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

  1. My Name Is says:

    It seems to be on a par with the practice of selling ARCs, or advance reading copies – many of them state “not for sale” but when you receive one in the mail, unsolicited, and decide, hey, I’ve got ten boxes of unsolicited proofs and I need to pay my PG&E bill, it’s pretty easy to assume a person will head over to their nearest bookstore and sell them. I’ve yet to see a bookstore that wouldn’t buy them – and there’s a thriving collector’s market for them, same as with the promo CDs. Most collectors assume they are up for sale the same way any new or used book is. Some publishers mark them, or number them, so that when they see one for sale, they know who they sold it to, and can track them that way…but it does seem that if you saw one in a bookstore, why not buy it? If you see a used CD and it’s one you want, why not buy it? The law of supply and demand, well, it generally works.

  2. One Stop Shop says:

    man…after all these years, the penny counters at the labels still won’t stop – you’d think after seeing their profits plunge, their reputations damaged BEYOND repair, their sales disappear, and the landscape of music retailers…wait – WHAT music retailers? oh yeah – WALMART; iTunes, that’s where i want to buy cool…that they would realize they’ve completely and UTTERLY killed the goose. Speaking strictly as someone who used to have THOUSANDS of these type of cd’s (back in the day, your fave person in the world was your rep – and the back of their trunk where the BOXES of stuff was) – shit, u didn’t CARE what it was – u just knew you could offload it for $. And i personally took a 6 month sabbatical selling loads at the height of the market (i was getting $6-$8 PER DISC) when i jumped ship. Now? It’s all about the collectors; And cd’s? Dime a pound. Music stores? Thankfully back in hands of those who LOVE music, and don’t see it as just an ACCESSORY for your phone. Kinda better now, actually. And youth relationship to music has changed (too many options, too few real talented musicians); but knowing that their is a groundswell of record players being sold nationwide gives me hope (lotta that going around these days; maybe Hopey can bring some sense back to the RIAA – NOT!). In the end, the pendulum will swing back, i think, and music will once again be more than just a way to sell product (or just be product).

    Man – i sound OLD. Rotten kids! Get off my zen stone garden!

    btw – mp3 BLOWS and anyone who says otherwise has their foot in their ear..

  3. Visitor says:

    Great article… but “illegally corroborated” made me chuckle because you clearly meant to type “illegally collaborated”.

  4. Anna says:

    I laughed at the same thing, Visitor.

    No doubt he was trying to hit the word “collaborated,” but even that would be wrong in this context. Collaboration isn’t a crime, “Ebony and Ivory” notwithstanding.

    The correct right term is “colluded.” (See the FTC article to which Matt’s “illegally collaborated” link points, in fact.)

  5. D. says:

    The word “collude” already implies illegality. “Illegal collusion” is a tautology. You only need to say that they colluded.

  6. money man says:

    What will RIAA think when people start offering up older or unwanted albums/songs in MP3 format on the EBay? As long as the files were purchased legally in the first place and are no longer in there possession after the transaction. Would this be a way to legally re-sell unwanted files?

  7. steve says:

    “conspired,” even. I’m pretty sure that price-fixing between horizontal competitors would fit the definition of a Sherman Act illegal conspiracy in the US.

    Money Man: I would argue that re-selling mp3 files is a legal extension of the first-sale doctrine, as long as the “original” copy is destroyed by the seller after the sale. I would bet that the record labels could try to distinguish the general rule by pointing to the ephemeral nature of an electronic file, as compared to the physical nature of, e.g. a CD or a book.

    I’d side with you, but I ain’t even a lawyer yet, much less a federal judge.

  8. 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 corroborated 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?

  9. Matt says:

    “Corroborated,” “Collaborated,” “Conspired…” you get the idea. Though sorry Anna, I am in fact not Japanese. Just foolish, apparently.

    Having said that, you are correct that “collusion” was what I was going for. Though, D is also right that “illegal collusion” is a tautology.

    Irregardless, sorry for any confusion my grammatical insufficiencies may have caused.

    Money Man – Steve is correct that one could argue for the principle of first sale protecting someone who sold an mp3, provided they had erased the “original” from their computer upon selling… though I believe that argument would ultimately fail.

    There is some question whether digital copies kept on a hard drive or flash-drive supported device such as an iPod meet the “fixed” requirement as defined by 17 U.S.C. § 101, as follows:

    A work is “fixed” in a tangible medium of expression when its embodiment in a copy or phonorecord, by or under the authority of the author, is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration. A work consisting of sounds, images, or both, that are being transmitted, is “fixed” for purposes of this title if a fixation of the work is being made simultaneously with its transmission.

    In short, it’d be tough to argue that the court should consider a copy on your hard drive “fixed,” as defined above. Without the “fixed” status, the principle of first sale would not apply, per 17 U.S.C. § 109(a).

    [The Duke Law & Technology Review discusses this further here: http://www.law.duke.edu/journals/dltr/articles/2001dltr0018.html ]

    Then again, as with Steve, I’m not in a position to give legal advice. But that doesn’t stop me from arguing!

  10. Lyn says:

    Would UMG continue to claim perpetual ownership of all promo copies if one day (by chance) all people possessing copies decided to mail them back to the distributor – to arrive in the same mail??

  11. Joe Gratz says:

    Thanks — great post!

    Joe Gratz
    (one of Troy Augusto’s lawyers)

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