From the Ninth Circuit: Giving CDs Away for Free Is a "Sale," But Selling Software for Money Isn't a "Sale"

While the title of this post perhaps gives away the answer, I thought I'd start the post with this quiz.  Which of the following is a "sale" of the goods involved?

A.  A record company gives promotional CDs away for free, with no right to get the CDs back once the recipient is done with them. 
B.  A software company sells software for money, with no right to get the software back once the buyer is done with the software. 

If you thought that "B" was a sale and "A" was not a sale, you're not alone (based on the unscientific home survey I did last night).  But based on two cases from the Ninth Circuit, you have it completely backwards.

The first case, decided in September 2010, was Vernor v. Autodesk.  The case involved Autodesk's sale of computer software; the Ninth Circuit opinion was the inspiration for my starting this blog.  My post on Autodesk was entitled, "The Ninth Circuit on first sale: "'If it looks like a duck, and quacks like a duck, and flies like a duck . . . it's a CHICKEN!'" Read that post for the background of the "first sale" doctrine, which in summary says that once a copyright owner sells a physical copy of a work, the buyer can resell the physical copy without implicating the copyright laws.  In Autodesk, the Ninth Circuit held that certain restrictions in Autodesk's end user agreements meant that even though its customers bought copies of the software for a one time fee and got permanent possession of the software (that is, Autodesk had no right to regain possession of the copies), the transaction was a license, not a sale, and the "first sale" doctrine didn't apply.  I commented that putting a "license" label on the transaction, which Autodesk did, didn't make the economic realities of the transaction a license instead of a sale, any more than calling a duck a "chicken" makes it a chicken.

Two other cases were argued before the Ninth Circuit the same day as Autodesk.  One of them, MDY v. Blizzard, was decided in December and only peripherally involves the first sale doctrine.  The other one, UMG v. Augusto, was decided yesterday.

Augusto involved UMG's distribution of promotional CD's.  UMG would give the CD's to disc jockeys and the like for marketing purposes.  UMG did not charge money for the CD's and gave them away unsolicited.  UMG marked the discs either "Promotional Use Only--Not for Sale" or with a promotional statement saying that the transaction was a license.  Augusto obtained copies of the CD's and tried to sell them on eBay; the lawsuit ensued.

Well, if the transaction in Autodesk wasn't a sale because Autodesk sold its software under a "license" agreement, then surely UMG's giving CD's away for free under a license agreement can't be a "sale" either, right?  In other words, the UMG CD's are even more of a "chicken" than the Autodesk software.

Not according to the Ninth Circuit, which ruled in favor of Augusto under the first sale doctrine (and also a Postal Act statute on unordered merchandise).  The Court stated:

We conclude that, under all the circumstances of the CDs’ distribution, the recipients were entitled to use or dispose of them in any manner they saw fit, and UMG did not enter a license agreement for the CDs with the recipients. Accordingly, UMG transferred title to the articular copies of its promotional CDs and cannot maintain an infringement action against Augusto for his subsequent sale of those copies.
. . .
It is one thing to say, as the [promotional] statement does, that “acceptance” of the CD constitutes an agreement to a license and its restrictions, but it is quite another to maintain that “acceptance” may be assumed when the recipient makes no response at all. This record reflects no responses. Even when the evidence is viewed in the light most favorable to UMG, it does not show that any recipients agreed to enter into a license agreement with UMG when they received the CDs.  Because the record here is devoid of any indication that the recipients agreed to a license, there is no evidence to support a conclusion that licenses were established under the terms of the promotional statement.

It's hard to disagree with any of this.  Except, of course, that most of the above applies equally to the software sales in Autodesk.  About the only difference is that buyers of mass-marketed software find when they open a shrink-wrapped package that there is a "license" agreement inside.  But otherwise, software buyers can dispose of the software as they see fit, and don't make a "response" to a shrink-wrapped license.

The Ninth Circuit says that software is different, though, to explain the different result in the two cases.  Its Augusto opinion says that its Autodesk "formulation, however, applies in terms to software users," and not to UMG's customers.  At least one problem with this is that the first sale statute itself makes no distinction between software and other works of authorship. 

Perhaps the Ninth Circuit will rehear Autodesk en banc, or perhaps the Supreme Court will review one of these cases.  In the meantime, it's hard to tell the ducks apart from the chickens in that Circuit.

Here is additional commentary by the EFF, Eric Goldman, and Techdirt.