Preserving Innovative Business Models
in the Digital First Sale Debates
2nd Asia Pacific IP Forum
October 1, 2014
Sean M. O’Connor
Assistant Dean for Law, Business & Technology
Professor of Law
University of Washington School of Law
soconnor@uw.edu || 206 543 7491
Overview
1. 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 models
3. 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.
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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.
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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.
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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.
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“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
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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
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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
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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
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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
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Statutory “Digital Sale” proposal
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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’Connor
Assistant Dean for Law, Business & Technology
Professor of Law
University of Washington School of Law
soconnor@uw.edu || 206 543 7491