UMG Recordings, Inc. v. Troy Augusto, et al.

The Central District of California granted summary judgment in UMG Recordings, Inc. v. Troy Augusto, No. CV 07-03106. (SJO), regarding the legality of reselling promo CDs. Mr. Augusto acquired promo CDs and resold them on eBay, which Universal alleged infringed their copyright due to the following language placed on the CDs:

This CD is the property of the record company and is licensed to the intended receipient 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.

Augusto argued that his resale of the CDs was protected under the first sale doctrine. The court agreed.

Finally, a voice of reason in the wilderness. Thank you Judge Otero for a very well written opinion.

Here is the full opinion (pdf).

Universal Music Group v. Augusto – Complaint and Answer with Counterclaim

UMG v. Augusto, Case No. 2:07-cv-3106 SJO (AJWx) in the U.S. District Court for the Central District of California, Western Division. Pending.

Some background – Augusto collects up all those promo only CDs that record labels send out, which are typically stamped “Promotional Only – Not For Sale” or similar language, and sells them on eBay. These have been a traditional tool for labels to promote their artists since they started sending out 45s stamped in this way in the 1950s. Univeral doesn’t like the fact Augusto is doing this and sue claiming that the first sale doctrine (see 17 U.S.C. § 109(a)) does not apply to these products because they have that special stamp on them. UMG’s Promo CD language states:

This CD is the property of the record company and is licensed for 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.

UMG attaches this language to the CD when they, literally, send one to every record store, distributor, radio station, reviewer, and promoter in the nation. I still have cases full of Promo CDs from my days in the music industry (note: I have a record label, 2 studios, and music publishing house lined up as legal clients starting soon, so the onslaught of really awful free CDs may commence again soon). UMG claims the that they never give up ownership of the CD, but merely license it to the intended recipient for use. As such, no first sale and the first sale doctrine does not supply a defense. It is not a new argument, but one rarely tested – Does the marking of the CDs as Promo Only create an agreement supplanting § 109(a)? In essence, UMG seeks a way to control content after they ship it out.

This is nothing new, Universal Republic is trying to do the same thing with import CDs at the moment, under copyright law’s right of distribution.

I think that if there was an return address imprinted on each CD, there would be an argument that UMG was only only giving a provisional license to the use of the CD. Taken as a whole, the transaction currently looks like what it is – a giveaway with the person in possession having ownership of the media. UMG is likely to lose this one, so long as the EFF can keep their political views out of the litigation (I feel that they are good at grassroots organizing, but tend to be ultimately harmful to online rights by being extreme in their views and, thereby, losing suits they should have handily won. See here and here.)

On the issue of first sale, Tamera H. Bennett asks Who Pays the Songwriter Under First Sale Defense?

Here is my question for the day that has yet to be addressed: Who pays the artist, producer, music publisher/songwriter and yes even the record label when “promo only” copies are sold? [when the artist contract contains language like:] . . . no such royalty shall be payable with respect to promotional Phonorecords . . .

Answer: Ummm, no one pays the songwriter. The “first sale” was a giveaway, so everyone loses out. The songwriter, artist, producer, and label all trade these free copies in exchange for building interest in a product and therefore, hopefully, sell more of the product. That is the trade. And, because the number of promo copies sent out is a relatively stable number, if the product sucks then the Promo Only CDs may end up being a large percentage of existing pressings. But if the product is a winner, the Promo Only CDs will represent a miniscule amount of total pressings. The fact that having these promo copies on the resale market is not already baked into their calculations is the real disturbing part in all of this. However, I have a belief that promo copies are accounted for these in their financial projections but the labels are looking for a way to alter the underlying assumptions to help shore up declining margins from CD sales.

Merle Norman Cosmetics, Inc. v. Labarbere: Order Denying Motion to Dismiss Order Denying Motion to Stay Discovery

Evan over at InternetCases.com points to the case of Merle Norman Cosmetics v. Labarbera, summing up the case thusly:

Labarbera moved to dismiss under FRCP 12(b)(6), arguing that the “first sale doctrine” protected her right to resell products she had lawfully acquired in the stream of commerce. Merle Norman responded that the first sale doctrine should not apply, as the doctrine only protects defendants for claims of intellectual property infringement.

It was an interesting argument, but one doomed from the start. In the decision the judge puts the smackdown on some of the creative arguments… reprinted here in its entirety.

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

Magistrate Judge Snow

CASE NO. 07-60811-CV-COHN

MERLE NORMAN COSMETICS, INC., a California corporation, Plaintiff,  vs. JOYCE LABARBERA and JANE DOE, Defendants.

ORDER DENYING MOTION TO DISMISS ORDER DENYING MOTION TO STAY DISCOVERY

THIS CAUSE is before the Court upon Defendant Labarbera’s Motion to Dismiss [DE 16] and Motion to Stay Discovery [DE 32]. The Court has carefully considered the motions, Plaintiff’s memorandum regarding the First Sale Doctrine, and Defendant Labarbera’s Response to the Memorandum (effectively a reply memorandum), and is otherwise fully advised in the premises. The Motion to Dismiss became ripe on July 25, 2007. [fn1]

[fn1] As the Motion to Stay is based upon the pendency of the Motion to Dismiss, the Court need not wait for Defendant to respond to the Motion to Stay.


I. BACKGROUND

Plaintiff Merle Norman, Inc. (“Plaintiff”) filed this diversity action against Defendants Joyce Labarbera and “Jane Doe” for various state law claims. As to Defendant Labarbera, Plaintiff’s claims are for tortious interference with contract, civil conspiracy, and deceptive and unfair trade practices pursuant to Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”). [fn2] [fn2] For a complete background of the facts giving rise to this dispute, please refer to the Court’s Order Denying Motion for Preliminary Injunction [DE 21].

