Guest Post: Exhaustion in the Context of Seeds

I have discussed the doctrine of exhaustion in several posts on this blog. Below is a short guest post from Ms.Apurba Kundu on the issue of exhaustion with reference to protected seed varieties under the Plant Variety Protection and Farmers Rights Act, 2001. Apurba has a Bachelors degree in biotechnology engineering and a Bachelors in law from IIT Kharagpur. Apurba loves to read and hopes to teach someday. 

Now, to the Guest Post.

Exhaustion in the Context of Seeds

The US Supreme Court will start hearing arguments on patent exhaustion on February 19, 2013, specifically on whether the Federal Circuit Court of Appeals erred in refusing to find patent exhaustion – a doctrine which eliminates the right to control or prohibit the use of an invention after an authorized sale. The doctrine of exhaustion would be analyzed by the Court in the specific context of self-replicating technologies such as patented seeds. 

A case on similar lines was heard by the Supreme Court of Canada where it was held that the licensor/patentee could restrict sale of seeds produced from his patented invention and is entitled to impose contractual obligations, such as a prohibition on saving seeds.

This led me to think about the position of Indian Law on this issue.

The Plant Variety Protection and Farmers Rights Act, 2001 (“PVP Act”) is a very progressive, pro-developing country legislation. The relevant provision of the Act is Section 39(1)(iv), which throws light on the issue of exhaustion. The provision reads thus:

a farmer shall be deemed to be entitled to save, use, sow, resow, exchange, share or sell his farm produce including seed of a variety protected under this Act in the same manner as he was entitled before the coming into force of this Act: Provided that the farmer shall not be entitled to sell branded seed of a variety protected under this Act.

Section 2(za)(iii) of the act defines “variety as follows”:

variety means a plant grouping except microorganism within a single botanical taxon of the lowest known rank, which can be considered as a unit with regard to its suitability for being propagated, which remains unchanged after such propagation, and includes propagating material of such variety, extant variety, transgenic variety, farmers’ variety and essentially derived variety.

This means the traditional right of a farmer to save seeds for the next season is protected. However, the farmer is enjoined from selling seeds which are owned by third parties.

Also, Section 39(2) of the Act entitles farmers to claim compensation from owners of registered seeds in case the performance of the seed fails to match the expected performance as disclosed by the right owner.

While discussing the PVP Act, it is important to discuss the Seeds Bill, 2004 too which has been pending since December 2004. New amendments were proposed by the government to the Bill in April 2010 and November 2010, which incorporated several recommendations of the Parliamentary Standing Committee. This bill also doesn’t restrict the farmer’s right to use or sell his farm seeds and planting material, provided he does not sell seeds which are owned by a third party.

Importantly, transgenic varieties of seeds can be registered only after the applicant has obtained clearance under the Environment (Protection) Act, 1986.  Farmers buying seeds are covered under Consumer Protection Act, 1986 and all registered varieties, seed producers, distributors and vendors have to disclose the expected performance under certain given conditions. If the seed fails to perform to expected standards, the farmer can claim compensation from the dealer, distributor or vendor under the Consumer Protection Act, 1986.

Maybe it’s high time that the Seeds Bill was passed by the Parliament. Meanwhile, farmers in faraway lands must be thinking it would have been better if they were Indian farmers. 

Section 107A(b) Does Not Refer to International Exhaustion: Proof in Legislative Debates

Finally, I think I have what I need to settle the debate on Section 107A(b). I am still keeping an open mind and I am willing to be convinced otherwise, but this document which I just came across shows that Section 107A(b) does not refer to “international exhaustion” at all. In fact, it refers to “limited parallel import”, something I have argued over and over again in several posts here and elsewhere.

The document I refer to is the “Combined discussion on the Statutory Resolution regarding disapproval of Patents (Amendment) Ordinance, 2004 (No.7 of 2004) and the Patents (Amendment) Bill, 2005”. The title’s pretty much self-explanatory, the document records the legislative debates prior to the passing of the 2005 Amendment to the Patents Act.

I have always insisted on “duly authorized under the law” as being one of the critical pointers to the true meaning of Section 107A(b). I have stated my position of the provision in an ealier post as follows:

“It would be extremely repetitive to reiterate all that I have said in those 9-and-odd posts on the interpretation of this provision, but it is important that I briefly state the line of interpretation I have been inclined to take in those posts. In a line, my take on the provision is that contrary to popular assumed conclusion, Section 107A(b) does not seem to talking about, leave alone endorse, international exhaustion remotely.

