Appeals court upholds first sale doctrine for promo CDs

By Jacqui Cheng

Collect all those promo CDs you managed to pick up at bars and clubs and get ready to make a trip to your local used music shop: the Ninth Circuit Court of Appeals has ruled that it's legal for you to sell those CDs. In the case of UMG vs. Augusto, the appeals court upheld a lower court's decision, saying that a mere stamp on the CD label isn't enough to force the recipient into a license agreement, and therefore people can resell the CDs without the record label's permission.

This case goes back to 2007 when Universal Music Group (UMG) sued California resident Troy Augusto, who made a living by selling promo CDs on eBay. UMG claimed that it had merely licensed the CDs to Augusto—the label insisted that it had never officially transferred ownership, and therefore Augusto did not "own" the CDs. As a result, UMG said he was committing copyright infringement by reselling the CDs—after all, they did have a line printed on the label saying they couldn't be redistributed.

At issue was the first sale doctrine, which says that CD (or book, or DVD) buyers can do with the item as they please after they purchase them the first time. That includes lending the items out (as libraries do), or selling them to others. The doctrine has never been a favorite of copyright holders, though, and they have actively worked in recent years to limit the doctrine's scope via the courts.

In 2008, a federal judge ruled against UMG, saying that promo CDs are gifts under federal law. The court said at the time that the terms under which the material is provided are consistent with ownership, not a license, and that a mere stamp on the CD label did not constitute a license either. Unsurprisingly, UMG appealed the decision, but the Ninth Circuit sided with the lower court.

"Because the record here is devoid of any indication that the recipients agreed to a license, there is no evidence to support a conclusion that licenses were established under the terms of the promotional statement," wrote Judge Canby on Tuesday. "Accordingly, we conclude that UMG’s transfer of possession to the recipients, without meaningful control or even knowledge of the status of the CDs after shipment, accomplished a transfer of title."

The ruling is good news, not just for eBay sellers and used music stores, but also used bookstores, movie and video game rental services, and numerous other businesses that market used items in one way or another. The Ninth Circuit appears to be walking a fine line on the first sale doctrine, and it appears on the surface to not jibe with another one made by the Ninth Circuit just a few months ago. In September of 2010, the appeals court ruled on Vernor v. Autodesk, stating that if a company says you don't have the right to resell a program, you simply don't have that right.

So it looks as though license agreements imposed by software makers are valid and binding, but those suggested by CD labels are apparently not. Tuesday's ruling is a positive step, though, and shows that the first doctrine debate is far from over
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