Claire Corlett

Fish Food, Fish Tanks, and More
William Fisher, CopyrightX: Lecture 8.1, Distribution & Performance Rights: Distribution

William Fisher, CopyrightX: Lecture 8.1, Distribution & Performance Rights: Distribution


Hello, I’m Terry Fisher. This is the eighth of 12
lectures on copyright. In the preceding lecture, I examined
two of the four major economic rights associated with a copyright,
specifically the right to control reproduction and the right to control
modifications of a copyrighted work. In this lecture, I’ll examine the
other two major economic rights– the right to control
distribution, and the right to control public
performances and displays. As usual, I’ll spend most of the
time discussing the law in the United States, but will also
indicate various issues on which the law in
other countries differs. As always, I’ll be
illustrating the presentation with various audiovisual
materials, one of which is a map of copyright law,
the current version of which can be found on my
homepage, tfisher.org. We’ll begin with the
right of distribution. This aspect of copyright
law is characterized by a clash between two
powerful sets of impulses. On one side are strong economic
interests of copyright owners. On the other side is an equally
powerful set of attitudes, hostile to the copyright
owners’ yearning for continuing control over
embodiments of their works. The tension between these
forces has generated and will continue to generate strife
and periodic doctrinal eruptions. The interest of the
copyright owners are, as I say, strong for three reasons. They want to be able to control what
purchasers and possessor of copies of their works do with those copies. The first, and least
important, of those reasons is that such control supplements
the copyright owner’s right of reproduction. Specifically, by enabling the
owners to attack intermediaries who do not themselves
make unauthorized copies, but who traffic in unauthorized copies. In this sense, the distribution right is
analogous to the rules in criminal law penalizing the receipt
of stolen property. The second, and more important
reason is that copyright owners would like to suppress, if
possible, resales and lending of copies of their works. In other words, they would like to
prevent the first purchaser of a copy from passing it on to others. Why? Because the result would be
to increase demand for copies, and thus to enhance the
copyright owners income. For example, novelists would
like to be able to prevent sales of used copies of their books. Movie studios would like
to prevent, or to charge for resales or rentals of DVDs
embodying their works, and so forth. Third, copyright owners would
like to prevent arbitrage, which corrodes their ability to engage
in lucrative, differential pricing. This last point is both
complicated and important. I touched on it very briefly at
the end of lecture number four. I now want to discuss it in more detail. The following analysis
consists of a condensed version of an argument deployed in much
more fine grain in an article I wrote some years ago on this topic. If you’re curious about
this phenomenon, you might wish to follow the
links on my home page. Differential pricing, otherwise
known as price discrimination, consists in the core case of charging
different consumers different prices for access to the same good or service. A more subtle form of differential
pricing involves charging different consumers different prices for different
versions of the same good or service when the variation cannot be
explained by differences in the costs of the versions. A familiar example of the core
case of differential pricing is when a bus company or museum
charges lower entrance fees to students or senior citizens than
it does to middle aged, non students. A familiar example of
the more subtle form is the practice of airlines to charge
vastly more for a business class seat than for a coach class
seat for a given trip. Suppose, for example, that
I want to fly from Boston to Los Angeles in the afternoon of
June 1, 2014, roughly three months from right now. I prefer American Airlines, so I
visit the website of the company, and check for available
flights and prices. Flight 143, which departs at 4:30 in
the afternoon, suits my schedule well. I now have to choose a class. As you can see, there
are various options. But the major choice involves
where in the plane I will sit. Flight 143 uses the
Boeing 757-200 aircraft, which is configured as follows. So, if I want to sit in what’s
known as the main cabin, I will pay $400 or $500. If I want to sit up
front, in first class, I’ll pay more than three times as much. The difference between these prices
cannot be explained on the basis of the extra costs associated
with a wide seat, better food, and more attentive service. Rather, it reflects primarily
the airline’s shrewd effort to capitalize on
differences in the price sensitivity of the two
types of passengers. If I’m wealthy, or I’m able to rely on
the generous business expense account, I’ll choose first class. If neither, I’ll choose the main cabin. Price discrimination usually
increases the profits of the firm that engages in it. Why, then, is it relatively uncommon? Because, with rare exceptions, the
