Written Testimony of John Villasenor House Committee on the

Written Testimony of John Villasenor

Nonresident Senior Fellow

The Brookings Institution

and

Professor of Electrical Engineering and Public Policy

University of California, Los Angeles

before the

House Committee on the Judiciary

Subcommittee on Courts, Intellectual

Property, and the Internet

“First Sale Under Title 17”

June 2, 2014

First Sale Under Title 17

John Villasenor is a

nonresident senior

fellow in Governance

Studies and the Center

for Technology

Innovation at the

Brookings Institution,

and a professor of

electrical engineering

and public policy at

UCLA.

O P E N I N G R E M A R K S

ood morning Chairman Coble, Ranking Member Nadler, Chairman

Goodlatte, Ranking Member Conyers, and Members of the Subcommittee.

Thank you very much for the opportunity to testify today regarding the first

sale doctrine in U.S. copyright law.

I am a nonresident senior fellow in Governance Studies and the Center for

Technology Innovation at the Brookings Institution. I am also a professor at UCLA,

where I hold appointments in the Electrical Engineering Department and the

Department of Public Policy. The views I am expressing here are my own, and do

not necessarily represent those of the Brookings Institution or the University of

California. Portions of my testimony today are adapted from an article I published

last year in Competition Policy International Antitrust Chronicle.

My testimony today can be summarized as follows: First, modification of U.S.

doctrine would lead to

unintended consequences that would dramatically reduce the ability of content

creators to be properly compensated for works sold digitally. If loans, sales, and

other dispositions of such digital content could be made instantly, without the

authorization of the copyright holder, and among parties who might be separated by

thousands of miles, those dispositions would largely replace the market for initial

sales.

Second, the question of digital first sale, as important as it has been, is becoming

less so with each passing year. As licensing-based models continue to become more

common, fewer creative works are distributed using sales that confer ownership

over a particular digital copy of the content. And when there is no sale, the first sale

doctrine does not apply. Instead, the permissible downstream uses of digital content

in a license-based ecosystem are addressed through a combination of contract law

and intellectual property law.

Many licenses today are overly complex and restrictive. Content providers should

provide consumers with clearer disclosures regarding the permissible and prohibited

John Villasenor, “Rethinking a Digital First Sale Doctrine in a Post-Kirtsaeng World: The Case for

Caution,” Competition Policy International Antitrust Chronicle, May 2013, Vol. 2., available at

http://ssrn.com/abstract=2273022. Used with permission.

As used herein, “digital first sale doctrine” refers to a hypothetically expanded 17 U.S.C. §109 that

would allow for resales absent any physical transfer of an accompanying storage medium, without

the authoriziation of the copyright holder. In addition, as used herein, “digital” refers to works

conveyed to consumers through digital transmission, and not to digital works delivered in tangible

form such as a music CD or movie DVD.

First Sale Under Title 17

uses of licensed content. Once consumers are better informed about license-based

offerings, I am optimistic that market pressure will lead content providers to offer

licenses that are more flexible, and that in some cases could permit dispositions of

digital content analogous to those that have long been available to owners of non-

digital content under the existing first sale doctrine.

The First Sale Doctrine in U.S. Copyright Law

Before considering the issues that would be raised by modifying copyright law to

introduce a digital first sale doctrine, it is helpful to set the context by briefly

discussing the first sale doctrine as it exists today.

Under U.S. copyright law a copyright owner has a bundle of exclusive rights.

specifically, a copyright owner, subject to some exceptions, has an exclusive right

to reproduce (or authorize the repoduction of) the copyrighted work and to

distribute (or authorize the distribution of) “copies or phonorecords of the

copyrighted work to the public by sale or other transfer of ownership, or by rental,

lease, or lending.”

There are other exclusive rights conferred by copyright as well,

but in discussing digital first sale it is the reproduction right and the distribution

right that usually play the most central role.

One of the exceptions mentioned above is the first sale doctrine, which is an

exception to the distribution right, and is codified in the Copyright Act of 1976 as

follows:

Notwithstanding 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.

To see how this operates, consider a person who walks into a bookstore in the

United States and purchases a brand new paperback book.

Suppose that after she

has finished reading the book, she decides to loan it to a friend who lives nearby.

Thanks to the first sale doctrine, she is able do this without obtaining permission

from the copyright holder. In the language of the doctrine, as the “owner of a

17 U.S.C. §106.

The reproduction right is codified at 17 U.S.C. §106(1); the distribution right is codified at 17

U.S.C. §106(3).

