Lost in the Shadows of the Gray Market Legal Landscape - Part 1

A friend of mine recently asked me about the First Sale Doctrine of Copyright Law, and more specifically about Vernor v. Autodesk.   Being a good friend, I decided to exploit his question by reviewing the doctrine and its related cases in this post. 

Of course, this should not be construed as legal advice, but rather as a historical perspective and analysis of the doctrine.  Particular inquiries and application of the doctrine depend on specific facts, and an attorney should be consulted.

That said, our story starts in 1908 when books were selling for less than a dollar, and the Supreme Court decided Bobbs-Merril Co. v. Straus, 210 U.S. 339 (1908).  Bobbs-Merril Co. owned the copyright of The Castaway and on the cover of the book, the company posted the following notice: “[t]he price of this book at retail is $1 net. No dealer is licensed to sell it at a reduced price, and a sale at a less price will be treated as an infringement of the copyright.” Nevertheless, the defendant, Straus, sold the book at its store, Macy & Company, for less than a dollar ($0.89), without Bobbs-Merril’s permission. The dispute was not whether a purchaser could resell a book. Rather it focused on the effect of the notice, written inside the book by Bobbs-Merril, that placed restrictions on the sale.  At the time, there was no dispute that a purchaser could resell a book, but rather in this case what was the effect of the notice placing restrictions on sale that was placed inside the book by Bobbs-Merril.

In its analysis, the Court affirmed hat copyright law arises from legislation passed under Article 1, Section 8 of the U.S. Constitution.  The Court continues,

[t]he copyright statutes ought to be reasonably construed, with a view to effecting the purposes intended by Congress. They ought not to be unduly extended by judicial construction to include privileges not intended to be conferred, nor so narrowly construed as to deprive those entitled to their benefit of the rights Congress intended to grant.

Id. After that significant discussion of statutory construction and judicial restraint, the Court held that the then existing copyright statute could not restrict remote and downstream purchasers in resale of the book where no privity of contract existed. Ultimately, once Bobbs-Merril sold the book to wholesale intermediaries, the  one dollar notice had no effect on subsequent sales.

Skip forward to 1913, when the Supreme Court decided a similar case, Bauer & Cie v. O'Donnell, 229 U.S. 1 (1913). This was a similar case to Bobbs-Merril Co., however, it involved  two factual differences: 1) it involved a patent; 2) the patent was “licensed,” not sold like the copyrighted book. The specific notice stated:

[t]his size package of Sanatogen is licensed by us for sale and use at a price not less than one dollar ($1). Any sale in violation of this condition, or use when so sold, will constitute an infringement of our patent No. 601,995. . .

Again the court decided in favor of the reseller and dismissed the patent owner’s argument that each purchase is an acceptance of the notice provisions cited above.

Now let’s fast-forward to 1976, when the latest version of Copyright Act was passed.  Section 106 of the Copyright Act gives the author the exclusive right to distribute copies of the works. However, the Act also provides for exceptions to this right, such as the first sale doctrine.

In 17 U.S.C. section 109 is Congress’s most recent codification of the first sale doctrine defense or exception, which originated in Bobbs-Merril Co. The statute begins with the general rule in subsection a):

[n]otwithstanding the provisions of section 106 (3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. 

Again, this statute allows for the resale of specific copyrighted material without the owners consent.  However, it is important to note that the subsequent purchaser cannot copy the material to resell, but only distribute the copy that originated with the copyright holder.  

Finally, we must examine the declaratory judgment action of Timothy Vernor.  Autodesk is the creator and registered copyright holder of certain software. Before a user can install the software, the user must agree to a software licensing agreement. If the user refuses, the product can be returned for a refund.  If the user does agree, there are several important stipulations, e.g., Autodesk retains ownership of the software and the user is merely a licensee, prohibits transfers without consent, restricts use, and is allowed to terminate use if terms are violated.

Vernor, an experienced vendor on EBay, sold several copies of Autodesk’s software with the activation codes. None of the copies sold were purchased directly from Autodesk, and Vernor alleged that he never agreed to any of the terms of the SLA, i.e., there was no privity of contract.  During each of Vernor’s sales, Autodesk objected to EBay and Vernor’s alleged infringement, As a result, Autodesk’s claims hampered Vernor’s business, e.g., the allegations led to suspension of his EBay account.  Accordingly, Vernor commenced an action for declaratory judgment on the issue of whether the First Sale Doctrine and the essential step defense allowed him to conduct his business of reselling the software.

The Court framed the issue in terms of ownership.  The 9^th Circuit stated that the first sale doctrine and the essential step doctrine does not apply to mere licensees and is an exclusive defense of owners of copyrighted works.  In determining ownership, the 9^th Circuit used the following factors from an earlier 9^th Circuit case: 1) whether the copyright owner specifies that a user is granted a license; 2) whether the copyright owner significantly restricts the user’s ability to transfer the software; 3) whether the copyright owner imposes notable use restrictions. The 9^th Circuit held that all of these factors weighed in favor of Autodesk, whom it held to be the owner of the software.  As a result, Vernor was merely a licensee and could not avail himself to the first sale doctrine.

So now the interesting part. Was the 9^th Circuit correct?  This is untimely not my decision, as I have not yet been appointed to the Supreme Court (although Mr. President, I am available). However, I want to raise several issues: 1) does the decision fit with Congressional policy?; 2) is there a Circuit split?; 3) what about the applicability, if any, of Bauer & Cie?; 4) what will be the effect of the decision? I will examine each of these briefly in the next post. 

Internet for All, or to all a Good Night- Happy Holidays!

It is difficult to choose a specific development to write about.  So I chose a topic that I did not know very much about: net neutrality, and I invite comments of all variations to develop a discussion on this topic. Additionally, to the right, I have posted a survey. The purpose of this  survey is to understand if people generally believe Internet access is a right.  My preliminary research has provided me with surprising responses; please answer the survey before reading the post.

