UMG Recordings v. Augusto, —F.Supp.2d —-, 2008 WL 2390037 (C.D. Cal. June 10, 2008)
Some record companies create promotional CDs that they distribute to music industry insiders before an album is released. These promo CDs bear the following language:
This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.
Troy Augusto is not an industry insider, but he bought copies of promo CDs in record stores and online, and he resold those copies on eBay. Record label UMG sent a notice to eBay under eBay’s Verified Rights Owner program (“VeRO”) and got Augusto’s account suspended. UMG also sued Augusto for copyright infringement. Augusto counterclaimed under Section 512(f) of the Digital Millennium Copyright Act (“DMCA”), claiming that UMG knowingly misrepresented to eBay that the auctions infringed UMG’s copyrights.
Both sides moved for summary judgment on whether Augusto had infringed, and Augusto also moved for summary judgment on the DMCA misrepresentation claim. The court granted Augusto’s motion as it related to infringement, but denied it as to misrepresentation.
The court found that Augusto’s conduct was protected by the first sale doctrine. This principle is codified at 17 U.S.C. §109(a) and provides that “the owner of a particular copy or phonorecord lawfully made under [Title 17 of the United States Code]… is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” To invoke the first sale doctrine, Augusto had to show that (1) the CDs were lawfully manufactured with UMG’s authorization, (2) UMG transferred title to the CDs, (3) Augusto was the lawful owner of the CDs, and (4) Augusto disposed of, but did not reproduce, the CDs.
In this case, it was undisputed that the CDs were lawfully manufactured by UMG and that Augusto did not reproduce them. The remaining elements, i.e., that UMG transferred title to the CDs and Augusto was the lawful owner of them, hinged on the question of whether the mailing of the CDs to the industry insiders resulted in a transfer of title.
The court found that title to the CDs passed because the language on them did not create a valid license, and the recipients were entitled to treat the CDs as gifts pursuant to the Postal Reorganization Act, 39 U.S.C. §3009.
In determining that the purported license was invalid, the court found that a significant hallmark of a license — an intent to regain possession — was missing. Further, the absence of any recurring benefit to UMG (the recipients were under no obligation to promote the music) suggested the distribution was a mere gift or sale, and not a license.
Moreover, the only benefit to UMG in having the provision enforced as a license would be to restrain trade, which would run contrary to century old Supreme Court precedent.
The court determined that the CDs were, under the Postal Reorganization Act, a gift. Under that act, if one mails unordered merchandise to a consumer without the consumer’s consent, the merchandise may be treated as a gift, and the consumer may dispose of it as he or she sees fit. Despite UMG’s argument to the contrary, the court held that industry insiders receiving the promo CDs were consumers. The court further held (rejecting UMG’s argument) that the Postal Reorganization Act did not apply only to merchandise for which payment was requested.
In rejecting Augusto’s DMCA Section 512(f) claim that UMG misrepresented the fact of infringement when it demanded eBay remove the auctions, the court found that UMG had a subjective good faith belief in its assertions. Under the holding of Rossi v. MPAA, 391 F.3d 1000 (9th Cir. 2004), this subjective good faith belief could not constitute a Section 512(f) misrepresentation.