17 U.S.C. §109(a). In addition, 17 U.S.C. §109(c), which provides a defense to infringement of the

display right in 17 U.S.C. §106(5), is also relevant to the first sale doctrine.

This example assumes, of course, that the book is “lawfully made under this title.”

First Sale Under Title 17

particular copy” of the book, she is “entitled, without the authority of the copyright

owner,” “to dispose of the possession of that copy”—in this example by loaning it

to a friend.

No new copies are created when she loans the book, donates it to a library, or sells

it at a garage sale. In each of these transactions, the single copy purchased at the

bookstore simply gains a new custodian. As a result, the copyright holder’s

reproduction right is not implicated. In addition, while loans, donations, and resales

are distributions, the first sale doctrine frees the purchaser of the book to engage in

these transactions without obtaining the authorization of the copyright holder.

Stated another way, the copyright holder’s exclusive distribution right with respect

to that particular copy

of the book was exhausted after the “first sale.”

Although the first sale doctrine is a feature of copyright law, it has roots in a

broader recognition that markets are generally healthier when owners of goods have

a high degree of flexibility in determing if, when, and under what terms they are

later placed back into the stream of commerce. The procompetive benefits of

avoiding restrictions on that flexibility—or more formally, of avoiding restrictions

on alienation—have been understood for centuries.

As early as the 1600s, English jurist Lord Coke described the harms to “trade and

traffique, and bargaining and contracting”

that could accompany transfers of

ownership interests encumbered by alienation constraints. In the United States, in

the specific context of copyright, the first sale doctrine was articulated by the

Supreme Court the 1908 ruling in Bobbs-Merrill Co. v. Straus,

which held that a

retail sales.” The doctrine was codified in the Copyright Act of 1909

and again in

the Copyright Act of 1976 as noted above.

First Sale in the Digital Era

In the pre-digital era, the transfer of a copyrighted work from one person to another

typically involved the movement of a physical storage medium such as a vinyl

This example assumes that all of the dispositions described are occurring within the United States.

The landscape for international exhaustion has become more complex after the 2013 Supreme Court

decision in Kirtsaeng v. John Wiley & Sons. Inc., 133 S.Ct. 1351 (2013).

1 E. Coke, Institutes of the Laws of England § 360, p. 223 (1628), available at

http://www.constitution.org/18th/coke1st1778/coke1st1778_501-550.pdf.

Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 351 (1908).

See the Copyright Act of 1909, Pub. L. No. 60-349, 35 Stat. 1075 (repealed 1976).

First Sale Under Title 17

record, CD, DVD, or paper. By contrast, transfers today over the Internet are

electronic.

In its current form, the first sale doctrine does not enable the owner of a lawfully

made digital copy of a work to loan, sell, or otherwise dispose of it through a digital

file transfer over the Internet without the authorization of the copyright holder. The

reason is simple: The first sale doctrine is an exception to the distribution right, not

to the reproduction right. A digital transfer of a file from one location to another

implicates both rights, because a new copy of the work is created at the destination

of the transfer.

The role of the first sale doctrine with respect to digital transfers was at the core of

the recent Capitol Records, LLC v. ReDigi Inc. litigation in the Southern District of

New York. ReDigi, a company that launched an online digital marketplace in 2011

aimed at enabling users to resell lawfully acquired digital music files, had also

developed file deletion technologies. In addition to hosting a website to facilitate

the resales, ReDigi provided a downloadable “Media Manager” designed to ensure

that users did not retain copies of songs they had sold. After Capitol Records filed a

against ReDigi in the Southern District of New

York, Judge Richard J. Sullivan ruled in 2013 that the creation of a copy of a work

through ReDigi’s service “infringes Capitol’s exclusive right of reproduction.”

addition, Judge Sullivan ruled that the “sale of digital music files on ReDigi’s

website infringes Capitol’s exclusive right of distribution.”

Notably, with respect to the reproduction right, the ruling did not cite any failure of

the ReDigi technology at issue in the case to ensure that a seller’s copy is not

retained upon a sale as the basis for infringement. Instead, ReDigi was found to

infringe because the creation of a new copy of a file on a buyer’s computer (or

Notwithstanding extensive jurisprudence to the contrary, various legal theories have been

advanced to support an interpretation that resales via digital file transfers are permitted under current

the buyer’s copy is created, there has been no reproduction, and that the distribution that

accompanies a file transfer can be accomplished in a manner that is equivalent from a copyright law

standpoint to the distribution that accompanies the transfer of a tangible medium containing a

copyrighted work to a new owner. However, these theories have not gained a sympathetic reception

in the courts.

