PTO Weighs In on Digital First Sale

A little-known fact about the US Patent and Trademark Office (PTO) is that it advises the executive branch of government (the president and his administration) on copyright issues — just as the US Copyright Office advises Congress on copyright.  Although the Copyright Office’s efforts over the past couple of years to overhaul the country’s copyright law have gotten more attention, the PTO has been engaging in its own activities to shape copyright policy in the years to come.

In general, the PTO is taking an approach that favors market-based solutions and consumer education, and only calling for legislative reform in cases where those avenues don’t seem fruitful.  The leader of the PTO’s efforts on copyright is Shira Perlmutter, who is the PTO’s Chief Policy Officer but has a particularly deep and rich background in copyright — including stints at IFPI, WIPO, the Copyright Office, and academia, as well as the media industry as chief IP counsel at Time Warner.  (Perlmutter was a keynote speaker at our Copyright and Technology London conference in 2014.)

The PTO’s most recent copyright effort came last month in the form of a document that focuses on three copyright issues in particular.  The White Paper on Remixes, First Sale, and Statutory Damages follows on the heels of a Green Paper that the PTO published in July 2013 as a means of identifying specific issues that it would address in future work before coming out with policy recommendations.  After a series of roundtable discussions held across the country, the PTO chose to focus in on those three aspects of copyright law in the White Paper.

The conundrum of first sale for the digital age is one that we’ve examined here for years (see for example here, here, and here).  In the White Paper, the PTO concludes that no changes to the law are warranted.  This is the same conclusion that the Copyright Office came to back in 2001 in its Section 104 Report.  But because so much has happened over the past fifteen years, it’s worth examining the evidence and rationales that the PTO considered in reaching this conclusion as well as the input it received (or didn’t receive) from various stakeholders.

Many entities — largely the “usual suspects” — offered testimony that led to the White Paper.  The technology industry, represented by lobbying groups such as the Computer and Communications Industry Association as well as Google, found typical common cause with cyber-activists like Public Knowledge and the Electronic Frontier Foundation as well as various legal academics, while the media industry (MPAA, RIAA, AAP, NMPA, Copyright Alliance, etc.) was on the other side.  Also typically, the Center for Democracy and Technology provided valuable input that was somewhere in the middle.

First sale (section 109 of the Copyright Act) says that once you have legally obtained a copy of a copyrighted work, it’s yours to do with as you please, and the publisher can’t be involved.  You can sell it, lend it, give it away, throw it away, use it as a drink coaster or doorstop, etc. The question has been whether first sale rights should apply to digital files of the type that one might obtain on iTunes or Amazon.  Back in 2001, the Copyright Office said no.

There’s a fundamental question about whether digital files can be subject to first sale at all.  In the White Paper, the PTO states that on its face, the answer is no — because reselling (or lending, renting, or giving away) a digital file usually involves making a potentially unauthorized copy of it, whereas this isn’t the case for books, CDs, or DVDs. The only reliable way to implicate first sale on digital files is to sell, lend, rent, or give away the the storage device that holds them, such as a hard drive.

The media industry, of course, is against digital first sale because “used” digital files are identical to new ones and cannot “wear out”; therefore allowing people to resell their digital files will harm markets for “new” ones.  Some parts of the tech industry and its allies are in favor of digital first sale.  The library community is strongly in favor of digital first sale because it would allow libraries to lend e-books just as they do physical books, instead of being subject to publishers’ whims in dictating the terms of licenses for library distribution functions that simulate lending.  More on that later.

In its 2001 report, the Copyright Office looked at the feasibility of a “forward-and-delete” technology that could facilitate digital first sale for consumers by ensuring that the person who disposes of (or to use the legal term, “alienates”) a copyrighted work doesn’t hang onto a copy afterwards.  The PTO found that such technology is no more feasible than it was in 2001, due to the possibility of hacks and loopholes.  But it also found that it may not be necessary to rely on forward-and-delete to implement an approximation to digital first sale.

