First Sale Doctrine
First-sale
doctrine: Copyright, Supreme Court of the United States, Copyright Act of 1976, Copyright
infringement, Exhaustion doctrine, Restrictive covenant, Digital rights management
The "first sale" rule shields a reseller from infringement liability.
"first sale" protection to the reseller extends upto where the said goods
have not been altered so as to be materially different from those originating from the
trademark owner.
First sale doctrine originally applied to copies that had been sold, but in the 1976 Act
it was made to apply to any "owner" of a lawfully made copy regardless of
whether it was first sold.
Accordingly, if the copyright owner licenses someone to make a copy, then that copy (any
drive or removable storage medium) may lawfully be sold, lent, traded, or given away.
First sale doctrine does not include renting and leasing recorded music and generally
computer software, though private nonprofit archives and libraries are allowed to lend
them with a notice that the work may be copyrighted.
U.S. courts have allowed manufacturers to restrict the first-sale doctrine by a clickwrap
contract or other agreement. Though the legality of allowing first-sale doctrine rights to
be abrogated by contract is questionable.
The claim of software publishers that the first-sale doctrine does not apply arose because
software is licensed, not sold, under the terms of an End User License Agreement.
The U.S. Supreme Court cases, Bauer & Cie. v. O'Donnell and Bobbs-Merrill Co. v.
Straus deal with copyright holders trying to enforce terms beyond the scope of copyright
and patent, by calling it a license.
State courts have ruled that a sale of software is indeed a sale of goods under the
Uniform Commercial Code at the point where funds are exchanged for the physical copy of
the software.
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The doctrine of first sale for bundled computer software - cases:
Softman v. Adobe (2001)
After purchasing bundled software (A box containing many programs that are also available
individually) from Adobe Systems, Softman unbundled it and then resold the component
programs. The court ruled that Softman could resell the bundled software, no matter what
the EULA stipulates, because Softman had never assented to the EULA.
The Court decreed that software purchases be treated as sales transactions, rather than
explicit license agreements. That is, the court ruling argued that California consumers
should have the same rights they would enjoy under existing copyright legislation when
buying a CD or a book.
Davidson & Associates v. Internet Gateway Inc (2004). The US District Court for the
Eastern District of Missouri issued a ruling which appears to contradict the position of
the district courts in California and Texas. The first sale reasoning 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." In addition, 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.'"
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,
except non-profit educational institutions or non-profit libraries, to dispose of 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.
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; or
A 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.
However, section 109 specifically leaves the copyright holder bound by the Clayton Antitrust Act of 1915, if the
copyright holder allows; rental, lease, or lending, or by any other act or practice in the
nature of rental, lease, or lending.
3. Nothing in this subsection shall affect any provision of the antitrust laws. For
purposes of the preceding sentence, "antitrust laws" has the meaning given that
term in the first section of the Clayton Act and includes section 5 of the Federal Trade
Commission Act to the extent that section relates to unfair methods of competition.
The copyright holder is liable for Clayton Act violations through the fact that they claim
that the purchase of the software or music is not a purchase and that the end user does
not own the software but has rights to use it, thus engaging in other acts or practice in
the nature of rental or lease. They are through the terms of the EULA and TOS bypassng
section 109.
The Clayton Act prohibits:
price discrimination between different purchasers if such discrimination substantially
lessens competition or tends to create a monopoly in any line of commerce (Act Section 2,
codified at 15 U.S.C. § 13);
sales on the condition that (A) the buyer or lessee not deal with the competitors of the
seller or lessor ("exclusive dealings") or (B) the buyer also purchase another
different product ("tying") but only when these acts substantially lessen
competition (Act Section 3, codified at 15 U.S.C. § 14);
mergers and acquisitions where the effect may substantially lessen competition (Act
Section 7, codified at 15 U.S.C. § 18);
any person from being a director of two or more competing corporations (Act Section 8;
codified at 15 U.S.C. § 19).
Section 109 includes the language "or by any other act or practice in the nature of
rental, lease, or lending" and as having rights to use property but not own is in the
nature of rental, lease, or lending they are subject to the Clayton Act. Through the use
of the EULA and TOS which disclaim that the software is not owned but grants rights to use
the property in order to preclude
consumers first sale rights, they increase their liability.
Software companies and some music companies often engage in practices of discriminatory
pricing, enter into "exclusive" contracts where in exchange for a discount they
agree not to use competitors goods/services, or in the case of music services favor one
company or another to distribute thus violating the Clayton Act in some manner or another.