Section 107A(b) requires due authorization, not for importation, but to produce and sell or distribute the patented product.

In other words, so long as the patented product is imported from a person who’s been “duly authorized under the law” to produce and sell or distribute, importation from such a person would not amount to infringement of the patent. Since the provision uses “duly authorized under the law”, I took the view that the provision probably does not refer to authorization under foreign law to produce and sell or distribute the product, because that would eviscerate the patentee’s rights under the Indian Act; the authorization to produce and sell or distribute must be under Indian law.

Stated otherwise, lawful production of the product outside India does not necessarily legitimize its import into India. Also, “duly authorized under the law” must be taken to mean specific authorization, as opposed to implied consent by way of international exhaustion. Not just that, the provision may not even be referring to international exhaustion because nowhere does it allude to first sale or exhaustion of rights post the first sale.”

This interpretation now receives support in light of the following portions of the legislative debates on Section 107A(b). Following is the statement of Mr.Pawan Kumar Bansal in the discussion held on March 22, 2005, the Minister for Parliamentary Affairs of the UPA regime between 2004-2009 who says thus in response to concerns raised by the Opposition on affordability of medicines:

“The second point, Madam, which has now been incorporated in the present Bill and as also in the Ordinance, is an amendment to Section 107A(b), providing for parallel import.  Here, this amendment says:  “On import of patented commodity from anywhere in the world, the Government reserves the right.”  Despite the fact that a particular medicine may be patented here by any other company, we have the right to import that patented commodity from anywhere in the world, where it is cheaper, even though it is patented here. Earlier however, this required that the foreign exporter was duly authorised by the patentee.  That was the condition earlier.  I may remind my hon. friends on the other side that it has been taken off. Now, the law would be, as it has been included here in the Bill before us now, that ‘no longer do we only need to stick to that condition that the foreign exporter was duly authorised by the patentee to sell and distribute the products.’  The position now would be that ‘the foreign exporter be authorised under the law, thus making the parallel imports easier.’  This mechanism, as you know, would help in price control.”

This statement leaves nothing to imagination since it clearly says that it is the Government of India which has the right to authorize a "foreign exporter" to facilitate imports into India. Simply put, under Section 107A(b), once a foreign entity is authorized to manufacture and sell the product by the Indian Government, importation of the product from the authorized foreign entity would not amount to infringement of the Indian patent. 


In a way, this is the reverse mechanism of Section 92A. Instead of compulsory license being issued for export, this is a license issued to a foreign manufacturer to sell and distribute the product, from whom the product may be imported.

Some might ask, is there a parallel to this provision anywhere in the world? Yes, there is! The amended Section 15C of the Medicines and Related Substances Control Act of South Africa provides for a similar mechanism which reads as follows:

Section 15C: The minister may prescribe conditions for the supply of more affordable medicines in certain circumstances so as to protect the health of the public, and in particular may-

(a) notwithstanding anything to the contrary contained in the Patents Act, 1978 (Act No. 57 of 1978), determine that the rights with regard to any medicine under a patent granted in the Republic shall not extend to acts in respect of such medicine which has been put onto the market by the owner of the medicine, or with his or her consent;

(b) prescribe the conditions on which any medicine which is identical in composition, meets the same quality standard and is intended to have the same proprietary name as that of another medicine already registered in the Republic, but which is imported by a person other than the person who is the holder of the registration certificate of the medicine already registered and which originates from any site of manufacture of the original manufacturer as approved by the council in the prescribed manner, may be imported:

(c) prescribe the registration procedure for, as well as the use of, the medicine referred to in paragraph (b).

I had the opportunity of presenting this very provision in my talk at NLU Jodhpur. Pawan Kumar Bansal also says in his speech that he received calls from South Africa! I had presented this as an alternative to compulsory licensing for price control. This is exactly what Section 107A(b) aims to achieve and this is exactly what I had said in my earlier post on India’s representations to GATT in the Uruguay Round. A paper of mine capturing these arguments will be shortly published.

With this, I fervently hope we stop reaching summary conclusions of “international exhaustion” without giving “due regard” to the wording of the statute. 

I look forward to comments and thoughts from readers.

Of Markets, Exhaustion and Trade Marks..