practice of price discrimination is feasible only when
three conditions coincide. First, the firm ordinarily
must have market power. In other words, there must exist no
readily available, equally satisfactory substitutes for the good or
service the firm is selling. Otherwise, customers from whom the
firm seeks to extract a high price, will defect to competitors. Next, the firm must be able to
differentiate among its customers on the basis of the values they place
on the firm’s product or service. Are several ways in which
this could be achieved. In what economists refer to as
first degree price discrimination, the firm gathers information
about individual buyers, and attempts to charge each
one the most that he or she is able and willing to pay for
the good or service in question. In so-called second degree
price discrimination, the seller does not know how much
buyers are able willing to pay, but induces them to reveal their
resources or their preferences through their purchasing decisions. Among the techniques of this sort
are volume discounts and versioning, such as the practice I
mentioned a minute ago of differentiating business
class and coach tickets, and then charging radically
different prices for them. In so-called third degree
price discrimination, the seller does not know the
purchasing power of individual buyers, but is able to separate them into
groups that correspond roughly to their wealth or eagerness. The student discounts and senior
discounts I mentioned previously are examples. Opportunities to engage in first
degree price discrimination have traditionally been
rare, but opportunities for second and third degree
discrimination abound. One area in which they’re
proliferating especially rapidly are the kinds of
the informational products to which copyright law applies. Take software, for example. One of the ways in which software
firms seek to enhance their revenues is by selling identical or
versioned copies of their products to students for vastly
different prices than the prices they charge professionals. Here’s an illustration. As you can see, as of
today, February 23, 2014, Adobe’s Creative Suite 6 is
ordinarily priced at $1,700, but is available to
students and teachers– groups that tend to be poorer than
average– for $590, a huge markdown. As I hope you recognize, this is
an example of third degree price discrimination in which the
copyright owner uses a criterion to separate set of potential
customers for its product into two or more subgroups, which differ
roughly in their price sensitivity, and then charges the members of the
two groups very different prices. An example of second degree price
discrimination is the way in which book publishers typically package
and release their products. In the usual case, a hardcover edition
is sold at a substantial price. And then a few months
later, or a few years later, a much cheaper paperback
version is released. For example, right now I’m reading
Scott Turow’s novel Identical, the newest in a series of
excellent legal thrillers. I bought a hard cover copy of
this book about a month ago from Amazon.com for $28. I could have obtained from Amazon a
paperback copy for a much lower price. But I would have had to wait
until July of this year to get it. The cost of manufacturing
a hardcover copy of a book is not double the cost of
manufacturing a paperback copy. Rather, the sharp price difference
is a form of differential pricing. More specifically, this common marketing
practice, used by book publishers, combines two distinct price
discrimination schemes. The first is known as versioning,
just as was the case with respect to business class versus
coach airline tickets. Publishers expect price
insensitive consumers, like me, to buy the premium– in other words,
hardcover editions– and poorer consumers to prefer the economy model. The second strategy is sometimes known
as intertemporal price discrimination. The reason the publishers
do not ordinarily release the paperback
editions at the same time as the hardback editions is that they
don’t want buyers who care little about price but find paperbacks perfectly
acceptable to opt for paperbacks, so they wait until the market
consisting of wealthy consumers has been pretty well exhausted
through sales of hardbacks before putting the cheaper
versions on the shelves. The same composite strategy underlies
the so-called windowing system through which most Hollywood movies,
at least until recently, were marketed. Typically, a firm was first
licensed for performances in American movie theaters. Roughly three months later, it was
released both in foreign theaters and through pay per view channels. Three months after that, DVD copies
were made available for sale and rental. After three more months, it was released
to premium cable television channels. A year later, it was shown on television
in countries outside the United States, and then on network television
inside the United States. And finally, after
another three years, it was licensed to local
television syndicators. The price per viewing paid by
consumers in each of these windows was lower than in the preceding window. Again, we see here a
