“Damn The Man!” The Ability To Sell Second-Hand CDs

Written by: Matthew A. Schroettnig
Researched by: Adam Gottlieb
Edited by: Eric Blaine and Tom Borton
Managing Editor: Brady Iandiorio

Music is like, crazy, man.

It seems every time you check the news, the music industry is once again going broke as a result of some epic catastrophe. Second Hand CD SalesIn the 1980s that catastrophe was the blank cassette tape; in the ’90s it was used-CD sales; the turn of the century brought us the MP3 format and Napster. And now, another problem has surfaced: “promotional” music CDs. So much so, in fact, that Universal Music Group (UMG) filed suit against a man named Troy Augusto in California Federal Court in May 2007. Mr. Augusto runs an eBay business named “Roast Beast Music Collectables” based around finding rare promotional albums in second-hand shops and selling them online for a profit. These CDs are distributed by music labels to radio stations, music industry executives, and other influential people as a marketing tool. UMG argued that marking the CDs with the label “For Promotional Use Only” means that UMG will own the CDs forever, and that selling them, or even throwing them away, is illegal.

Luckily for Mr. Augusto, UMG seems to have forgotten about the century-old “First Sale Doctrine.” In 1908, the Supreme Court handled a similar issue in Bobbs-Merril Co. v. Straus. Therein, Bobbs-Merril, a publisher, attempted to control the second-hand price of one of its books by inserting a detailed declaration:

The price of this book at retail is $1 net. No dealer is licensed to sell it at a less price, and a sale at a less price will be treated as an infringement of the copyright.

Macy’s Department Store sold copies of the book for less than $1, and Bobbs-Merril brought suit to prevent them from continuing to do so. The Supreme Court replied, in short, “That’s not how this works…” The Court stated that once a person purchases or is given a book (that is, after its “first sale”), it belongs to that person exclusively. Of course, a seller is still free to negotiate a contract or licensing agreement with the buyer regarding subsequent use of that book. But barring that, the individual is free to sell, lend, or give away the book as he or she sees fit. The First Sale rule has since been extended to cover other published materials, including movies and music. The copyright holder still retains the right to make and distribute additional copies of the original work, but that copy Joe Plumber bought with his own money? It’s his and his alone. He doesn’t have to sell it at the price the publisher sets, pay the publisher a share of the resale value, or listen to what the publisher has to say at all.

Why They’re Wrong

Codified in 1976 in §109 of the Copyright Act (17 U.S.C. § 109(a)), the principle of first sale allows the purchaser of a legally produced “phonorecord,” “without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” A “phonorecord” is any material object that embodies “fixations of sounds,” including cassette tapes, CDs, and LPs. (17 U.S.C. § 101) Actual sale isn’t truly requisite. Instead, the principle applies after the first “authorized disposition by which title passes.” Significantly, this allows for the time-honored tradition of re-gifting around the holidays. Failing that, it allows us to sell our purchases to someone else when we grow tired of them.

Aside from our grandparents, another obvious beneficiary of this principle is the public library system. Libraries can purchase books and lend them out without having to first seek the permission of the publisher. UMG, however, saw Mr. Augusto’s business as an unjustifiable infringement on its ability to control its copyrighted works (via haakim). Given the option to purchase a new CD for $10 from a store, or a used copy for $5 from a friend, which would the average person choose? A choice of the latter, under UMG’s theory, would prevent the copyright holder from determining the terms of the article’s sale, thus depriving the copyright holder of revenue and control it fairly deserves.

So… Where’s the Rub?

It was unclear to Mr. Augusto why anyone would have an issue with his re-selling the CDs purchased at second-hand shops. Since the advent of the vinyl record there has been a vibrant second-hand market for music, including those labeled “for promotional use only.” Regarding promotional CDs, which UMG considered to be a copyrighted work, UMG’s opinion differed markedly. Their legal claim is detailed within the end-user license agreement (EULA) included with the promo CDs in question:

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.

Used by software companies to circumvent the principle of first sale, EULAs similar to the one seen above are often found attached to software programs. Many computer users are familiar with being required to click “I agree” prior to installing a newly purchased piece of software. Similarly, UMG attempted to retain ownership of the disks, by claiming that it merely “licensed” the buyer to use the disk for promotional purposes, until such time as UMG demanded it back. Given the nature of promotional CDs, though, that argument wasn’t going to work in a court of law.

Every year, producers and promoters mail thousands of free promotional CDs to influential people in the music business in order to “promote” the featured artists. This transaction constitutes a gift in which title transfers from one entity or individual (the publisher) to another (the recipient). EULA or no, the gifted CDs fall under the first sale principle, and can thus be resold at will.

The Legality of it All

Once again, the music industry overestimated the level of control they should be allowed to maintain over their copyrighted works. Just as when Sony invaded its consumers’ privacy by embedding software in CDs and when the five largest music distribution companies illegally collaborated to fix the price of CDs, the music industry has again violated the law. The United States District Court for the Central District of California concluded, via summary judgment, that the purported EULA included by UMG did not create a “license,” nor does it allow UMG to retain any control over the promotional CD. UMG gave away these CDs, and those who receive them are free to dispose of them as they see fit. Therefore, the court found, as the legal owner of the CDs in question, Mr. Augusto and Roast Beast Music broke no laws in selling these recordings, and may continue to do so.

At least we can still sell our old CDs… Right?

It depends. While Mr. Augusto enjoys the right to sell his legally owned CDs, questions arise in a number of states as to who can purchase them. The music industry, it seems, is foregoing lawsuits in favor of promoting preventative legislation. Recent legislation in Florida, Utah, Wisconsin, and Rhode Island has made it more difficult to sell used CDs in those states than it is to get a driver’s license. In Florida, for example, anyone attempting to sell used CDs to a retailer must present identification and be fingerprinted, and any retailer looking to sell those same CDs must apply for a permit and submit a $10,000 bond with the Department of Agriculture and Human Services. Thankfully, those restrictions do not apply to online or person-to-person sales.

The Recording Industry Association of America (RIAA) has made it extremely clear that any perceived loss of control over copyrighted materials is taken very seriously. Thanks to the first sale doctrine, Mr. Augusto and the rest of us currently have the right to buy and sell our legally purchased “phonorecords” at will. The question remains as to whether the above-mentioned restrictions would stand up in court when faced with a first sale claim.

Until that time, however, we should probably stick to eBay.

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