A good starting point for the discussion is the Telecommunications Act of 1996, which articulates the United State’s Internet policy. 47 U.S.C. section 157 provides that the nation’s policy aims are to deploy “on a reasonable and timely basis . . .advanced telecommunications capability . . . to all Americans.”  The Act further announces the reasons for universal Internet access: 1) educational development, 2) informational access, 3) political discourse, 4) cultural development, 5) intellectual development, and 6) economic development. 47 U.S.C. §230(a).

Given the important policy drivers identified in the Act, the FCC declared, in a 2005 Policy Statement that, “the Commission has the jurisdiction necessary to ensure that providers of telecommunications for Internet access…are operated in a neutral manner.”[i]

This brings us to net neutrality, and what it means to the average Internet user.  Net neutrality is generally defined as a policy where all Internet service providers treat all sources of data equally. Seems noble enough. What’s the opposition?

To examine the opposition, a good illustration and source is the Comcast case.  In April 2010, the D.C. Circuit, decided Comcast v. FCC,[ii] which dealt with the FCC’s authority to regulate the business practices of a private communication company, and how that company manages its Internet traffic. More specifically, two of Comcast high-speed Internet subscribers realized that the company was interfering with their exchange of information over a peer-to-peer application. As a result, a complaint was filed with the FCC, and the FCC attempted to intervene, relying on the policy statement mentioned above.  With regard to the merits of the case, Comcast argues that management of its bandwidth was necessary to efficiently allocate what was essentially a finite resource. In the end, the case was decided on jurisdictional grounds, i.e., the FCC did not have jurisdiction to issue the underlying order against Comcast. 

The Comcast case was a significant loss for the FCC, and the case sheds light on one of the business reasons for an Internet provider’s rejection of net neutrality. The other major objection derives from businesses’ general distaste for any type of government regulation, and the desire of the industry to be subject only to market forces. This position was clearly articulated by attorneys for AT&T: “market forces will continue to serve consumers in the Internet marketplace better than command-and-control regulation ever could.” [iii]  It is important to note that the opposition is generally not to concept of net neutrality itself, but of the government’s intrusion into private businesses’ network management.  

But market forces tend to favor those with more capital, and net neutrality advocates fear that companies will pay to have data preferences. Now we come to December 21, 2010, and the FCC’s ruling on net neutrality.

The FCC explains in its press release: “broadband providers have taken actions that endanger the Internet’s openness by blocking or degrading disfavored content and applications without disclosing their practices to consumers . . . broadband providers may have financial interests in services that may compete with online content and services.”  This is a reiteration of the 2005 policy statement. However, included in the FCC’s report and order are three rules: 1) transparency; 2) no blocking; and 3) no unreasonable discrimination.  The full report can be found here: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-201A1.pdf

As a result, providers must make public disclosures of their network management policies, must not block legal content, and must not discriminate against lawful data transmissions.  That said, reasonable network management would not be deemed “unreasonable discrimination.”  Additionally, the report specifically addresses the pay for priority problem mentioned above, and states that a priority agreement is unlikely to satisfy the “unreasonable discrimination” rule.

So where are we left?  Well, the FCC’s Comcast problem still needs to be addressed before these rules have any byte!

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[i] In re Appropriate Framework for Broadband Access to the Internet over Wireline Facilities.  FCC 05-151. (2005). 
Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-151A1.pdf.  Accessed on December 22, 2010.

[ii] Comcast v. Federal Communications Commission, (2010).
Available at http://pacer.cadc.uscourts.gov/common/opinions/201004/08-1291-1238302.pdf. Accessed on December 22, 2010.

[iii] In re Broadband Industry Practices (Vuse and Free Press et al.).  Comments of AT&T on Free Press and Vuse Petitions.
Available at  http://fjallfoss.fcc.gov/ecfs/document/view?id=6519841106.  Accessed on December 22, 2010. 

Superhero Legal blog!

Ok, this is not really related entirely to the topic on this blog, but it's still awesome. A couple of attorneys have made a blog that looks at the legal quandaries of a superhero.  Here is the link:

http://lawandthemultiverse.com/

Saying more than just "Hello World" - Cyberbullying

I first entertained the idea of practicing law after writing a paper in high school that featured Tinker v. Des Moines Independent Community School District, 303 U.S. 503 (1969).  In Tinker, several students were suspended for wearing black armbands in protest of the Vietnam War.  The Court held that freedom of expression applies equally to students and adults.  As you can easily see, this decision was of great interest to a rebellious teenager, but why is this forty-year-old decision relevant to cyberlaw and policy? 

Well, the doctrine has been summoned into the debate of cyberbullying. What is cyberbullyng? It's basically the torment and harassment of a minor, often students, committed by another minor, and it takes place using various forms of social media.  However, students, like everybody else, have at least some rights to freely express their opinions, unless they are materially disruptive to other students. Under the Tinker standard, school officials can often be unsure of when to take action, and concerned parents and educators are turning to lawmakers for help.  What can the legislators do? Well, since the issue is really where to draw the line, lawmakers can draft a clear line of demarcation.  But will these laws withstand a first amendment challenges?

An outline of the states that have enacted these laws has been listed by Dr. Sameer Hinduja and Dr. Justin W. Patchin. The survey can be found  here:

http://www.cyberbullying.us/Bullying_and_Cyberbullying_Laws_20100701.pdf.

If you wish to further investigate this issue, an excellent resource can be found at

http://www.cyberbullying.us/.

Also, this discussion will continue into the future.

Welcome

Welcome to Bytes and Briefs, a blog devoted to the legal developments of computers, the internet, and various technologies.  More to come shortly.