See Complaint, Capitol Records, LLC v. ReDigi Inc., No. 1:12-cv-00095-RJS, (S.D.N.Y. Jan. 6,

2012), ECF No. 1., available at

http://ia700800.us.archive.org/30/items/gov.uscourts.nysd.390216/gov.uscourts.nysd.390216.1.0.pdf

Capitol Records, LLC v. ReDigi Inc., 934 F. Supp. 2d 640, 651 (S.D.N.Y. 2013).

Id.. In finding that Capitol’s distribution right was infringed, Judge Sullivan wrote that because “a

digital music file sold on ReDigi is not ‘lawfully made under this title,’” its distribution by ReDigi

was outside the scope of the first sale doctrine. Id. at 655.

First Sale Under Title 17

cloud-based locker) falls outside the scope of §109(a). As Judge Sullivan wrote in

the conclusion to his decision, “[t]he Court cannot of its own accord condone the

wholesale application of the first sale defense to the digital sphere, particularly

when Congress itself has declined to take that step.”

Digital First Sale: Considering the Unintended Consequences

Few people would question the vital role that the existing first sale doctrine has

played with respect to non-digitally-delivered works. We have the first sale doctrine

to thank for libraries, used bookstores, garage sales where we can rummage through

used music CDs, and, just in the past few years, the hundreds of “Little Free

Libraries”

that have sprung up in neighborhoods around the country, and where

anyone is free to take or leave a book. The first sale doctrine has been, and

continues be, a powerful and positive force in the broader culture.

Against this backdrop, it is natural to consider whether to modify copyright law to

create a “digital first sale doctrine” that would accommodate dispositions of

copyrighted works over the Internet. This issue first gained attention in the 1990s as

Internet distribution of creative works became more common. The Digital

Millennium Copyright Act of 1998 contained a provision

calling for the U.S.

existing and emergent technology and the operation of sections 109 and 117 of title

17, United States Code.” The resulting report,

which was delivered in August

2001, devoted nearly 30 pages of discussion to “the first sale doctrine in the digital

world,” and recommended making “no change to section 109 at this time.”

Much more recently, in July 2013, the Department of Commerce Internet Policy

Task Force published a report titled “Copyright Policy, Creativity, and Innovation

in the Digital Economy.”

The Task Force discussed digital first sale and conluded

that “this is an area that deserves further attention.”

The Task Force also wrote

Id. at 660.

http://littlefreelibrary.org

Digital Millennium Copyright Act of 1998, Pub. L. No. 105-304, 112 Stat. 2860, 2876, available

at http://www.gpo.gov/fdsys/pkg/PLAW-105publ304/pdf/PLAW-105publ304.pdf.

U.S. Copyright Office, DMCA: Section 104 Report (A Report of the Register of Copyrights

Pursuant to Section 104 of the Digital Millennium Copyright Act) (2001) (“2001 DMCA Report”),

available at http://www.copyright.gov/reports/studies/dmca/dmca_study.html.

2001 DMCA Report, Executive Summary Section, p. xx.

U.S. Department of Commerce, Internet Policy Task Force, Copyright Policy, Creativity, and

Innovation in the Digital Economy (Green paper, July 2013), available at

http://www.uspto.gov/news/publications/copyrightgreenpaper.pdf.

Id. at 37.

First Sale Under Title 17

that the “USPTO, in collaboration with the Copyright Office, will solicit public

comments and hold a series of roundtables regarding the relevance and scope of the

first sale doctrine in the digital age.”

Proponents of a digital first sale doctrine often point out, correctly, that owners

today have less flexibility than in the past with respect to dispositions of

copyrighted works. Thirty years go, a person who purchased a vinyl record became

the owner of that copy of the songs it contained and enjoyed a wealth of choices in

their later disposition. Today, a person who purchases (as opposed to licenses) a

song over the Internet becomes an owner of a digital copy of that song. But,

because the first sale doctrine does not provide an exception to the copyright

holder’s reproduction right, it does not allow the purchaser to electronically transfer

the file to someone else pursuant to a loan or sale.

