Proof of Specific Licenses Required to Rebut Successful First Sale Defense

Adobe sued Joshua Christenson for copyright infringement when Christenson sold Adobe software on his website without Adobe’s authorization.  Christenson lawfully purchased genuine copies of the Adobe software from a third party distributor.

The Ninth Circuit concisely stated the central issue and controlling law:

Who bears the burden of proving the first sale defense in a software licensing dispute?

While the copyright holder bears the ultimate burden of establishing copyright infringement, the party raising a first sale defense bears an initial burden with respect to the defense. At the summary judgment stage, this burden is discharged by producing evidence sufficient for a jury to find that the alleged infringer lawfully acquired ownership of genuine copies of the copyrighted software. Once this initial burden is satisfied, the burden shifts back to the copyright owner to establish the absence of a first sale, because of a licensing or other non-ownership-transferring arrangement when the copy first changed hands.

(Opinion pdf page 4).

The Ninth Circuit agreed with the district court that Christenson lawfully acquired genuine copies of Adobe’s copyrighted software, but that Adobe failed to produce licensing agreements or other evidence that Adobe retained title to the software when Adobe initially transferred to a third party the copies that Christenson ultimately acquired.

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Omega Can’t Pull Off Copyright Infringement Hat Trick

High end Swiss watch manufacturer Omega decided to take on discount retailer Costco.  Omega registered its Omega Globe Design with the U.S. Copyright Office.  Omega engraved its Omega Globe Design on the back of some of its Seamaster watches.  Costco bought authentic Omega Seamaster watches on the “gray market.”  The gray market is “a market that legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.”  Costco sold some of the engraved Seamaster watches in California.  Omega then sued Costco for copyright infringement, claiming that Costco imported copyrighted works (the engraved Omega Globe) without the copyright holder’s permission.

This case went all the way to the U.S Supreme Court once.  An equally divided court summarily affirmed the Ninth Circuit’s first decision.  The first time it heard the case, the Ninth Circuit ruled that the first sale doctrine did not apply to copies of copyrighted works produced abroad.  The first sale doctrine states that once the copyright holder sells a copy of a work, the copyright owner cannot claim copyright infringement for unauthorized distribution for any subsequent sales of that particular copy. 

The case was remanded to the district court.  The district court ruled that Omega impermissibly attempted to expand its limited monopoly and therefore misused its copyright of the Omega Globe.  The Ninth Circuit affirmed the district court’s grant of summary judgment to Costco.

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Digital Used Music Sales Infringing, Not Protected by First Sale Doctrine

ReDigi Inc. claims that it is “the world’s first and only online marketplace for digital used music.”  (Opinion pdf page 1).  Capitol Records is the copyright owner for numerous songs sold on ReDigi’s website and did not authorize the sales.  Capitol Records sued ReDigi for copyright infringement, alleging direct copyright infringement, inducement of copyright infringement, contributory copyright infringement, vicarious copyright infringement and common law copyright infringement. 

The copyright owner’s exclusive rights under the Copyright Act include the right to make copies, distribute the work and publicly perform the work.  These rights are limited by the first sale doctrine, which allows the lawful owner of a particular copy of the work to sell the work without the permission of the copyright owner.  Last week’s blog post, First Sale Doctrine Not Limited by Geography, Rules U.S. Supreme Court, describes the first sale doctrine in detail.  “The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine.”  (Opinion pdf page 4.)  The district court ruled that it cannot.

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Apple Successfully Defends Copyright Misuse Claim

When Apple, Inc.brought a copyright infringement lawsuit against computer manufacturer Psystar Corp., Psystar claimed that Apple misused Apple’s copyrights.  Last week, the Ninth Circuit Court of Appeals upheld the district court’s ruling in Apple’s favor (pdf) on the copyright misuse claim.

Facts.  Apple’s Software License Agreement (SLA) for its Mac OS X operating system requires users to run the software only on Apple computers and expressly prohibits running the software on a non-Apple computer.  Apple registered its copyright for each version of its operating system. 

Psystar manufactured and sold computers running Mac OS X.  Psystar created a master image by imaging an Apple computer and adding some software of its own.  It shipped its computers with a copy of the master image installed and an unopened copy of Mac OS X in the box.  Psystar argued that because it purchased a copy of the Mac OS X software for every computer sold, it did not make unauthorized copies or distributions and that the Copyright Act did not apply.

Apple filed this case against Psystar in July 2008.  In response, Psystar sought a declaratory judgment of copyright misuse by Apple.  Although Apple initially claimed copyright, trademark, trade dress and state and common law unfair competition violations, Psystar’s copyright misuse defense was the major issue before the Ninth Circuit on appeal.

First Sale Doctrine.  The court discussed the first sale doctrine as a prelude to its copyright misuse discussion.  The distinction between a sale and a license was a key underlying factor in the court’s decision. 

The first sale doctrine allows owners of copies of copyrighted works to resell their copies without restriction.

(Opinion pdf page 9).

Once someone has purchased a copy of a copyrighted work, she is free to transfer that copy to whomever she pleases or publicly display that copy, without violating the copyright owner’s exclusive right to distribute under 17 U.S.C. §106(3) or to publicly display under §106(5).

17 U.S.C. §109 embodies the first sale doctrine.  Under §109(d), the first sale doctrine does not apply to “any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it.”  The copyright owner can agree to license the copy, allowing someone else to use that copy, without transferring ownership of that copy to the other person.  The first sale doctrine therefore does not apply to a license.  In Vernor v. Autodesk, Inc., the Ninth Circuit developed a three factor test to distinguish between a software licensee and an owner of a copy:

We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.

(Opinion pdf page 11).

The court ruled that it was clear from Apple’s licensing agreement that purchasers of Mac OS X software were licensees of the software, not owners.

