Preserving Innovative Business Models in the Digital First Sale Debates

2nd Asia Pacific IP ForumOctober 1, 2014

Sean M. O’Connor

Assistant Dean for Law, Business & TechnologyProfessor of Law

University of Washington School of Lawsoconnor@uw.edu || 206 543 7491

Overview1. Origins of “first sale” and exhaustion doctrines in

U.S. (copyright and patent)2. Digital first sale debates as conflict over not only

exhaustion but also innovative distribution models3. Proposal: new “Statutory Digital Sale” that exempts

copies made solely for purposes of resale where the original authorized sale was expressly structured as an unconditioned sale under the statute

Origins of Exhaustion in U.S.• Bloomer v. McQuewan, 55 U.S (14 How.) 539 (1853):

“[W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly.”

• Adams v. Burke, 84 U.S. 453 (1873): coffin lids made and sold lawfully within assignee’s territory (Boston) could be used outside the territory by a purchaser because there was no limit on the “sell” right

• Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908): mere printed minimum resale price notice in books did not limit retail store reseller who had no privity with copyright owner; interpreted to preclude “post-sale restrictions”

Origins of Exhaustion in U.S.• Theme: Authorized physical copies of IP-protected goods are

personal property when lawfully purchased in unconditioned sale; IP owner cannot limit its disposition

• Courts trying to enforce the “basis of the bargain”• But they limit this to unconditioned sales: “In this case, the

stipulated facts show that the books sold by the appellant were sold at wholesale, and purchased by those who made no agreement as to the control of future sales of the book, and took upon themselves no obligation to enforce the notice printed in the book . . . . There is no claim in this case of contract limitation, nor license agreement controlling the subsequent sales of the book.” Bobbs-Merrill, 210 U.S. at 350 (emphasis added)

Origins of Exhaustion in U.S.• IP owners who limit the “sell” right retain their rights against

unauthorized purchasers: these are not even post-sale restrictions under conditioned sales

• General Talking Pictures Corporation v. Western Electric Co., Inc., 305 U.S. 124 (1938): patent owner who limited manufacturing license to sales only to amateur market could sue purchasers in professional market (customers of manufacturer) because they had effectively bought counterfeit (unauthorized) goods.

• Contrast unconditioned sale vs. conditioned sale vs. lease/license vs. service

Origins of Exhaustion in U.S.• “First sale” first codified in 1909 Copyright Act, P.L. 60-349

(1909). • Current language in Copyright Act of 1976, P.L. 94-553

(1976), codified at 17 U.S.C. §109(a): “Notwithstanding the [exclusive rights granted under 17 U.S.C. §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.” (emphasis added)

• Further, even with physical copies, there are longstanding rental, leasing, and service models

Digital First Sale Debates• Because all online “transfers” of digital files involve copies,

then §109’s limitation of the distribution right after a first sale does not allow “resales” of these files—still infringement. See Capitol Records v. ReDigi, No. 12-00095 (SDNY 2013)

• Some have called for a digital first sale right that would allow these resales

• This seems fine, but some advocates are attacking digital licensing arrangements too as improper (e.g., software EULAs); licenses should be treated as disguised sales

• Some go much further to claim that Copyright Act makes sales the default, or favored, distribution mode; licenses are then suspect and must be justified by IP owner

Digital First Sale Debates• Nothing in U.S. copyright statute or case law support claim

of unconditioned sale as default mode• Distribution right under §106: Copyright owners have the

exclusive right “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; . . . .” 17 U.S.C. §106(3) (emphasis added)

• Further, even first sale right under §109 is limited in that purchasers of software or music cannot rent out those copies (unless purchaser is library/nonprofit)

Innovative Digital Distribution Models• Software EULAs: allows consumers to pay for only

rights/features they want, including “unlocking” more features over time; not a one-size-fits-all sale; also enabled mass market because vendors could maintain trade secrets and other aspects not covered by copyright or patent

• Streaming content: licensed access to more content than most consumers could ever afford to buy or store

• Licensed “sales” of content (e.g., iTunes): Vendor transfers digital file for single upfront price, but under license, not sale; license grants permission for consumer to make copies on certain other devices for ease of use/access

• Licensed “rentals” of content: digital file resides on user’s device for some defined period of time

Innovative Digital Distribution Models• Consumers are flocking to these innovative models. Some

do want to own some content (myself included), and that is still possible

• Digital first sale advocates argue that we may lose the ability to buy and own any content if the new license-based models are not cropped back

• But why should we limit popular distribution models? And is it certain that IP owners will no longer distribute through sales as well? What about market forces? Note resurgence of vinyl record sales!

• Is it possible to enable a digital sales model that does not override desirable license-based models?

Proposal• Statutory “Digital Sale” proposal• Copies made solely for purposes of resale are not

infringement where an original authorized sale was expressly structured as an unconditioned sale under the statute

• This allows buyers and sellers to intentionally enter into and agree to sales model; no second-guessing or paternalistic override of parties’ intent

• Preserves popular existing and future license-based distribution models

• Allows digital content market to develop similar to how courts allowed evolution of physical IP goods markets

Thank you for your attention

Sean M. O’ConnorAssistant Dean for Law, Business & Technology

Professor of LawUniversity of Washington School of Law

soconnor@uw.edu || 206 543 7491