It is tempting to conclude that there is an easy fix: Create a digital first sale doctrine

by modifying 17 U.S.C. §109 to add an exception to the reproduction right. This

could enable owners of copies of works delivered over the Internet to engage in

dispositions analogous to those that have long been possible with non-digital works.

But there is a problem: This change would also be exploited to engage in

dispositions that are unique to digital content, opening up a Pandora’s box of

unintended consequences.

One particularly vexing problem would be very short-duration loans of digital

works,

potentially facilitated by web-based services that would match listeners

and owners whose copies of requested songs were sitting unused on hard drives

dispersed throughout the country (or, post-Kirtsaeng, the world).

Consider a group of one million music fans, each of whom wishes to listen to a

certain 3-minute song exactly once a week at a randomly chosen day and time. How

many copies of the work would need to be available in the pool of lenders to ensure

that multiple simultaneous requests could be satisfied? In the strictest mathematical

sense, to account for the infinitesimal chance that all million people might choose to

listen to the song at the same time, one million copies would be needed. But the

statistical odds of that occurring are so low as to be effectively zero. In practice, the

majority of loan requests could be handled with access to an inventory of only a few

hundred copies of the song. If this approach were carried to its maximally efficient

extreme, a recording artist could only sell a number of copies of a song equal to the

Id.

The 2001 DMCA Report discussed this general scenario, though without any numerical examples.

See 2001 DMCA Report, at 83.

First Sale Under Title 17

maximum number of people listening to it at any one time. This would dramatically

reduce the market for digital music sales.

Suggestions that no one would go to these sorts of extremes to facilitate content

access using schemes like this aren’t particularly convincing. After all, one need

only look at Aereo’s approach to using the Internet to connect consumers with over-

the-air television broadcasts to see the lengths to which businesses will go to take

advantage of perceived loopholes in copyright law.

New loopholes created by a

digital first sale doctrine would be exploited to the fullest.

Another well-recognized aspect of digital works is that the concept of “used” loses

its meaning. On average, used printed books, CDs, and DVDs are less valuable than

their brand new counterparts. By contrast, a digital representation of a work can be

transferred over the Internet thousands of times and remain literally bit-for-bit

identical to the version originally delivered pursuant to a first sale. Markets where

works offered for resale are indistinguishable from new works will behave very

differently from markets where that distinction is clear.

Content creators who raise these sorts of issues in digital first sale discussions are

often waved off with criticisms that they “just don’t get” digital, and are trying to

deny inevitable technological progress. But the first sale doctrine has historically

worked in part because physical copies of works degrade with use, because they

cannot be traded instantly and temporarily among parties separated by thousands of

miles, and because it is impossible to loan a paperback book to a friend while

simultaneously keeping it on your own bookshelf.

Due to the inevitable unintended consequences that would result, modification of

U.S. copyright law to introduce a broad digital first sale doctrine would be a

mistake. And I am not aware of any statutory language that could be used to craft a

narrow digital first sale doctrine that would somehow avoid these unintended

consequences while also being practical and workable.

As many people with an interest in copyright issues know, Aereo provides a service involving

thousands of very small antennas, each assigned to an individual user who uses the Internet to access

the signal received at his or her antenna. The Supreme Court heard arguments in American

Broadcasting Companies, Inc., et al. v. Aereo, Inc. in April 2014, and a ruling is expected in June.

First Sale Under Title 17

The Shift to a Licensing-Dominated Ecosystem

More fundamentally, the issue of digital first sale, while important, is becoming less

so as license-based content distribution becomes increasingly common.

Fewer and

fewer digital works are provided pursuant to sales that confer ownership of a copy

of a work. Due to this shift, consumers of digital content are now increasingly likely

to be licensees as opposed to owners. And the first sale doctrine, which applies to

“the owner of a particular copy of a work,” does not apply to licensees.

For

licensees, permissible uses of content are governed by a combination of intellectual

property law and contract law.

Today’s consumers have access to a remarkable and quickly growing range of

license-based content offerings. Some classes of offerings, such as Internet-based

music streaming and movie streaming services, do not tend to lead to customer

confusion regarding ownership. There is little chance that consumers using these

services could reasonably conclude that they are receiving an ownership interest in

the temporary copies of works streamed to their devices.

However, consumers who shop at content provider web sites featuring opportunities

to “buy” a digital verson of a song, movie, or book can reasonably expect that when

the transaction is completed, they will own a copy of the work. But in many cases,

that is not what occurs. Instead, consumers who “buy” copies of digital works are

often subject to terms of use agreements specifying that they are in fact licensees,

not owners.

