"First Sale" - Little Known Doctrine Plays A Big Role

"Pop quiz, hotshot!" (Gratuitous and completely unnecessary "Speed" reference). What do Netflix, Omega watches, and used software programs on CD-ROMs have in common?

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Answer: They are all affected substantially by the "First Sale Doctrine". Those of you who routinely devour the content of this blog will no doubt remember our earlier discussion of such doctrine as it relates to the right to resell a disc containing a software program. For a quick refresher, the First Sale Doctrine is used as an exception to copyright protection and it provides that when the first sale of a copyrighted item occurs, subsequent sales, gifts, or loans are not restricted by the rights of the copyright owner. This doctrine enables libraries, used book and music stores, and art galleries to function.

So, how are Netflix, Omega watches, and used CD-ROMs impacted by this rule?

Netflix's brilliance was the enabling of prompt delivery by mail of DVDs. Netflix would buy a large number of DVDs of a particular title from the distributor, usually at a discounted price, and mail them out to subscribers. Netflix could do this free of any copyright claims because of the First Sale Doctrine. Netflix also was quick to recognize the utility and convenience of providing such material in the form of streaming video through Roku, Xbox, and other platforms. The problem arises in that streaming video is not subject to the First Sale Doctrine because there is no "sale". Therefore, Netflix must license the streaming rights from the studios and this may turn out to be very expensive.

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 Reports are that some studios are asking as much as $16 million per title for a two-year license. There is no indication whether these are new titles only or how this will shake out in the marketplace in the long run as Netflix seeks to dominate the streaming market. The only sure thing is that it is a markedly different business model for Netflix. They can avoid the postage costs and some of the costs of maintaining mailing centers as users transition to streaming. However, the costs of licensing may negate that. This could prove to be interesting.

In the case of Omega watches, Costco bought a bunch of Omega watches outside the U.S. at a discount, imported them, and began selling them at a price lower than Omega sells them domestically. Omega sued Costco alleging copyright infringement. Costco replied that they were not copyrightable and even if they were, the First Sale Doctrine applied. Omega said, "Not so fast, Costco" (or words to that effect), "There is an image of a globe on the back of each watch that is half a centimeter in diameter and that gives us copyright rights"

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 Costco, in a haughty rejoinder, said "Well, so's your Mom and we can do this because of the First Sale Doctrine" (I made up the Mom part). Omega then pointed out that the Copyright Law states in pertinent part that the First Sale Doctrine set out in the copyright act applies only to copies "lawfully made under this title" [Section 109(a)]. Omega said since the watches were made outside the U.S. they were not "made under this title" and hence no First Sale Doctrine. The Ninth Circuit agreed and an appeal was taken to the U.S. Supreme Court. Justice Kagan recused herself because she had filed an amicus brief in the lower court in her role as Solicitor General and the remaining Supremes split 4 to 4, which lets the lower court ruling stand, i.e. Omega wins for now.

As we pointed out in the earlier post referenced above, a court held that if a CD-ROM contained a software program that was licensed and not sold, then the First Sale Doctrine also does not apply and resale of the used discs can be prevented under the copyright provisions. The case was Vernor vs. Autodesk and is discussed here. The result: You can't sell a used disc if the contents are licensed and not sold. So, you may not be able to get inexpensive streaming movies, buy a cheaper "gray market" watch, or resell that disc you bought at the garage sale down the street. All this because our friend, the First Sale Doctrine, is not available in these situations. It is probable that these are not the last words in any of these situations, so as we usually do to wind up these posts, we just say: "Stay tuned."

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