Judge’s Ruling in Redbox Case Raises Concerns for Physical/Digital Content Bundles

A ruling from a California district judge last month impacts an area we explore here from time to time: when you purchase a digital content product, what rights do you have to that product, and are you buying it or licensing it? Judge Dean Pregerson’s recent ruling in Disney v. Redbox helps define the boundaries between sale and license, but it could hamper media companies’ plans for bundling physical and digital content together.

If you’ve been to an American supermarket, you probably know Redbox. It operates automated video rental kiosks that sit outside supermarkets, drugstores, and other high-traffic locations. It buys DVDs and Blu-ray discs of movies and video games, places them in its kiosks, and rents them out. Customers pay a daily rental fee until they return the discs.

Like Blockbuster before it, Redbox has had a contentious relationship with Hollywood studios. It takes advantage of the first sale provision in U.S. copyright law, which enables a purchaser of a copyrighted work to dispose of it in any way — sell, rent, lend, give away, throw away — without any involvement from the copyright owner. The studios have been concerned that Redbox DVD and Blu-ray rentals cut into their sales of those products.

Around nine years ago, three major studios (not including Disney) had tried forcing Redbox to stop making new releases available and to wait until they had been in theaters for at least four weeks. Redbox responded by claiming that the studios were colluding to limit Redbox’s ability to buy their DVDs and Blu-rays in the same ways that ordinary consumers can — in other words, to use their copyrights to violate antitrust law. Those cases settled, so no court decided the issue.

Redbox’s accusation was an example of a legal doctrine called copyright misuse. Intellectual property misuse — it applies to patents as well as copyrights — basically means using your intellectual property in ways that extend your power beyond the rights granted to you by intellectual property law. Copyright misuse doesn’t come up very often, but when it does, it usually applies to situations where copyright holders act to restrain trade or fix prices.

Disney’s recent lawsuit against Redbox involves Combo Packs. A Combo Pack is a product that contains a DVDs and Blu-ray disc of a given movie, plus a printed code that the buyer can redeem online to download a digital copy of the movie or stream it. Redbox bought Disney Combo Packs, made the discs available for rent in its kiosks, and then sold the download codes separately for $8-$15 each. It presumably started doing this because Disney would not license its content to the Redbox On Demand online movie service that Redbox launched last December (not to mention that this is more lucrative than simply buying DVDs and Blu-ray discs and renting those out).

In its complaint, Disney claimed that consumers who buy Combo Packs are forbidden, by an agreement in the packaging, from transferring ownership of the download codes. It also noted that the download code redemption sites (MoviesAnywhere.com and RedeemDigitalMovies.com) contain language requiring users to “represent” that they own the discs when they redeem the download codes.

Disney moved for a preliminary injunction, which would force Redbox to stop reselling the download codes. Redbox countersued, claiming (among other things) that its actions were lawful under first sale and that Disney’s restrictions on the download codes are another flavor of copyright misuse.

Judge Pregerson, in his order denying the preliminary injunction, agreed with Redbox. He said that the terms in Disney’s license agreement on the download codes required consumers to “forego their statutorily-guaranteed right to distribute their physical copies of that same movie as they see fit” if they want to “access digital movie content, for which they have already paid”, that the court was likely to find that “those terms improperly grant Disney power beyond the scope of its copyright”, and thus that Disney is engaging in copyright misuse.

If this holding sticks as a precedent, it could inhibit development of various types of physical-plus-digital bundling deals for media products. As we’ll see, the details of physical/digital bundles can be subtle, and the law could cause media companies to question their own product development decisions.

Bundles are desirable: they provide a way to offer cross-format, interoperable content, and they help keep physical products relevant in the digital age. They are already common practice in the music industry (music CDs purchased online often come with MP3 downloads), so more and more people are coming to expect them for other types of media.

For one thing, this development means that bundles wouldn’t be able to be designed so that the buyer must hold on to the physical product to claim the digital one. Instead, to ensure that the person claiming the digital content is the same one who bought the bundle, they would need to depend on a record of purchase at the retailer. Or, the bundles might have to be made available as separate post-purchase offerings rather than single combined products. Both of these cases require that the retailer cooperate with the copyright owner.

