For years, record labels have distinguished promotional copies of recording with a sticker or stamp proclaiming "promotional use—not for resale." Sometimes the promo copies have bonus tracks not on the retail recordings, sometimes they have different art, but frequently the only thing that distinguishes them is the stamp or sticker (or, on LPs, a different colored label). For any (or all) of these reasons, many promos are considered prime collectables.
Troy Augusto would seek out collectable promo copies at used record stores and flea markets and offer them for sale on eBay, which is how he came to the attention of the Universal Music Group, which attempted to have his auctions de-listed using the Digital Millennium Copyright Act (DMCA). When that didn't fly, UMG sued Augusto in federal court, alleging that the "not for resale" sticker granted UMG ownership in perpetuity, making it unlawful for the discs to be sold, given away, or (we assume) even thrown away.
The Electronic Frontier Foundation (EFF) and the Keker and Van Nest law firm argued that the doctrine of first sale could not be voided by adding a label to the merchandise. The court rejected UMG's argument that the label constituted a "license," stating that one of the hallmarks of a license is the owner's intent to regain possession, which does not exist in the mass distribution of promotional copies. "Licensing language does not create a license," the court stated. "The music industry insiders' ability to indefinitely possess the Promo CDs is a strong incident of ownership through a gift or sale."
The court decided that the promo CDs had to be considered "gifts," since they were distributed without requiring any recurring action—they were sent in hopes of coverage, but no guarantee of coverage was necessary. In fact, the court observed, promotional CDs had to be considered gifts according to federal law. "The Postal Reorganization Act prohibits 'the mailing of unordered merchandise' without 'the prior expressed request or consent of the recipient. This merchandise "may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without obligation whatsoever to the sender.'"
Recipients of promo CDs are not, the court stated, "free to accept or reject" the terms of the "license," making the mailing of the promotional CDs with restrictions on their use, analogous to mailing unsuspecting recipients merchandise with demands of payments.
While the court did reject Augusto's contention that UMG had "abandoned" the promo CDs, it decisively upheld his first sale doctrine rights to possess and resell them. It also ruled against his motion for summary judgment against UMG's use of the DMCA takedown order, stating that UMG had "subjective good faith that Augusto was infringing its copyrights."
Along similar lines, the Supreme Court's June 9 decision in Quanta v LG Electronics addressed the patent exhaustion doctrine, which is patent law's equivalent to the first sale doctrine.
LG Electronics sued Quanta for patent infringement because it manufactured products that contained patented chipsets that Quanta had purchased from Intel, which was authorized by LG to manufacture and sell them. Head spinning yet?
Fred von Lohmann, senior staff attorney of the EFF, which filed an Amicus brief on behalf of Quanta, explains: "LG argued that its license only reached Intel, not its customers. Moreover, LG required Intel to give customers a 'notice' that explicitly said as much. This is exactly the kind of downstream 'double-dipping' that the patent exhaustion doctrine was meant to prevent."
Roughly translatied the Supremes' unanimous decision was "you bought, you own it," von Lohmann said. However, he warned, the Court's refusal to make a broad ruling on which (if any) labels, licenses, or contracts could defeat the patent exhaustion doctrine leaves the door open to other companies' attempts to turn purchases into "conditional sales"—and, ultimately, to another trip to the Supreme Court "to face the issue squarely."