A recent Delhi High Court decision, has left me rather perplexed! The decision rendered in Samsung Electronics Company ... vs Kapil Wadhwa & Ors, deals in exhaustion of rights vis-à-vis trade marks, and an associated claim of infringement. 

The decision leaves me taken aback for the interpretation that it takes on the legislation, albeit attempting to justify its stand, under the layers of dicta that guide legislative interpretation, and drawing international comparatives- both of which are, in my humble opinion, unnecissitated.

To summarize the 156 page long decision, the allegations made by Samasung, upon the defendants were that by way of parallel importation and lack of consent or authorization, the defendants sold the products, thus committing infringement as envisaged under the Trade Marks Act. 

Also by way of deep hyperlinking and meta-tagging, they had committed infringement and mislead consumers to believe the source of products to be Samsung itself. The court while determining infringement, states that the law of Trade Marks in India, follows the scheme of National Exhaustion of rights, which I am in vehement disagreement with.

For the benefit of our readers, the operative part of the provision governing exhaustion of rights is reproduced here:

30. Limits on effect of registered trade mark.—

3) Where the goods bearing a registered trade mark are lawfully acquired by a person, the sale of the goods in the market or otherwise dealing in those goods by that person or by a person claiming under or through him is not infringement of a trade by reason only of—

(a) the registered trade mark having been assigned by the registered proprietor to some other person, after the acquisition of those goods; or

(b) the goods having been put on the market under the registered trade mark by the proprietor or with his consent.

In discussing whether the mark has in fact been infringed, and whether the provision acts as a defence (or “limit”, in statutory language), the Judge looked at the use of the term “market” in its different forms – viz. “in the market” in the body of the provision, while “on the market”. The use of prepositions, 'in' and 'on' are construed as below:

“[O]nce the situation becomes clear about the import of the opening words of the section, then the said lawful acquisition due to the controlling words registered trademark must originate from the domestic market/ national market, and the subsequent wordings has to be also given contextual reading and the wider import of the same words "in the market" cannot be given to include "worldwide market"…

However, this makes little sense to me. The provision describing “use of a trademark”, under S. 29(6)(c) clearly qualifies “imports or exports goods under the mark”.

As a fall out, how can the term “in the market” or “on the market” be construed as being the domestic market? “Import” as we all understand means bringing “into one’s country” (I deliberately choose not to use the term market here, because, the two need not necessarily coexist!)

Another reason I refute this interpretation is the way the law of trade marks is designed to operate. While the law may be to grant territorial rights, it does not deny rights to register or apply for registrations to corporations outside India. One can appoint an Indian agent and have a body incorporated in a foreign location to apply for the mark. If “in the market” were to be construed strictly, as deliberated by the learned judge, then every applicant would have to furnish an address and accompanying proof of residency in India.

Additionally, as many of us would have encountered in our practice, one of the most concrete and reliable proofs of use,are invoices and bills of lading, to prove “use in India”. In this view, if exhaustion is only meant to be national, have we been wrong so far, as to advice registrants to maintain records of their voluminous shipping documents? If exhaustion of a trade mark was only meant to be “national”, then we would only have invoices from distributors or local subsidiaries.

To further attempt bolster as to why a trademark may originate from a registrant, having presence in India vide imports, is the fact that we have recognized the principle of “well-known trade marks” and accompanying secondary significance way too well in our jurisprudence. If law were to interpreted absolutely in a territorial structure, then what we are ALSO indirectly saying is that the opening up of our economy, as executed by the present Indian Prime Minister, (during his term as a Finance Minister in the 1990s), was superfluous!

Further in the judgement, the Learned Judge also reasons that :

“This is due to the reason that the word "market" is not qualified by any other word either in clause (3) or sub clause (b). It is just mentioned "in the market" and "on the market". Had there been a separate meaning ascribed to the word "market" in sub clause (3) and in (b), then there must have been a qualification before or after the word "market" in both the provisions which is not so present.”

I do not think the word market needs to be defined or qualified by another term, so as to monitor trade mark. The law of Trade Marks is for the consumers, who very clearly define the market - so long as demand for a product or brand exists, the market does. 

The Trade Marks Act, 1999 also carefully omits defining this term- for reasons beyond the obvious. “Likelihood of confusion” is also deciphered on this very basis constituting of trade channels, class of consumers, price disparities and the akin- something that you and I as the commoner would consider during our shopping escapades.