Instead, the PTO found that many existing services either provide meaningful subsets of first sale rights for digital content or make first sale irrelevant.  Take Netflix as just one example.  Netflix’s original business as a DVD rental service couldn’t have existed without first sale rights.  Its current streaming service provides access to a huge library of video content for a monthly subscription fee, and therefore makes “ownership” beside the point. Furthermore, it offers de facto “friends and family” access by enabling multiple people to use the service on different devices if they know the login credentials.  Many other mainstream content services also offer multi-user, multi-device authentication — even if only because confining access to single users is impractical and could be user-unfriendly — including all the major e-book retailers, most of the major on-demand streaming music services, and so on.

Cloud storage is also making first sale lose relevance in the digital age. If you store your digital files on a cloud storage service like Google Drive, Apple iCloud, or Dropbox, then other people can access them (e.g., for streaming playback) simply by knowing your login credentials.  In fact, that’s the basis for the latest version of ReDigi, the digital music resale service that lost a landmark court case back in 2013 when the court held that it was making unauthorized copies as part of its forward-and-delete mechanism.  “ReDigi 2.0” works by storing each user’s files in the cloud (before any resales) and then simply changing access credentials from one user to another when the first user resells the files. (No court has ruled on the legality of this scheme.)

The positions of the different sides of the debate over digital first sale were curious to read in the White Paper.  Public Knowledge pointed out that private companies shouldn’t be relied on to provide the kind of flexible access to content that Netflix and others do, that this right should be enshrined in law.  They called for a legal guarantee of “ownership-like” rights, yet stopped short of claiming that users should be trusted to delete files once they have conveyed them to others — calling instead for a forward-and-delete mechanism.

This seems out of step with Public Knowledge’s typical stance against imposing rights technology on consumers — particularly when one considers that forward-and-delete is really a sort of cousin to DRM.  In addition, the insistence on enshrining “ownership” for digital files in law almost sounds like a bit of nostalgia, an anachronism in this age of shrinking e-book and music download sales.  Many people still do care about ownership, but a growing number of them are coming to prefer even-older-fashioned physical media objects, such as vinyl LPs, which are covered under old-fashioned first sale.

The media industry, on the other hand, rejected forward-and-delete as a scheme that is even more susceptible to hacks and loopholes than it was back in 2001, given the ubiquity of cloud storage, automated backups, USB drives, etc.  The PTO took the media industry to task for lack of quantitative evidence to support its assertion that digital resale would harm normal sales.  (I have offered speculation about this but am not aware of any actual studies; if anyone wants to do one, let’s talk.)

Yet the most curious thing about the PTO testimony on digital first sale was the utter lack of it from major content retailers — the Netflixes, Apples, and Amazons of the world. Retailers “sell” digital downloads under licenses (EULAs or Terms of Service) which often give consumers rights that are roughly similar to rights they would get to physical media objects under copyright law, but often with limitations such as prohibitions on resale.  (Amazon’s are particularly unequivocal that users are licensing, not purchasing, content through its services, and that resale is a violation of its terms.)

The White Paper does mention these agreements, and many respondents condemned them as opaque and non-negotiable “contracts of adhesion.”  Yet it seems to me that public interest groups’ efforts to enshrine ownership-like rights for digital files in law might be more profitably focused on making some of the terms in those agreements unenforceable than on forward-and-delete mechanisms.  Instead, the PTO recommended that retailers provide more clarity on their license terms and questioned whether a button marked “Buy” for digital content really ought to say “Buy.”

There are many interesting implications of digital first sale beyond consumers reselling their iTunes or Amazon files, such as consumers’ rights to resell the growing number of devices that contain software (cars, refrigerators, IOT devices, etc.) that is subject to license agreements.  There are also some arguably peripheral issues such as privacy (e.g., the “right to read anonymously“) that the PTO decided to leave alone.  But the PTO did pay close attention to the other issue for digital resale that we’ve discussed at length here: libraries’ right to lend digital content.

Because e-books are licensed and not sold, libraries don’t have first sale rights to lend them.  Therefore, publishers can dictate whatever terms they like to libraries for e-lending — including prices (often higher than consumer retail) and durations (often limited in time or number of e-lends).  Moreover, antitrust law restricts publishers from collaborating on license terms.  The result has been e-book lending terms that are not only less favorable than they are for print books but also confusing, as they vary from one publisher to another.  The major trade book publishers have admittedly liberalized their e-book licensing terms over the past few years, but the basic problem remains.