combination of versioning, which prompts consumers to
sort themselves by format, and intertemporal
discrimination, whereby the most price sensitive consumers
have to wait the longest. There are many more examples of price
discrimination by copyright owners, some of which we’ll encounter
later in the course. But there remains one more
condition essential to the strategy. To engage in effective
price discrimination, the copyright owner must be able
to prevent, or at least to limit, arbitrage. In other words, it must
be able to stop customers to whom it sells copies of its work
a low price from reselling them, either directly or with
the aid of intermediaries, to customers from the firm is
seeking to extract a high price. If it can’t do so, then
the copyright owner forfeits its high margin
customers, which is disastrous. This is where the right to control
distribution comes into play. What copyright owners would
most like would be a legal right to prevent altogether any
resales of copies of their works. Not just for the reason
we’ve already seen– namely, that such a right would increase
demand for their products– but also for the more subtle reason
that it would enhance their capacity to charge different customers
different prices without worrying that poor customers who bought
the copies for low prices would resell them to rich
customers for intermediate prices, and thus corrode the high end market. To summarize, for three
reasons, copyright owners would like strong rights to control
distribution of copies of their works. First, it would help them
to attack intermediaries who traffic in unauthorized copies. Second, it would enhance demand
for copies of their works. And third, it would
enhance their ability to engage in differential pricing. Opposed to these interests are not
only the obvious economic interest of consumers, in
reducing the amount they have to pay for access
to copyrighted works, but also three widely shared attitudes
hostile to the kind of control the copyright owners seek. First, copyright owners who seek to
prevent resales or lending of copies of their works are often seen as greedy. They’ve already been paid once when
a copy of their works was first sold. They’re not morally entitled to more. This sentiment is loosely tied to
the principle of proportionality that figures so prominently, as
we saw in lecture number two, in the fairness theory of copyright. Copyright owners, it is
widely thought, do not deserve to collect
more revenue than they receive from the first sale of copies. Exactly why not is unclear, but
this attitude is very common. Second, many people– and
many lawyers in particular– are skeptical of attempts to control
a thing after you’ve sold it. Viewing the same issue
from the other side, a widely shared attitude is that
once you have bought an object, you are entitled to do
with it whatever you want. Among the manifestations
of this sentiment in the law is the bias against
restraints on alienation of real property– in other
words, land– and the impediments I mentioned once before to
servitudes, longstanding restrictions on what people who buy
land can do on or with it. The same sentiment figures in the
debate over the Monsanto case, which was decided last year by the
United States Supreme Court, which concerned the right of a purchaser
of seeds that contain genes subject to patent protection
to grow crops from that seed, save some of the seeds
produced by those crops, and then use the saved
seed to grow more crops. The Monsanto case involved patent
and contract law, not copyright law, so the complex legal issues
at issue in that case are not pertinent to our subject here. But one of the general sentiments
expressed often in the public debate over that case is that the farmer,
Vernon Bowman, having bought the seed, should be able to do
what he wants with it. The same sentiment tilts against
the interests of copyright owners to control redistribution
of copies of their works. The third attitude is skepticism
concerning differential pricing. Now, this attitude is not universal. Some forms of differential
pricing– for example, the practice of US private
universities of charging students very different tuitions depending on the
financial resources of their families– are accepted without much grumpiness. But other forms, even trivial
in amount, can provoke rage. Here’s just one example. In the fall of 2000, Amazon.com began
to adjust the prices of a few DVDs, depending on the status
of the purchasers. It seems– although most Amazon
representatives denied this– that repeat customers, identifiable by
the Amazon cookies on their computers, were quoted higher prices for
films than were new customers. Presumably, Amazon thought the
new customers might shop around, and so offered them lower
prices to induce them to buy. When this practice was revealed
on an online DVD talk forum, the response of most
participants was fury. Quote, “I will never buy
another thing from those guys,” declared one consumer. Surveys confirm the prevalence of the
sentiment that underlies this reaction. For, example in 2005,
the Annenberg Center asked 1,500 adult internet
