By Scott Hervey 

Have you ever been into a used record store (remember those) and picked up a used CD that had the following language either on the CD case or on the CD itself:


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.

Have you ever wondered how on earth can the record label control the sale of these CDs. (An obvious question given the fact that the CD in question is for sale in a used record store.) According to a recent federal court case, they cant.

Prior to a record being released for sale to the public, a record label will often create and distribute a “promotional CD” to promote and advertise the release of the new record. Often, the promotional CD is similar to the new CD, although it may contain fewer songs, different artwork, etc. These promotional CDs are sent to music industry “taste makers” such as disc jockeys, journalists, bloggers and the like for the sole purpose of gaining exposure for the upcoming release.

The defendant in UMG Recordings, Inc. v. Troy Augusto was not a music industry taste maker. Rather, he was an industrious fellow who obtained numerous promotional CDs from record shops and online auctions and then turned around and sold them on eBay. UMG complained that Augusto was infringing UMG’s copyright in the CDs by selling them on-line; UMG even notified eBay of its belief that Augusto’s sale of the promotional CDs infringed UMG’s copyright. Although eBay temporarily suspended Augusto’s account, Augusto had his account reinstated and continued to sell the promotional CDs, prompting UMG to sue him for copyright infringement.

To establish its case of copyright infringement, UMG had to show that it owns a copyright in the work allegedly infringed, and that Augusto violated one of the exclusive rights granted to UMG under the Copyright Act. Augusto did not dispute either of these elements – he admitted that UMG owned the copyright in the sound recordings embodied in the promotional CDs and that he sold these CDs through eBay contrary to UMG’s exclusive right to sell those sound recordings to the public. However, Augusto contended that his conduct was not infringement but was protected by the “first sale doctrine.”

The first sale doctrine is a limit on the copyright owner’s right to control the distribution of a work. The statute provides that “the owner of a particular copy of a phonorecord lawfully made under [the Copyright Act] is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” The first sale doctrine does not necessarily require a “sale” in order to apply. It merely requires an authorized disposition by the copyright owner through which title passes. Ordinarily this occurs as a sale, but it may also occur by way of a gift.

Augusto argued that title to the UMG manufactured promotional CDs passed at the time they were distributed to industry insiders. UMG countered that, as set forth on the label affixed to each CD, the use of the promotional CDs was licensed to the music insiders receiving them. Augusto countered that the words on the CD label dis not create a valid license.

In deciding whether a license existed between UMG and the persons receiving the promotional CDs, the court examined the “economic realities” behind the entire transaction. The court noted that just because an agreement labels itself a license does not control the analysis. Here, the court found that UMG’s willingness to relinquish ultimate possession of each promotional CD was strong evidence that a license did not exist. UMG did not require the recipients of any promotional CDs to return them and does not take any affirmative efforts to recover their possession. Instead, each recipient is free to keep the CD forever. Coupled with other elements, the court found that the economic realities of the situation show that UMG’s distribution of the promotional CDs is properly characterized as a gift or sale, and not a license.

Because the court determined that UMG’s distribution of the promotional CDs was a gift, title to each CD was deemed to have passed to the music industry professional at the time of the gifting. As such, Augusto subsequent sale of the promotional CDs on eBay was protected by the first sale doctrine.

This case has broader implications then just promotional CDs. Software manufacturers couch transactions with consumers (or end users as they are referred to) as licenses and not purchases. Some do this as means of trying to control the market for their second hand products.

UMG has since appealed this case to the 9th Circuit.