On June 10th, in UMG Recordings Inc. v. Augusto, the U.S. District Court for the Central District of California held that the recipient of promotional CDs distributed by a record label was allowed to resell the CDs on eBay under the first sale doctrine without infringing the record company’s copyright. In so holding the court concluded that licensing language prohibiting the sale of the CDs that was contained on the CDs’ labels was not binding, and as soon as the record company distributed the promotional CDs, it relinquished ownership of them, and lost control of future sales and distributions. According to the court, the defendant Augusto must meet four requirements for the sales to fall under the first sale doctrine: (1) the CDs must have been lawfully manufactured with plaintiff UMG’s authorization; (2) UMG must have transferred title to the CDs; (3) Augusto must have been the lawful owner of the CDs; and (4) Augusto must have disposed of, but not reproduced, the CDs. As for factors two and three (the only factors in dispute), the court explained that
“UMG’s distribution of Promo CDs to the music industry insiders is properly characterized as a gift or sale, not a license, and title to the CDs transferred to the insiders.”
The court conducted an extensive analysis of the Postal Reorganization Act to establish that the CDs should in fact be considered to be a gift. The court also found that the licenses contained in the CDs’ labels were not enforceable because the “license” did not require the return of CDs and there was no recurring benefit to UMG of transferring the music under the license – two important factors in determining whether the license is enforceable. Significantly, the court distinguished software licenses from the licenses on the CD labels in this case, saying that
“[u]nlike the use of software, which necessitates a license because software must be copied onto a computer to function, music CDS are not normally subject to licensing. Therefore, the benefits of a license for software do not exist under these facts.”