made in the ad without its permission.

YouTube responded to the campaign by pointing out that while limiting legal reviews to only official campaign uploads would reduce the burden of reviewing all uploaded content, YouTube, as an intermediary content host, simply was not in a position to perform a substantive legal review of the claims in takedown notices. YouTube Chief Counsel Zahavah Levine noted that “[t]he claimant and the uploader, not YouTube, hold all the relevant information in this regard, including the actual source of any content used, the ownership rights to that content, and any licensing agreements in place between the parties.”²¹

As to assessing fair use, Levine emphasized the uncertainty produced by the complex fact-based balancing test that goes into making a fair use determination, stating that “[l]awyers and judges constantly disagree about what does and does not constitute fair use. No number of lawyers could possibly determine with a reasonable level of certainty whether … videos for which we receive disputed takedown notices qualify as fair use.”²² Levine’s unstated point is that YouTube’s lawyers are being paid to make sure YouTube avoids liability, not make speculative determinations on behalf of its users.

Finally, Levine referred to YouTube’s neutral policies, emphasizing that the company prefers not to favor any category of content or user over another, pointedly adding that “there is a lot of content on our global site that our users find to be equally important [to United States political campaigns], including… political campaigns from around the globe at all levels of government, human rights movements, and other important voices.”²³

A Constant Tension

The McCain campaign’s complaint to Google highlighted one of the central underlying conflicts of copyright: the tension between the exclusive rights of copyright holders and the first amendment’s guarantee of free speech. To the McCain’s campaign, the curtailment of its political speech—one of the most protected and revered categories of speech—was a violation of a fundamental right. University of Virginia Professors Christopher Sprigman and Siva Vaidhyanathan succinctly expressed the sentiment in a Washington Post column: “[u]sing a song to communicate a political message is just the kind of speech the First Amendment was designed to protect.”²⁴ Yet however controversial the results—artists’ songs being used by the candidates they oppose, access to a presidential candidate’s message blocked by a studio that owns the ad’s background music, and the provider of an increasingly important medium for political discourse erring on the side of caution (and maybe censorship) to avoid liability—what we really saw was the current state of the law. Though as Zahavah Levine suggests, perhaps that might change now that a US Senator has felt the practical results of his handiwork, and hasn’t been too pleased.

By Hamilton Falk, Raza Panjwani, TJ Wilkinson and Rajiv Batra

1. One of the authors of this post, being a history major with an affinity for Americana would like to note that presidential campaign songs have a storied history. If you’re capable of recalling your high school American history classes, you may remember that William Henry Harrison’s 1840 presidential campaign got a special mention in your textbook for his campaign jingle, “Tippecanoe and Tyler too.” At some point candidates decided that self-referencing jingles just weren’t doing the trick and turned to popular music. In recent memory, Bill Clinton punctuated the final line of his 1992 convention speech (“and don’t stop thinking about tomorrow!”) by segueing to Fleetwood Mac’s “Don’t Stop.” Bob Dole, on the other hand, got into trouble for riffing on the 60s Motown hit “Soul Man,” using the reprise “I’m a Dole Man” for his 1996 presidential campaign.That earned him a reprimand from the song’s writer, Isaac Hayes.
2. Christopher Sprigman & Siva Vaidhyanathan, Cue ‘Barracuda’, Wash. Post, Oct. 13, 2008, at A21, available athttp://www.washingtonpost.com/wp-dyn/content/article/2008/10/12/AR2008101201630.html.
3. Copyright Act of 1976, 17 U.S.C. § 102(a) (2005).
4. 17 U.S.C. § 115.
5. 17 U.S.C. § 106(4).
6. 17 U.S.C. § 106(1).
7. 17 U.S.C. § 106(3).
8. 17 U.S.C. § 114(a).
9. You can thank the radio station lobby for that exception, since they wanted to only pay once when they played a recording over the air, but didn’t want competition from internet radio stations.
10. Bruce P. Keller & Michael P. Cunard, Copyright Law: A Practitioner’s Guide §4:1:4:C (Incorporating Release No. 9 2007).
11. Id.
12. Harvey Reid, ASCAP & BMI – Protectors of Artists or Shadowy Thieves? (2005), http://www.woodpecker.com/writing/essays/royalty-politics.html.
13. 17 U.S.C. §107.
14. 17 U.S.C. § 504.
15. 17 U.S.C. § 504(c).
16. 17 U.S.C. § 505.
17. 17 U.S.C. § 512(c).
18. 17 U.S.C. § 512(g).
19. Sarah Lai Stirland, Stifled by Copyright, McCain Asks YouTube to Consider Fair Use (2008), http://blog.wired.com/27bstroke6/2008/10/stifled-by-copy.html
20. Id.
21. Letter from Zahavah Levine, Chief Counsel, YouTube, to Trevor Potter, Gen. Counsel, McCain-Palin 2008 (Oct. 14, 2008) (available from Sarah Lai Stirland, YouTube to McCain: You Made Your DMCA Bed, Lie in It (2008) http://blog.wired.com/27bstroke6/2008/10/youtube-to-mcca.html
22. Id.
23. Id.
24. Christopher Sprigman & Siva Vaidhyanathan, Cue ‘Barracuda’, Wash. Post, Oct. 13, 2008, at A21, available at http://www.washingtonpost.com/wp-dyn/content/article/2008/10/12/AR2008101201630.html