users some questions concerning their views of online
marketing practices. 87% disagreed with the
proposition that, quote, “It’s OK if an online
store I use charges different people different
prices for the same products during the same hour,” unquote. The way this attitude
bears on our subject today is that, to the extent copyright
owners seek increased control over the distribution of their works
in order to more effectively engage in differential pricing,
they face strong– though not universal– popular resistance. The tension between these competing
forces is managed to some degree by a set of interlocking statutory
provisions, to which we’ll now turn. The financial interests
of copyright owners are protected by Section 106(3)
and 602(a) of the US Statute. The first of these, as you can
see, gives copyright owners the exclusive right quote, “to
distribute copies or phonorecords of the copyrighted work to the public
by sale or other transfer of ownership, or by rental, lease, or lending.” 602(a) gives copyright
owners analogous rights to control importation and
exportation of copies of their works. Now, if these are the only
relevant statutory provisions, they would reflect total
victory by the copyright owners. But each of these provisions
is qualified by others. The right granted by 106(3)
is curtailed quite sharply by 109(a), which, as you can
see provides that, quote, “the owner of a particular copy
or phonorecord lawfully made under this title, or any other
person authorized by such owner, is entitled to sell or otherwise
dispose of the possession of that copy or phonorecord,” close quote. This provision is widely known
as the first sale doctrine. The basic idea underlying that doctrine
is that once a copyright owner has sold a copy, he cannot control
resales, gifts, et cetera. We’ll return to the precise meaning
of this provision in a minute. The right to prevent unauthorized
importation of copies is also qualified in various ways. Three specific exceptions
are listed on your screen. In addition, the way in
which 602(a) is phrased leaves open the possibility
that it is qualified, not just by these specific exemptions,
but also by the much broader first sale doctrine embodied in 109(a). How might this work? Well, you’ll notice that 602(a)
refers to unauthorized importation as, quote, “an infringement
of the exclusive right to distribute copies under
Section 106,” close quote. Section 106, in turn,
makes all the rights it grants to copyright owners quote,
“subject to sections 107 through 122,” close quote. Included in that list is 109(a),
which we’ve already seen. Through this chain of
connections, it’s possible that the first sale doctrine qualifies
the importation right, as well as the right to control domestic
distribution of copies of the work. We’ll return to this
textual nuance shortly. The first sale doctrine
embodied in section 109(a) is itself subject to exceptions. Specifically, to the
provisions of 109(b)(1)(a). The key language is, quote, “neither
the owner of a particular phonorecord, nor any person in possession of a
particular copy of a computer program, may, for the purposes of a direct
or indirect commercial advantage, dispose of that phonorecord or computer
program by rental, lease, or lending,” close quote. The primary purpose
of this provision was to shut down stores that,
at the time of its adoption, were renting audio CDs to
customers who would then copy the sound recordings on those CDs
to the hard drives of their computers, return the CDs to the
stores, and thereby avoid the cost of buying CDs of their own. As you can see, this exception is
subject to exceptions of its own. So graphically, the relationship
among these various provisions might be represented as follows–
106(3) and the primary portion of 602(a) advance the
interests of copyright owners. 109(a) and 602(a) (1-3)
establish limits on those rights, giving expression to the
sentiments opposed to the copyright owner’s interests. 109(b)(1)(a) reinstates
a portion of 106(3), with respect to some
categories of works. 109(b)(1)(b) tempers that reinstatement. As I hope you can see, from
the diagram on your screen, this combination of
statutory provisions seeks to manage the deep tension
between the competing forces that shape this field of the law. But the statute is not precise
enough to resolve all issues. The result is that there’s lots of
litigation along this fault line. I’ll describe two sets
of cases of this sort. Others will likely come
up in the discussions that accompany this lecture. The reason why the relationship between
109(a) and 602(a) is so important is that it determines the
power of copyright owners to engage in international
geographic price discrimination. In other words, to sell
copies of their works at high prices to customers in the
United States, and at lower prices to customers in poorer countries. In lecture number three, I mentioned
one among the many companies that engage in this practice, Omega watch. Here’s a brief reminder. Omega has obtained a US copyright
on the design shown on your screen. Omega engraves a version of this
logo on the underside of its watches. Omega sells those watches
all over the world. Typically, it sells them for
