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Case Report: Exhaustion and Promotional CDs

The law relating to the exhaustion of rights with respect to CDs has thus far been primarily derived from Vernor (in the US). However, the ruling of the US Court of Appeals for the Ninth Circuit in the case of UMG Recordings, Inc. v. Troy Augusto could change have the effect of changing this by restricting the application of Vernor to software.

UMG mailed CDs without solicitation to persons for marketing purposes, and these CDs were later sold. UMG claimed that the sale infringed its right to distribution. However, it was held that the unsolicited distribution by UMG of the CDs constituted a first sale as far as the first sale doctrine was concerned:

Did UMG succeed in creating a license in recipients of its promotional CDs, or did it convey title despite the restrictive labeling on the CDs? 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 particular copies of its promotional CDs and cannot maintain an infringement action against Augusto for his subsequent sale of those copies.
Reference was also made to the Unordered Merchandise Statute, 39 U.S.C. § 3009, although it was not directly relevant.

The most compelling arguments against UMG were that UMG retains “virtually no control over the unordered CDs it issues because of its means of distribution, and it has no assurance that any recipient has assented or will assent to the creation of any license or accept its limitations. UMG also does not require the ultimate return of the promotional CDs to its possession. Although the failure to require return of the CDs may not, by itself, conclusively establish a sale under our precedent, it is one more indication that UMG had no control over the promotional CDs once it dispatched them. UMG thus did not retain “sufficient incidents of ownership” over the promotional copies “to be sensibly considered the owner of the cop[ies].” Krause v. Titleserv, Inc., 402 F.3d 119, 124 (2d Cir. 2005).”

Quotes source: UMG v. Augusto
(This post is by Nandita Saikia and was first published at Indian Copyright.)