Microsoft v. Zamos
Dispute between Microsoft and David Zamos, a student at Kent State and the University of
Akron in the United States.
Microsoft accused Zamos of illegally reselling his student-discounted copies of Windows XP
Pro and Microsoft Office on eBay. Microsoft sued Zamos claiming that "Microsoft has
suffered and will continue to suffer substantial and irreparable damage to its business
reputation and goodwill as well as losses in an amount not yet ascertained... Defendant's
acts of copyright infringement have caused Microsoft irreparable injury." and sought
legal fees and the profit from the sale.
At issue was the fact that Zamos acquired Microsoft software at a discount for academic
use, then re-sold it to the general public on eBay for a profit. Zamos contends, and can
document, that he found the software unsuitable when he realized it required him to format
his computer's hard drive. He attempted to return the software, first at the University of
Akron's bookstore, then directly to Microsoft.
Zamos countersued Microsoft for making false claims.Microsoft was countersued in Microsoft
Corp v. Zamos (Case: 5:04-cv-02504) for violating the Clayton Act. And further charged
that, "Microsoft purposely established and maintained a sales and distribution system
whereby rightful rejection and return of merchandise that is substantially non-conforming
is either impossible or practically impossible due to the ineptness of its employees,
unconscionable policies, malicious intent and deceptive practices," thus engaging in
fraud and violating the Consumer Sales Practice Act.
Zamos requested a trial by jury. Microsoft offered to drop their case if he would drop his
countersuit. Zamos insisted on reimbursement for the software, and an apology for
Microsoft's behavior. Microsoft refused this, and Zamos wrote a brief press release to the
Akron Beacon Journal, which published the item on March 7, 2005.
The press release to the Akron Beacon Journal generated so much interest that Zamos
immediately received requests for interviews from across United States and the United
Kingdom. Microsoft proposed a new settlement, and Zamos agreed. As part of this
settlement, Zamos has agreed not to discuss the case further.
The first-sale doctrine was established in this case Bobbs-Merrill Co. v. Straus, 210 U.S.
339 (1908). In Quality King v. L'Anza, the Court described this opinion as follows:
“ In that case, the publisher, Bobbs-Merrill, had inserted a notice in its books that
any retail sale at a price under $1.00 would constitute an infringement of its copyright.
The defendants, who owned Macy’s department store, disregarded the notice and sold
the books at a lower price without Bobbs-Merrill’s consent. We held that the
exclusive statutory right to "vend" applied
only to the first sale of the copyrighted work... ”
'Betamax Case', Sony Corp. of America v. Universal City Studios, Inc., 1979. It was
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.
Novell v. Network Trade Center 25 F. Supp. 2d 1218 (C.D. Utah 1997) - 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.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. Said 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 against such a
purchaser insofar as it purports to maintain title to the software in the copyright owner.
Under the first sale doctrine, NTC was able to redistribute the software to end-users
without copyright infringement.
Quality King Distributors Inc., v. L'anza Research International Inc. 523 U.S. 135 (1998)
Whether a copyright holder could restrict redistribution of material containing
copyrighted content (authorized by the copyright holder) which is imported into the United
States as "grey market" goods. The Supreme Court found that the copyright holder
could not prevent re-importation of materials it had authorized. Unanimous ruling: in the
case involving distribution of hair care products bearing a copyrighted label.
The Supreme Court found that the doctrine does apply to importation into the US of
copyrighted works (the labels) which were made in the US, then exported.
Grey market imports of copyrighted works take advantage of lower price outside the US. The
importation of goods first manufactured outside the US under the copyright laws of other
countries was specifically excluded from that decision.
The licensed-and-not-sold argument - cases:
Step-Saver Data Systems, Inc. v. Wyse Technology
Vault Corp. v. Quaid Software
Blizzard v. BNETD (Davidson & Associates v. Internet Gateway Inc. (2004)).
The doctrine of first sale for bundled computer software - cases:
Softman v. Adobe (2001)
Davidson & Associates v. Internet Gateway Inc (2004)
Novell, Inc. v. CPU Distrib., Inc. (2000).
First-sale
doctrine: Copyright, Supreme Court of the United States, Copyright Act of 1976, Copyright
infringement, Exhaustion doctrine, Restrictive covenant, Digital rights management