All in all, I think this judgment clearly misreads the law. I shall revisit the judgment soon for a fresh take. In the meanwhile, I hope that we will hear from our readers on what they think of this ruling.

P.S. Thank you to a dear friend of the blog, for pointing this decision to me.

India’s Communication on IPR in the Uruguay Round of GATT

If I had to identify one provision of the law which has been a constant fixation with me, and on which I have written and discussed a lot, it would have to be Section 107A(b) of the Patents act, 1970. In all I must have written over 9 posts on this blog and elsewhere.

The provision reads thus:

107A. Certain acts not to be considered as infringement- For the purposes of this Act-

(b) importation of patented products by any person from a person who is duly authorized under the law to produce and sell or distribute the product,

Shall not be considered as an infringement of patent rights.

It would be extremely repetitive to reiterate all that I have said in those 9-and-odd posts on the interpretation of this provision, but it is important that I briefly state the line of interpretation I have been inclined to take in those posts. In a line, my take on the provision is that contrary to popular assumed conclusion, Section 107A(b) does not seem to talking about, leave alone endorse, international exhaustion remotely.

Section 107A(b) requires due authorization, not for importation, but to produce and sell or distribute the patented product.

In other words, so long as the patented product is imported from a person who’s been “duly authorized under the law” to produce and sell or distribute, importation from such a person would not amount to infringement of the patent. Since the provision uses “duly authorized under the law”, I took the view that the provision probably does not refer to authorization under foreign law to produce and sell or distribute the product, because that would eviscerate the patentee’s rights under the Indian Act; the authorization to produce and sell or distribute must be under Indian law.

Stated otherwise, lawful production of the product outside India does not necessarily legitimize its import into India. Also, “duly authorized under the law” must be taken to mean specific authorization, as opposed to implied consent by way of international exhaustion. Not just that, the provision may not even be referring to international exhaustion because nowhere does it allude to first sale or exhaustion of rights post the first sale.

In the course of a research for another related issue a few days ago, a friend passed on a document to me to examine the document’s take on patents. The document happened to be India’s communication dated July 10, 1989 on standards and principles concerning the availability, scope and use of trade-related intellectual property rights. (Please search for MTN.GNG/NG11/W/37 at this link)

This communication was sent by the Indian Government during the Uruguay round of Multi-trade negotiations within the framework of GATT. Paras 5-29 of this letter spell out the Indian Government’s position with respect to patents.

Paragraph 28 of the communication caught my attention because it seemed to literally restate Section 107A(b). In the process, it makes the intention of the legislature so very clear that it leaves very little doubt about the actual purpose of exemption of infringement under Section 107A(b).

I reproduce Paragraph 28 for ease of reference:

28. As explained earlier, the patent system of developing countries should strike a rational and reasonable balance between the private monopoly interests of the patent owner and the larger public interest of the society. Therefore, where the public interest, and in particular, national security, food production, poverty alleviation, nutrition, health care or the development of other vital sectors of the national economy so requires it, the host country government or any third person designated by it should be free to work and use the patented invention in the country, including the importation of the patented product if necessary, without the consent of the patent owner on such terms and conditions as the host country government may decide.

Please note the underlined portion. It says that the government or any third person designated should be free to work and use the patented invention. Not just that, critically it permits importation of the patented product if necessary, without the consent of the patent owner on such terms and conditions as the government may decide. 

This supports the line of interpretation that I had explored, namely “duly authorized under the law” in Section 107A(b) means specific authorization from the government. Simply put, in the absence of any specific "designation or authorization under the law", parallel import of the patented invention would amount to infringement of the patent.

Could this paragraph be referring to compulsory licensing provisions? NO. Why? Because Paragraphs 11-13 of the communication clearly refer to compulsory licensing scheme, so there is no way it can be said that Para 28 refers to compulsory licensing provisions under the Act.

Could this paragraph be referring to the Government’s acquisition of patents under Section 102 of the Act? Again NO. Why? Because Paragraph 28 refers to use and import of the patented provision, but not to the acquisition of the patent from the patentee.

Also, in this communication, the Indian Government clearly states that with respect to trademarks, it follows international exhaustion, but it never says so in relation to patents. After all, this being an important issue, the position would have been clarified and not left to imagination.

Therefore, although I am not foreclosing any other interpretation, I find it a tad bit difficult to treat Section 107A(b) as referring to international exhaustion. In fact, it now appears India endorses territorial exhaustion....I am sure naysayers will still be shaking their heads, but I would like to know what would it take turn the shake to a nod.