I have said that the most efficient legal route to solving this particular problem is not by granting a blanket first sale right for digital content but by updating section 108 of the copyright law — the section that grants libraries and archives rights beyond those granted to the public — to enable libraries to lend e-books as they do print books.  As the White Paper reveals, book publishers are at least in favor of amending section 108 to give libraries the right to hold copies of digital works for preservation (if not e-lending) purposes.

And this is one of the very few areas in which the PTO concludes that legislative reform could be necessary.  In the White Paper, it notes that the Copyright Office “has concluded that Section 108 must be completely overhauled“, and it calls for “convening library and publisher stakeholders to work out statements of best practices, or amending the Copyright Act to address the library concerns raised here.”  Best practices for e-lending are already out in the open for all to see: some independent publishers are now licensing e-books to libraries under print-like terms.  And studies have already appeared that shed some light on the economic effects of library lending on publishing revenue. If none of these developments end up influencing the major trade publishers to rationalize e-lending, then legislative reform may be the only answer left for libraries.

 

7 comments

  1. Hi Bill – interesting post, something very close to my interests.

    You mention you are looking for evidence of whether the resale market for digital media goods would harm the primary market or not. Economics does have some peer reviewed literature on the effect of resale markets, but a lot of it is for goods that are quite different from digital media goods (for example, a paper on resale markets for automobiles is irrelevant, since cars deteriorate with use but digital media files don’t, and that would change the impact of resale markets).

    Are you aware of Ben Shiller’s empirical work? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2314980

    He uses data on the resale market for video games as well as the primary market sales. His focus is on the fact that video games are durable (they don’t wear out with use) but that people tire of video games as they use them – two economic properties that are generally shared by digital movies and music. So his paper is probably the closest to the types of markets you are thinking about.

    Anyway, he uses his data to show empirically show that resale markets significantly decrease profits in the primary market for these types of goods. The paper was peer reviewed and published in a high quality economics journal (QME).

    Worth a look!

  2. Hi Brett,

    Many thanks for this. I had not been aware of this study, and yes, it’s relevant. More specifically, I’d say that the research is interesting for the gaming market precisely because game publishers have been laboring under a “limited shelf life” regime for years — the time limitations coming from a combination of gamers getting tired of games (as Shiller says) and piracy. Game publishers are under enormous, constant pressure to issue updates to popular game titles for these reasons.

    However, I’m not sure the same rationale necessarily applies to other types of media. Studies have been done on some subset of the number of times that people typically watch movies vs. listen to songs vs. read books. From what (little) I remember offhand, the number for movies was low, as you’d expect, but higher for music. If you think about it, streaming music is gaining in popularity because it’s a better deal for people who like to move around from one song/artist/album to the next, while ownership remains popular precisely for those people who want to listen to music over and over again.

    I’d also expect this factor to vary widely across book publishing segments. On one side, I’d expect digital resale to do serious damage to the textbook industry — except that most e-textbooks I know of are DRM’ed, so they can’t be resold — while I’d expect it to do little or no damage to professional and academic publishing, with trade somewhere in between. There is one professional publisher that does allow digital resale in its license agreement for e-books (and doesn’t use DRM): O’Reilly Media. I’m an O’Reilly author and I can’t say I’ve seen any effect from this, but then my titles are ancient history and I’m amazed they still sell anything at all.