Very few consumers take the time to read these agreements in full. And those who

do can find them to be mind-numbingly complex, often containing clauses with

Computer software has been distributed pursuant to licenses for decades. But for music, books,

and movies, the shift towards license-based distribution is much more recent.

See 17 U.S.C. §109(d): “The privileges prescribed by subsections (a) and (c) do not, unless

authorized by the copyright owner, extend to any person who has acquired possession of the copy or

phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring

ownership of it.” In addition, in 1998 the Supreme Court explicitly noted that 17 U.S.C. §109(a)

does not apply to licensees: “[B]ecause the protection afforded by §109(a) is available only to the

‘owner’ of a lawfully made copy (or someone authorized by the owner), the first sale doctrine would

not provide a defense to a §602(a) action against any nonowner such as a bailee, a licensee, a

consignee, or one whose possession of the copy was unlawful.” Quality King Distributors, Inc. v.

L’anza Research Int’l, Inc., 523 U.S. 135, 146–47 (1998).

The issue of when terms constitute contracts is complex, and can depend, for example, on whether

the user has taken an action such as clicking an “I agree” button. See, e.g., Ed Baylay, The Clicks

That Bind: Ways Users "Agree" to Online Terms of Service, ELECTRONIC FRONTIER FOUNDATION,

Nov. 16, 2009, https://www.eff.org/wp/clicks-bind-ways-users-agree-online-terms-service.

First Sale Under Title 17

ambiguous wording susceptible to conflicting interpretations even among attorneys

who specialize in contract law.

I am not sympathetic to the argument that the onus is on consumers to resolve these

ambiguities as a pre-condition to obtaining new digital content. I believe that

content providers have at least an ethical obligation—and quite possibly a legal

obligation under consumer protection laws—to clearly structure offerings so that

consumers are informed about restrictions accompanying their purchases of digital

copies of copyrighted works. When consumers are weighing offers enabling them

to “buy” content that they in fact will not own, that information should be clearly

and explicitly conveyed before the transaction is completed. When consumers are

considering acquiring content that they will be prohibited from loaning, selling,

giving as a gift, or bequeathing to an heir, that information should be presented in

easy-to-understand, unequivocal language, before the “purchase” is completed.

While these issues are of vital importance to the creative content ecosystem, they

cannot and should not be addressed through changes to copyright law. And they

should not be addressed through judicial decisions that might retroactively and

improperly reclassify contractually valid license agreements as sales.

Instead, they

should be addressed by ensuring what in fact should be common sense: that

consumers who license copyrighted works have access to clear up-front

descriptions regarding the permitted and prohibited uses of the content.

Once that occurs, I am optimistic that market forces will lead to future license-

based content offerings giving consumers many more options than those commonly

available today. And, in contrast with attempting to address digital content

dispositions through a one-size-fits-all statutory approach, allowing the market to

experiment with a diversity of solutions is more likely to result in balanced

approaches that, among other things, could permit licensees to engage in

dispositions of digital content analogous to those that have long been available to

owners of tangible copies of works.

However, courts do have an important role in determining when licenses are contractually binding.

For example, in a 2011 decision in UMG Recordings, Inc. v. Augusto (628 F.3d 1175 (9th Cir.

2011)), the Ninth Circuit found license terms prohibiting resale to be nonbinding because there was

no “indication that the recipients agreed to a license.” Id. at 1182-1183. See also Vernor v. Autodesk,

Inc., 621 F.3d 1102 (9th Cir. 2010), cert. denied, 132 S.Ct. 105 (2011), in which the court ruled that

a software licensee was indeed bound by terms accepted as a condition of installing the software.

More problematically, in Europe in 2012, the Court of Justice of the European Union did reclassify

an apparently valid license as a sale, ruling in C-128/11, UsedSoft GmbH v. Oracle Int’l. Corp., 2012

E.C.R. I-0000 (3 July 2012), that a software licensee holding a perpetual license could resell the

license, despite terms prohibiting a transfer. Though UsedSoft was not a decision by a U.S. court, it

could nonetheless have influence in future U.S. court cases involving analogous fact patterns.

First Sale Under Title 17

Thank you again for the opportunity to testify on this important topic.

The views expressed herein are those of the author and should not be attributed to the staff, officers or

trustees of the Brookings Institution.

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