lower prices in poor countries than in the United States. Some years ago, Costco, a discount
retailer using an intermediary, purchased some of the watches that Omega
had sold cheaply outside the United States, imported them
into the United States, and then began selling
them in its US stores for prices lower than those used
by Omega’s authorized US dealers. Omega brought suit
against Costco, contending that the so-called parallel importation
violated Omega’s copyright in the logo. Now Costco had a
seemingly strong defense. In an earlier case, called
Quality King vs Lanza, the United States Supreme Court
held that 109(a) did indeed limit the reach of 602(a), with the
result that a copyright owner could not block importation of copies that he or
it had sold outside the United States. However, Quality King involved so-called
round trip parallel importation. In other words, a situation in which
the copies of the work in question were lawfully manufactured
in the United States, shipped overseas, sold at low
prices there, bought overseas by an arbitrageur, and then
imported by the arbitrageur back into the United States, where
they were sold for prices lower than those charged by
authorized US dealers. Omega, relying on a concurring opinion
by Justice Ginsburg in the Quality King case, pointed out that its
situation was different. The watches that bore
its copyrighted logo, and thus the copies of
the logos themselves, were not first made
in the United States. They were manufactured in Switzerland. As a result, Omega argued, 109(a)
did not bar its claim against Costco because 109(a) only applies, as
you can see, to copies quote, “lawfully made under this title.” The phrase, “this title,” refers
to title 17 of the US Code, namely, the US Copyright statute. Omega argued that, because the
watches were not made in the US, they were not made under the US statute,
and thus the provision did not apply. And thus Omega had a right, under
602, to block unauthorized importation of the watches bearing the
logo into the United States. It’s a clever argument, and it worked. The Court of Appeals for the
9th Circuit agreed with Omega, ruling that the first sale doctrine
applies to copies manufactured outside the United States only if
an authorized first sale occurs within the United States. Costco asked the Supreme Court
to review the case, which it did. But the Supreme Court was
unable to resolve the question. Four justices sided with
Costco, four with Omega, and Justice Kagan recused herself. The result is that the
lower court’s ruling stood. In other words, Omega won. But the main issue had not
been definitively resolved. Last year, in the Kirtsaeng
case, the Supreme Court was provided a second opportunity
to address this issue. The essential facts of that
case were straightforward. Supap Kirtsaeng was born in Thailand,
but educated in the United States. In 2007, he was studying for a
Ph.D. In mathematics at UCLA. Like many students, he had discovered
that copies of the English language textbooks could be purchased more
cheaply abroad than in the United States. Kirtsaeng decided to
capitalize on this fact in order to finance
his graduate education. He asked his relatives in Thailand to
buy there large quantities of textbooks of various sorts, and ship
them to him in California. He then resold the books to US
students for prices below the rates that the publishers were
charging in the United States– well above the prices in Thailand. He was thus able to repay his relatives
and keep a substantial amount of money for himself. This system enabled him, in short order,
to earn roughly a million dollars. Enough to finance his graduate
education and then some. At this point, you’re
probably wondering, wasn’t Kirtsaeng aware of the
legal risk he was running? After all, the copies of
the books he was importing bore clear warnings that
his conduct was unlawful, like the warning shown on your screen. He might have thought that
he, like many students, could avoid the wrath of the publishers
if he operated on a small scale. But did he think that he could sell
a million of books with impunity? Apparently, yes. In making that judgment, he relied
on advice from his relatives in Thailand, and upon the website
Google Answers, which assured him that he could legally resell the
foreign additions in the United States. In the short term, Kirtsaeng’s
reliance on that advice proved foolish. One of the publishers, John
Wiley, brought suit against him, contending that unauthorized
importation of the books constituted copyright infringement. Because all of the books in question
had been manufactured and first sold by Wiley’s wholly owned subsidiary
outside the United States, Wiley could and did point to
the Omega decision for support. Wiley prevailed in the
trial court, and then the Second Circuit Court of Appeals. Kirtsaeng asked the Supreme Court
to review the case, which agreed. The stakes were very high. Not just book publishers,
but the sellers and buyers of all copyrighted materials
distributed at different prices in different countries would
be affected by the outcome. As one might imagine,
the Supreme Court was deluged with briefs from organization