Opinions and Corrections are welcome!

Working of a Patent, Parallel Imports and Compulsory License: What is the Indian Position?

Over a series of posts in the last leg of 2010, I had discussed the import of Section 107A(b) of the Patents Act, 1970. To be honest, I don’t think the line of interpretation that I had explored is the only possible or sensible one, in fact it could well turn out that it’s way off the mark.

That said, the fundamental purpose of those posts was to subject the provision to rigorous analysis, instead of merely assuming that it speaks of international exhaustion. 

In this post, the idea is to continue with that line of enquiry, and use certain other provisions of the Act to try and support the interpretation I had advanced.

Before I proceed, let me pen down the gist of my earlier posts on Section 107A(b),  i.e. the provision could be referring to an alternative to international exhaustion. Section 107A(b) reads thus:

107A. Certain acts not to be considered as infringement- For the purposes of this Act-

(b) importation of patented products by any person from a person who is duly authorized under the law to produce and sell or distribute the product,

Shall not be considered as an infringement of patent rights.

In my earlier series of posts, I took the view that Section 107A(b) requires due authorization, not for importation, but to produce and sell or distribute the patented product.

In other words, so long as the patented product is imported from a person who’s been “duly authorized under the law” to produce and sell or distribute, importation from such a person would not amount to infringement of the patent. Since the provision uses “duly authorized under the law”, I took the view that the provision probably does not refer to authorization under foreign law to produce and sell or distribute the product, because that would eviscerate the patentee’s rights under the Indian Act; the authorization to produce and sell or distribute must be under Indian law.

Stated otherwise, lawful production of the product outside India does not necessarily legitimize its import into India. Also, “duly authorized under the law” must be taken to mean specific authorization, as opposed to implied consent by way of international exhaustion. Not just that, the provision may not even be referring to international exhaustion because nowhere does it allude to first sale or exhaustion of rights post the first sale.

As I said, I may or may not be right, but that isn’t the issue. The issue is, have we considered the Act thoroughly enough to rule out this interpretation as a possible approach to the provision? Honestly, since I found the answer to be in the negative, I had to ramble over 5 posts to dissect the provision.

In this post, I will take up a combined reading of Sections 48, 83, 84(7)(e) and 107A(b) to further this line of enquiry. How do I intend to connect all these provisions meaningfully? I shall try and keep this as un-convoluted and lucid as I can. Here it goes:

1. Section 48, as popularly understood, does not grant to the patentee the right to practice his invention. It merely vests in him an exclusive exclusionary right i.e. to preclude third parties from doing any of those acts enumerated in Section 48, without his consent. For ease of reference, here’s Section 48:

48. Rights of Patentees: Subject to other provisions contained in this Act and the conditions specified in Section 47, a patent granted under this Act shall confer upon the patentee-

(a) where the subject matter of the patent is a product, the exclusive right to prevent third parties, who do not have his consent, from the act of making, using, offering for sale, selling or importing for those purposes that product in India;

(b) where the subject matter of the patent is a process, the exclusive right to prevent third parties, who do not have his consent, from the act of using that process, and from the act of using, offering for sale, selling or importing for those purposes the product obtained directly by that process in India.

___

2. That said, in order for a patentee to justify the grant of the right and to avoid attracting an application for compulsory license, the Act emphasizes on working/practicing the invention within the territory of India. Here’s Section 83:

83. General principles applicable to working of patented inventions- Without prejudice to the other provisions contained in this Act, in exercising the powers conferred by this Chapter, regard shall be had to the following general considerations, namely:

(a) that patents are granted to encourage inventions and to secure that the inventions are worked in India on a commercial scale and to the fullest extent that is reasonably practicable without undue delay;

(b) that they are not granted merely to enable patentees to enjoy a monopoly for the importation of the patented article;.......

___

3. If that be so, a patentee has to ensure that he doesn’t fall within the circumstances/situations spelt out in Section 84, including 84(7)(e). Here’s Section 84(7)(e):

84. Compulsory Licenses: .....

(7) For the purposes of this chapter, the reasonable requirements of the public shall be deemed not to have been satisfied-

....

(e) if the working of the patented invention in the territory of India on a commercial scale is being prevented or hindered by the importation from abroad of the patented article by-

(i) the patentee or persons claiming under him; or

(ii) persons directly or indirectly purchasing from him; or

(iii) other persons against whom the patentee is not taking or has not taken proceedings for infringement.