Copyright Misuse.

As defined by the Ninth Circuit,

Copyright misuse involves restraining development of competing products.

(Opinion pdf page 14).

The purpose of the copyright misuse defense is to prevent copyright holders “from leveraging their limited monopoly to allow them control of areas outside the monopoly.”  (Opinion pdf page 13). 

The court indicated that “[a] software licensing agreement may reasonably restrict use of the software as long as it does not prevent the development of competing products.”  (Opinion pdf 15-16).

Psystar argued that Apple’s SLA impermissibly extended the reach of Apple’s copyright by requiring purchasers to run their copies of the Mac OS X only on Apple computers and therefore amounted to copyright misuse.

The court ruled that Psystar’s copyright misuse defense failed because it was an attempt to apply the first sale doctrine to a valid licensing agreement.  The court also indicated that Apple’s licensing agreement did not prevent others from developing their own computers or operating systems and appropriately attempted to prevent infringement and to control the use of the copyrighted material.

This case is Apple Inc., v. Psystar Corporation, No. 10-15113.

Zediva DVD Streaming Service Infringing or Not?

Zediva recently captured the attention of copyright commentators with its new streaming movie service.  Zediva Streams New Releases Through Copyright Loophole, by Ryan Singel, captures the essence of what the service is about.  As soon as a movie is released on DVD, Zediva buys it, then rents it and a DVD player to you.  The DVD and DVD player remain in Zediva’s data center and the movie is streamed to you over the Internet so that you can see it on PC, Mac or Google TV devices with Adobe Flash.  You can’t download or copy the DVD – that’s a violation of Zediva’s Terms of Use.  The service is designed to allow movie watchers to see DVD releases sooner than they could on Nexflix, which has agreed not to rent out movies in the first month they are available on DVD.  According to Singel, Zediva doesn’t have any licensing agreements with the studios and does not intend to seek any.

Zediva’s FAQs draw analogies between its service and brick and mortar DVD rental stores. Perhaps Zediva’s founders and attorneys think Zediva’s service is noninfringing for the same reason a brick and mortar store’s service is noninfringing.  The first sale doctrine (17 USC §109)  allows the owner of a particular copy of a copyrighted work to sell or dispose of that particular copy without regard to the copyright owner.  That is why lending libraries and DVD rental stores are noninfringing uses of works.  Section 109 specifically excludes sound recordings and computer programs from the first sale doctrine and that is why you can’t rent a music CD or a computer program.  A software license can seem like a rental, but it is not.  You get a license because the copyright holder or someone authorized by the copyright holder grants you one.  With a rental, a third party rents something to you without the authorization of the copyright holder.

James Grimmelmann argues against Zediva’s success in That Zediva Thing? It’s So Not Going to Work. Grimmelmann makes the point that the first sale doctrine is a defense only to distribution and display rights and is irrelevant to a performance right claim.  The Copyright Act gives the copyright owner the right to perform the copyrighted work publicly.   

To perform or display a work “publicly” means —

(1) to perform or display it at a place open to the public or at any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered; or

(2) to transmit or otherwise communicate a performance or display of the work to a place specified by clause (1) or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.

17 USC §101 

Grimmelmann compares two cases, Columbia Pictures Industries v. Redd Horne  and Cartoon Network LP, LLLP v. CSC Holdings, Inc. In Redd Horne, a video store rented video tapes together with private viewing rooms where its customers could view the videos.  The court held that was a public performance that could be prohibited by movie studio copyright owners.  In Cartoon Network, Cablevision offered a “cloud” DVR service in which a customer could record a TV show to a remote DVR system and have it played back to her TV set later on.  The court in Cartoon Network held that this was not a public performance.

Grimmelmann explains that the distinguishing factor in the two cases is that in Cartoon Network, each customer viewed a distinct copy, whereas in Redd Horne, the video store owner kept showing the same copy over and over again to different people.  So long as the customer views her own distinct copy, it is not a public performance.  There is certainly support for this interpretation in the Copyright Act, in which members of the public can “receive it [the performance] in the same place or in separate places and at the same time or at different times.”  Grimmelmann also thinks it’s significant that Zediva keeps physical control of its DVDs at all times, just as the video store in Redd Horne kept physical control of the videos at all times.  The customers in Cartoon Network controlled their viewing times.  Netflix and video store customers physically control the DVDs they rent.

Can Zediva get around these distinct copy and viewing in different places at different times predicaments?  A unique feature of the Zediva service is that once a customer starts watching a movie, that particular DVD of the movie is not available for other customers to use.  Zediva buys its DVDs and does not copy them.  A Zediva customer has up to two weeks to finish watching her movie.  She can even watch the movie again during those two weeks.  If she wants to stop in the middle and continue the next day at the same place in the movie, she can.  Are these differences enough to take Zediva from the Redd Horne result to the Cartoon Network result?

Even if Zediva clears the above hurdles, lack of control over the end users could turn a streamed DVD into an unauthorized public performance of that DVD.  How will Zediva police its users so that they do not publicly perform the streamed movies by playing them on screens in places open to the public, such as bars or other retail establishments?  Zediva’s Terms & Conditions of Use indicate that “public performance of any kind” is not allowed, but does not define “public performance.”  That language seems inadequate for anyone trying to prevent unauthorized public performances.

Finally, could this be the same kind of streaming as the illegal streaming that was targeted by the Obama Administration’s white paper and was the subject of last week’s post?  No, it could not.  Criminal streaming under the Copyright Act requires that the infringement occur after the motion picture has been released and before “copies for sale to the general public in the United States in a format intended to permit viewing outside a motion picture exhibition facility” are made available.  17 USC §506(a)(3)(B). Zediva streams DVDs it purchases after the movie has been released on DVD.