with stakes in one result or another. This legal battle was paralleled
by a struggle for dominance in the so-called court
of public opinion. Here’s one Foray into
that war, sponsored by the groups supporting Kirtsaeng. I think that once you’ve bought an
item, you should be able to do with it what you want. If you want to resell it,
that should be up to you. Because I paid money for
it, and gosh dang it, I should be able to do
whatever I want with it. I don’t own anything,
I’m just borrowing things from a company for a long time,
which seems to be outrageous. How can they tell you that
you don’t own what you buy? You used your own money to buy that. I think that would be totally
unfair, and against capitalism. I would say it would be
important to everybody, because that’s just the way of America. We buy, we sell, we trade. Country boundaries aren’t
what they once were. So, of course, you should be able
to buy and sell things, regardless of where you get them from. Of course, of course. Because most of the things I’ve got
on now are made from someplace else. I’d be very highly upset and
pissed off due to the simple fact that they’re trying to tell
me what to do with an item. It’ll affect everybody. Anybody that has a power to purchase
now will be impacted by this. For one thing, in college
books, it would be a killer. It’s already so expensive
to go to college that you should be able to use
whatever textbooks we want, wherever we got them, without
having the threat of the government telling us that that’s
not appropriate to use. It really hurts the consumers. I’m really about the consumers
because I’ m a consumer. That seems to add a whole new
level of administration that’s going to cost millions
and millions of dollars. And that’s just all that
money going into having to ask someone if you wants
to sell your own things? That seems silly. Just thinking of kind of the
gravity of what that would mean. It would piss me off a little bit. If I want to buy it, I’ll buy it. If I want to sell it, I’ll sell it. It’s my right. Perhaps moved in part by sentiments
like these, the Supreme Court, in the Kirtsaeng case–
somewhat to my surprise– reversed the ruling of
the lower court, holding that one way parallel importation,
like round trip parallel importation, is privileged by section 109. The heart of the court’s rationale
was that the statutory phrase quote, “lawfully made under
this title,” close quote, is not a geographic limitation. So long as copies of a work are made
with the authorization of the copyright holder, they are, in the
Supreme Court’s judgment, lawfully made under this title. The decision by the Supreme
Court is widely and rightly regarded as a win for at least some
consumers in the United States, who may, as a result of the ruling,
be able to obtain copyrighted materials more cheaply. On the other hand, the
decision disadvantages the residents of poor countries. The reason is that the sellers
of copyrighted materials are likely, in the future, to
find it somewhat harder to engage in international geographic
price discrimination. If so, how will they respond? One option, of course, will be to
reduce the prices of their goods in the United States. If their markets are poor countries
are large enough, they may do that. But it’s at least as likely that they
will increase the prices of their goods in poor countries, thus
disadvantaging consumers there. So returning to our
chart, the ruling in Omega has now been superseded by
the ruling in Kirtsaeng. The struggle over this issue
is probably not finished. Copyright owners, most of whom
are unhappy with this outcome, are already seeking to change the law,
either through an amendment of the US Copyright statute, or through
adoption of a treaty provision that would compel the United States and
all other members of the treaty, to amend the statute. Indeed, they’re likely to seek not
just a return to the Omega rule– which would forbid unauthorized one way
parallel importation– but elimination or qualification of the earlier ruling
in Quality King, which, as you recall, authorized round trip
parallel importation. Stay tuned. But for the time being,
here’s where the law stands. OK, that’s one of the zones of
ongoing litigation on this fault line. There’s another volcano. Autodesk makes CAD software. In other words, computer
aided design programs. Its main product is known as AutoCAD. It distributes AutoCAD in the old
fashioned way– namely, on CD-ROMs. Just as we saw with
Adobe, AutoCAD engages in explicit price discrimination. As you can see from this
slide, it sells the program to commercial users, presumably
architects, for very high prices. It then uses various
techniques to sell the program to other groups, such as
students, for much lower prices. One of those techniques is versioning. For example, as you can
see from this slide, a student edition– presumably a
de-tuned edition– of the program is available for less than
5% of the commercial version. Another technique that Autodesk employs
to facilitate price discrimination is contract. In other words, the company
seeks to impose upon customers various restrictions on
what they’re permitted to do with the copies of
