“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!