Plaintiff sells cosmetics through franchised “studios.” Its franchise agreements with studio owners ban resales of its products via the internet. In this case, Plaintiff alleges that Defendant Labarbera obtained Merle Norman cosmetics from a studio owner (“Jane Doe”) and then resold the products via Ebay over the Internet. At the preliminary injunction hearing held in this case, Defendant Labarbera raised the defense of the “First Sale Doctrine,” as a complete defense to all of the claims in this case. After taking evidence and denying the preliminary injunction motion, the Court directed Plaintiff to respond in writing to Defendant’s motion to dismiss pursuant to the First Sale Doctrine. Labarbera does not deny that she made those sales. Rather, the disputed factual issue is whether Labarbera obtained the Merle Norman items she sold over the Internet from a studio owner, or from some other source. In denying the motion for preliminary injunction, the Court determined that Plaintiff had not met the stringent burden for obtaining a preliminary injunction. However, for purposes of consideration of the motion to dismiss, however, the Court assumes that the facts alleged in the Complaint are true.

II. DISCUSSION

A. Motion to Dismiss Standard

Defendant Labarbera argues that the First Sale Doctrine requires dismissal Plaintiff’s claim for failure to state a claim. Until the recent Supreme Court decision in Bell Atlantic Corp. v. Twombly, 550 U.S. —, 127 S.Ct. 1955 (2007), courts routinely followed the rule that, “a complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff could prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Marsh v. Butler County, 268 F.3d 1014, 1022 (11th Cir. 2001). However, pursuant to Twombly, to survive a motion to dismiss, a complaint must now contain factual allegations which are “enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true.” 127 S. Ct. at 1965. “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 1964-65. Taking the facts as true, a court may grant a motion to dismiss when, “on the basis of a dispositive issue of law, no construction of the factual allegations will support the cause of action.” Marshall Cty. Bd. of Educ. v. Marshall Cty. Gas Dist., 992 F.2d 1171, 1174 (11th Cir. 1993).

B. First Sale Doctrine

Defendant asserts that the “First Sale Doctrine,” which is part of federal copyright law, protects her right to sell products lawfully acquired in the stream of commerce. [fn3] Allison v. Vintage Sports Plaques, 136 F.3d 1443, 1447-48 (11th Cir. 1998). In Allison, the Eleventh Circuit extended the doctrine to a tort action, specifically the right to publicity. Id. In this case, the Plaintiff conceded at the preliminary injunction hearing that if Labarbera’s source is a flea market, than she can make the sales in question without committing a tort. However, as discussed above, Plaintiff asserts that if Labarbera is working in conjunction with a studio owner to violate the Merle Norman franchise agreement, then the First Sale Doctrine does not protect such tortious acts, as the only intellectual property rights are protected. Defendant asserts that the First Sale Doctrine is not so limited.

[fn3] The second legal issue initially raised by Labarbera concerns the jurisdictional requirement of an amount in controversy greater than $75,000. In its Order denying the motion for preliminary injunction, the Court denied the motion to dismiss as to this jurisdictional argument. Court’s Order Denying Motion for Preliminary Injunction at pp. 8-9 [DE 21].

There has been no further Eleventh Circuit decision discussing the First Sale Doctrine. However, another judge within the Southern District of Florida stated that: “Courts have limited this doctrine to cases where there is no other conduct of infringement or where the defendant is not culpable for anything more than mere reselling of a product.” Bulova Corp. v. Bulova Do Brasil Com. Rep. Imp. & Exp. Ltd., 144 F.Supp.2d 1329, 1331 -1332 (S.D.Fla. 2001). Plaintiff argues that if Labarbera is reselling products obtained from an authorized distributor who is prohibited from selling these products over the Internet, then she is tortiously interfering with the Merle Norman-distributor contract and/or conspiring to violate that contract, and therefore not merely reselling goods.

In a fairly recent decision involving similar facts, the United States Court of Appeals for the Tenth Circuit discussed the First Sale Doctrine in the context of trademark infringement claims under the Lanham Act, but did not apply the Doctrine to tortious interference claims nor civil conspiracy claims. Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1235-38, 1241 (10th Cir. 2006). While Defendant Labarbera argues that her conduct is no where near as egregious as the defendants in Australian Gold, the point at this early stage of this litigation is that the First Sale Doctrine has not been accepted as a complete defense to tortious interference and civil conspiracy claims. Therefore, the Court will deny the motion to dismiss in its entirety. [fn4]

[fn4] The Court also notes that Defendant Labarbera misunderstands the nature of Plaintiff’s claims. It is not automatically true that one cannot be liable to another just because there is no contract governing the parties’ conduct to one another. Plaintiff’s claims are tort claims for acts that Florida common law (or statutory law) has recognized are actionable. Plaintiff, of course, has to prove the elements of a claim to ultimately win the case.

III. CONCLUSION

Accordingly, it is ORDERED AND ADJUDGED as follows:

1. Defendant Labarbera’s Motion to Dismiss [DE 16] is hereby DENIED;

2. As the Motion to Dismiss is denied, there is no basis to stay discovery, so Defendant’s Motion to Stay Discovery [DE 32] is hereby DENIED;

DONE AND ORDERED in Chambers at Fort Lauderdale, Broward County, Florida, this 3rd day of August, 2007.
 

Follow

Get every new post delivered to your Inbox.