the programs they buy. In the 1990s, those restrictions
included the following. First, Autodesk retains
title to all copies. Second, Autodesk grants the customer a
nonexclusive, non-transferable license to use the software. Third, the purchaser agrees to
refrain from various activities, including reverse
engineering the software, or using it outside
the Western hemisphere. Fourth, the purchaser agrees to
destroy copies of the software within 60 days of the time
the purchaser upgrades it. Among other things,
these restrictions sought to destroy the secondary
market for copies of AutoCAD. In 1999, a company called CTA
acquired, through legitimate channels, 10 copies of the 14th
release of AutoCAD. Some months later, CTA paid
a modest fee for an upgrade to obtain the 15th
release of the program. But instead of destroying its
copies of the 14th release, CTA sold them to a
man named Vernor, who, in turn, offered them for sale on eBay. Vernor was a pure intermediary. He signed no contract with Autodesk and
never installed or used the software. His only ambition was to
resell the copies at a profit. Autodesk got wind of
this plan, and sought to block the eBay sales
on the ground but they would violate Autodesk’s
exclusive right under 106(3) to distribute copies of the program. Vernor contended that the sales in
question were privileged under 109(a). So here’s how the competing
parties told their stories and described their legal implications. Vernor conceded that Autodesk
had a valid copyright in AutoCAD. Exercising its exclusive right under
106(1) to reproduce the software, Autodesk made a copy on a CD-ROM. Exercising its exclusive right under
106(3) to distribute that copy, Autodesk then sold it to CTA. CTA then exercised its
privilege, under 109(a), to resell the validly acquired copy
to Vernor, who, similarly, relied on 109(a) in seeking to resell the
copy through eBay to another buyer. As Vernor told the tale, every step in
this process, including the last one, was lawful. Autodesk, not surprisingly,
saw things differently. Steps one and two were just
as Vernor described them. But instead of selling
the copy to CTA, Autodesk contended that it merely leased the copy
to CTA in return for various promises. CTA then purported to sell to
Vernor a copy it did not know, because 109(a) only applies to, quote,
“the owner of a particular copy,” close quote. It did not shield this transaction. The purported resale thus violated
Autodesk’s distribution rights under 106(3). For the same reason, this last
transaction was not shielded by 109(a). Vernor was no more an owner
of the copy than was CTA. Thus, selling the copy on
eBay also violated 106(3). In sum, according to Autodesk, both this
transaction and this one were unlawful. The key issue in the case thus
became whether the relationship between Autodesk and CTA
had been a lease or a sale. Vernor, of course, preferred
the latter, Autodesk the former. In 2010, the Court of
Appeals for the Ninth Circuit ruled in Autodesk’s favor. Here’s the decisive portion
of the court’s opinion. We hold today that a software
user is a licensee, rather than an owner of a copy, where the copyright
owner, one, specifies that the user is granted a license, two,
significantly restricts the user’s ability to transfer the
software, and, three, imposes notable use restrictions. The way in which this decision
fits into the overall landscape of the law governing distribution
rights is indicated on the map. It’s reasonably well settled
that, using Nimmer’s typology, a transaction involving a
copy of a copyrighted work is covered by 109(a), and
thus lawful, if and only if four conditions are satisfied. A, a copy was lawfully manufactured
with the authorization of the copyright owner. B, the copy was transferred under
the copyright owner’s authority. C, the defendant qualifies as the
lawful owner of that particular copy. And D, the defendant thereupon
disposed of that particular copy, as opposed to, for
example, reproducing it. When software firms provide
customers copies of their programs in return for money,
requirements A and B are more or less
automatically satisfied. However, if the software
firm adds to the transaction enough conditions to make the deal
appear to be a lease of a copy, and thus not a sale, then
requirement c is not satisfied. And as a result, the customer does not
have a privilege to resell that copy. This option is highly beneficial
to software firms for two reasons. First, by suppressing
resales of copies, it enables the firms to sell
more original copies. Second, it helps the
firm suppress arbitrage of copies sold cheaply
to students and so forth, and thus protects the
firm’s primary markets, consisting of adult or commercial users. The result, as you might expect,
makes the software firms happy, but makes their customers
much less happy. Again, a highly technical
ruling, which locates this particular transaction on one
side rather than the other of the fault line, has large economic implications. This concludes our analysis
of the rights of distribution. After the break, we’ll turn
to the even more intricate set of rules governing public performances.

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