Let’s try and understand what exactly is covered under Section 84(7)(e). The gist of the provision is that a patentee would not be deemed to have fulfilled the reasonable requirements of the public under the Act, if the working of the invention on a commercial scale is prevented or hindered by importation of the patented article. But importation by who?

The importation could be by:

A. the patentee or persons claiming under him or

B. persons directly or indirectly purchasing from the patentee or

C. other persons against whom the patentee is not taking action for infringement.

This is the critical part of the discussion- the Section deems the patent to have not been worked reasonably if working of the patent in India is hindered or prevented by importation of the patented article under any of the above 3 circumstances.

What is to be noted is that these circumstances also include a situation where importation involves importation of the patented article by the patentee or persons claiming under him or persons directly or indirectly purchasing from the patentee.

This means if Sony Corp has a patent in India, and a person purchases the patented product in Pakistan from a licensee of Sony Corp and imports it into India, such importation could also hinder or prevent the patentee from fulfilling the reasonable requirements of the Indian public.

In effect, this provision requires the patentee to ensure that such importation does not affect his ability to meaningfully work/practice the invention by manufacturing it in India. Again simply put, if the Indian market is flooded by imported goods, albeit of the patentee, the parallel importation could make it unviable for a patentee to manufacture the goods in India.

Assuming that this train of logic is correct, it becomes a tad bit difficult to argue in the same breath that Section 107A(b) endorses international exhaustion. In other words, if the Act requires the patentee to ensure that he fulfils his working requirements and requires him to take action against any hindrance which arises on account of parallel imports, I don’t think it would be consistent to argue that the very same Act, speaks of international exhaustion in Section 107A(b).

I’ll mull over this proposition a bit more and come back with a few thoughts in another post.

“Unsolicited Delivery of Goods Could Lead to First Sale Exhaustion” Says US Court

Here’s something some of our copyright owners might want to know. If you were to send a promotional CD, which contains your copyrighted work, make sure you build in all trappings of a license. 

If you do not, it could amount to first sale, which means you have no control over the product’s movement in the stream of commerce.

In a judgment delivered on January 4, 2011, in UMG Recordings v. Augusto,the US Court of Appeals for the Ninth Circuit held that for a license to be treated as one, it must:

1. Call itself a license

2. Prohibit transfer of title and

3. Contain notable use restrictions.

In the absence of either of these requirements, the transaction, even if undertaken for no consideration, would amount to sale or at least transfer of title. The case in which this judgment was delivered makes an interesting read, the facts of which are as follows:

A. UMG Recordings sent unsolicited promotional CDs to select individuals with the caveat that the CDs were meant solely for promotional use and that they were being licensed the CDs. The notice on the CDs read thus:

“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.”

B. Some of these promotional CDs ultimately found their way into the hands of the Defendant Augusto, an individual. Augusto auctioned these CDs on Ebay.

C. UMG wanted Ebay to take down Augusto’s offer since his acts violated UMG’s copyright.

D. Ebay did not budge, so UMG took Augusto to Court

Augusto’s Defense

1. UMG’s transaction with the initial recipients of the CDs was in the nature of “sale”, therefore they had no further rights to control the movement of the CDs

2. In the alternative, he had rights under the Unordered Merchandise Statute, which gave original recipients of the CDs rights to retain, use, discard, or dispose of the CDs in any manner they saw fit.

3. Since Augusto had received the CDs from the original recipients, who had to per force be treated as owners, and not licensees, his possession of the CDs and subsequent auction on Ebay were legitimate acts.

Court’s Verdict

A. Mere label of a license did not make the transaction one

B. No recipient of the CD was expected to revert to UMG recordings with an acceptance of the terms. UMG could not have assumed their acceptance (sounds more like the Google books project...)

C. No recipient was charged even a dime for the CDs

D. There was no mechanism by which the possession of the CDs could be traced

E. There were no use restrictions or requirement for return or destruction of the CDs

F. Further, first sale doctrine was a misnomer of sorts in the sense that the sale envisaged in the doctrine need not be one for consideration. It could be transfer of title through any other means, including a gift.

Considering all the above reasons, the Court observed that it was a stretch of an argument for UMG to contend that the transaction was a license.

Moral of the Story

Sometimes free lunches could cost you more than you can imagine, so be careful when you handout doles!