Consider “P+E” (print plus e-book) bundles in book publishing. Amazon has a P+E bundling program called Kindle MatchBook. It ties Kindle e-book downloads in this program to the same accounts as those who bought the print books. This process makes it virtually impossible to transfer the e-book downloads to other people, and users can get e-book versions of books they bought in print long after they have resold or disposed of those books. Therefore Kindle MatchBook is unlikely to be susceptible to copyright misuse allegations of the type raised by Redbox.

On the other hand, there’s Shelfie, the Canadian startup that was recently acquired by Kobo. Shelfie works by requiring users to hand-sign their names on the copyright pages of print books (that they could have gotten from anywhere) as proof of ownership, and then scan them with the Shelfie app, to get free or discounted e-book versions of those books. One could argue that this diminishes books’ potential resale values and therefore falls under the same copyright misuse rubric as Disney’s Combo Packs — except for the fact that the Shelfie “product” is purchased separately from the print books, and therefore users aren’t “access[ing e-book] content for which they have already paid”.

Back in the video world, another physical-plus-digital bundling scheme is UltraViolet Disc to Digital, which is available for certain movies (from studios other than Disney) through retailers such as Walmart’s VUDU. This is also a post-purchase program, which costs users $2-$5 extra for the digital content. UltraViolet Disc to Digital uses barcodes on DVD and Blu-ray packages, which users have to scan from apps on their smartphones. This means that people have to have the disc packages in their possession when they claim their digital content. The barcodes are much harder to transfer to other people than printed numeric codes, and in any case, UltraViolet Disc to Digital is also a post-purchase add-on offering.

Judge Pregerson’s ruling makes it unclear whether media companies can offer certain types of physical/digital bundles in the future, or as we’ll see, it at least requires them to put more legalese on their product packaging.

The ruling also sheds some more light on the boundaries between sales and licenses of copyrighted works. If you buy a physical copy of a copyrighted work — a printed book, a music CD, a movie on DVD — you get rights to it under copyright law, such as first sale rights. But if you license a piece of digital content, the rights you get to it are those stated in the license agreement. Sometimes a physical product will be packaged in ways that include license terms, the classic example being “clickwrap” agreements on software products distributed on CD or DVD. That’s where things start to get fuzzy.

An important recent precedent here is the Ninth Circuit’s 2010 ruling in Vernor v. Autodesk. This case was about a person’s right to resell high-priced software distributed on CDs. (Timothy Vernor had accused Autodesk of copyright misuse, but the court didn’t reach that issue.) The Ninth Circuit held that if a copyrighted work is distributed with a license agreement with usage terms that are more restrictive than those granted to the buyer by copyright law, then it’s a license, not a sale, and the terms are enforceable — meaning that the buyer doesn’t get resale rights.

Judge Pregerson used the license test in Vernor to determine that purchases of Disney Combo Packs were sales of copyrighted works while the agreements on download codes in the Combo Packs were licenses. Disney tried arguing that the licenses governing download codes actually govern Combo Packs in their entirety, and therefore that Redbox broke the license agreement when it resold the download codes. The judge didn’t buy that argument, because he found that the legal language on the Combo Pack packaging wasn’t substantive enough to amount to the equivalent of a clickwrap agreement per Vernor. His finding that the Combo Packs were actually two (or three) separate items informed his copyright misuse analysis. It might be possible for Disney to continue offering Combo Packs without fear of copyright misuse allegations if it beefs up the legal language on the outside of the Combo Packs.

Yet decisions on copyright misuse are supposed to turn on the public policy implications of the copyright owner’s actions. Disney could well argue that physical/digital bundles — priced below the sum of the prices of the components — are consumers’ interest, so it should be free to construct them as it sees fit and let consumers decide whether they’re worth buying. Disney might just have to wait until this case is before the Ninth Circuit appeals court to make that argument.

Finally, it’s worth mentioning that the copyright misuse doctrine has much broader implications beyond first sale rights. James Grimmelmann, the Cornell expert who spoke on this subject at our last Copyright and Technology conference, has noted that if Disney is found to be misusing its copyrights, then those copyrights — like the ones on the major hit movie Frozen — are unenforceable in any circumstance. This includes things like theatrical screenings and use of characters in other movies, as well as duplication and sale of physical products. Yet Judge Pregerson’s ruling isn’t a final determination on copyright misuse; the case is just getting started.

 

 

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