  3. Hi Bill,
    As a librarian, I have one comment regarding amending section 108. I think your idea was relevant and important 8-10 years ago but user experience and attitudes have made that somewhat irrelevant. If libraries finally get the right to pay the cover price of an ebook and lend it like they do print books, I don’t think it will matter because consumers expect no wait time for digital materials. Spotify, Netflix and the like are conditioning them to the inherent fungible nature of digital goods. Even my senior citizens are asking me why they can’t get their ebook now rather than wait, because they know that it is a digital file and can be synced to 1 or 100 users with minimal effort.
    In essence digital copies are commodities and consumers behavior and expectations are different for the digital version of the same physical material. If section 108 finally gets amended, I think it will be too late for libraries to really make use of the amendment as most of our patrons will have already migrated to other services where their expectations of immediate gratification are met. Netflix has demonstrated this well with their growing subscriptions in spite of the fact that they have less blockbuster and A list content than ever before. My suspicion (and this goes against everything I used to think) is that consumers are being conditioned to care less about what is not available, and more about accessibility and instant gratification. As publicly funded entities libraries need to serve a significant portion of the population in order to justify their expenses, and if we continue to see the trend of less people using those traditional services- even if we migrate them over to the digital world- we are still in a bad position for relevancy.
    Now we may be able to come up with some kind of unlimited bundling costs for bestsellers or a pay per play model, but those are just as unknown and unquantifiable as our current dilemma. User behavior and expectations may make a section 108 amendment irrelevant, and we will be left searching for solutions that allow us to get ebooks to our users without a 1 to 1 lend model.
    Incidentally, I am currently scoping a case study to test and see if our users really care more about accessibility and access than catalog depth. The idea would be to pay for Kindle unlimited on a number of devices and get those in the hands of various library user profiles for 1-2 months. We do a pre and post interview with a series of questions aimed at qualitatively addressing their interests and behavior. I think this type of research is necessary to build a foundation for good quantitative analysis, as we really don’t know if user behavior is changing. but Netflix’s success and some of the anecdotal evidence about Kindle Unlimited suggests that this may in fact be happening.

  4. Joe,

    Thanks very much for your comment. (For those of you out there who aren’t familiar with Joe Sanchez, he’s at the forefront of thought and strategy in the public library world regarding digital content, so he knows whereof he speaks.)

    My reaction to what you say is this: yes, research of the type you suggest is as critically important as it is thin on the ground. But why limit yourself to scoping the impact of Kindle Unlimited on your patrons? I understand the point about getting something real into the hands of patrons instead of dealing in hypotheticals. But why Amazon? It’s known that Amazon has been actively trying to “take market share” from public libraries (see for example https://copyrightandtechnology.com/2012/05/20/a-nail-in-public-libraries-coffins/). Seems to me that you’re looking at feeding money directly to a competitor. It’s also known that e-reader sales are in decline as people shift to tablets and phones. So why not construct this type of experiment with another commercial service (e.g. Scribd) that has a bigger variety of content, on an iPad or Android device?

  5. Thanks for the kind words Bill. I agree with you completely, but am going to leave those decision up to the professional researcher, as my own training in quantitative and qualitative research methodologies is too slim to make those calls.

    Given that reality, my understanding is that there are two options each with its own set of pros and cons.
    1. Use Amazon. Pros: we get a sense of what a mature market will do, and that is really what we need to measure. The other markets are less mature and stable, but Amazon is really the behemoth in the room that will have the same long-affects on our services that Google had on traditional library services. Cons: you already highlighted those
    2. Make it more broad:Pros: you covered those. Cons: we don’t have the funding to do that, and we run the risk of polluting the data, because of the fragmentation. This would most likely be a follow up study to test the data from the first study with Amazon.

    Thank Bill, you are one of the best thinkers on these subjects I know of, and I appreciate you taking the time to respond. I have been considering Scribd since I first read your reply this morning, but again I will leave that up to the expert once we get to that stage.

  6. Thanks Joe. Do you have someone already lined up to do this research? If not, maybe we should talk, as I may know people who could do a great job. It also occurs to me that Overdrive might be interested in participating in something like this, given that they’d have an incentive to do so. I suspect you might have a fraught relationship with them, but I am due to speak to their CEO in a couple of weeks and could suggest something……. Anyway I’m at billr (at) giantstepsmts.com if you want to continue the conversation (and if you email me I’ll give you my phone number).

  7. […] That type of scheme would complement what the Patent and Trademark Office (which advises the Executive Branch of government on copyright) had in mind in the White Paper on Remixes, First Sale, and Statutory Damages that it published in January of this year.  After rounds of stakeholder input on digital first sale, the PTO concluded that no changes to copyright law are necessary, and that various currently available services either provide meaningful subsets of first sale rights for digital content or make first sale irrele…. […]

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