The decision in Disney Enterprises, Inc. v. Redbox Automated Retail, LLC was, to me, unexpected. Who would have thought that Redbox would win a case about selling codes for digital download of Disney movies?
The way Disney elected to distribute the codes was key to the outcome, so I don’t know how much ripple effect the decision will have (or whether the district court’s reasoning will even survive appeal). Disney bundled DVDs, Blue-Ray discs, and a code that a user could redeem for a digital download, all for the same movie. The packaging for this “combo pack” made the declarative statement on the outside “Codes are not for sale or transfer.”
The codes could be redeemed through two websites. The more liberal of the two websites’ “terms and conditions” prohibited the sale or transfer of the codes apart from the physical copy and stated that, by redeeming the code, the person redeeming it confirmed they were the owner of the physical products that accompanied the code. There was presumably no problem with contract formation when a user used the code to download the movie.
Redbox would buy the bundles and break them up, packaging the pieces of paper containing the code and selling them in their kiosks. Disney sued for breach of contract, the contract being the statement on the box prohibiting sale or transfer of the codes, and for contributory infringement, with the purchasers of the codes from Redbox in the role of direct infringers.
As to breach of contract, there was no contract:
Although Disney seeks to analogize its Combo Pack packaging and language to the packaging and terms in Lexmark, the comparison is inapt. The thorough box-top license language in Lexmark not only provided consumers with specific notice of the existence of a license and explicitly stated that opening the package would constitute acceptance, but also set forth the full terms of the agreement, including the nature of the consideration provided, and described a post-purchase mechanism for rejecting the license. Here, in contrast, Disney relies solely upon the phrase “Codes are not for sale or transfer” to carry all of that weight. Unlike the box-top language in Lexmark, Disney’s phrase does not identify the existence of a license offer in the first instance, let alone identify the nature of any consideration, specify any means of acceptance, or indicate that the consumer’s decision to open the box will constitute assent. In the absence of any such indications that an offer was being made, Redbox’s silence cannot reasonably be interpreted as assent to a restrictive license.
Indeed, the presence of other, similarly assertive but unquestionably non-binding language on the Combo Pack boxes casts further doubt upon the argument that the phrase “Not For Sale or Transfer” communicates the terms or existence of a valid offer. The packaging also states, for example, that “This product … cannot be resold or rented individually.” This prescription is demonstrably false, at least insofar as it pertains to the Blu-ray disc and DVD portions of the Combo Pack. The Copyright Act explicitly provides that the owner of a particular copy “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” 17 U.S.C. § 109(a). Thus, the clearly unenforceable “cannot be resold individually” language conveys nothing so much as Disney’s preference about consumers’ future behavior, rather than the existence of a binding agreement. At this stage, it appears that the accompanying “Not For Sale or Transfer” language plays a similar role.
I wonder, when advising the packaging group about what needed to be on the outside of the box, whether I would have been so scrupulous about ensuring that an enforceable contract was formed. Real estate on packaging is precious, and perhaps I have become too complacent with the concept that contracts are enforceable on the thinnest thread – after all, with just a hyperlinked “Terms and Conditions” you may have given away your copyright. But we know what to do, now, to create an enforceable contract on the outside of the packaging, because the court has given us the roadmap.
But the contributory infringement claim seems pretty solid, right? The license to download was conditioned on possession of the physical copies, which the owner of the code purchased from Redbox didn’t have. And Redbox made money off of selling a code that could ONLY be used in an infringing way, so that seems like a slam dunk for contributory infringement.
But instead, the court finds that this provision of the websites’ terms and conditions is a copyright misuse. First, the court rejected Disney’s argument that a copyright misuse is only where the copyright owner tries to extend the exclusivity of copyright to an unrelated product, like granting a copyright license only if the grantee agrees not to use a competing product, or using a barely perceptible copyrighted image on a watch so there would be a copyright infringement claim against parallel imports:
The copyright misuse defense, however, is not so narrow as Disney would have it. Indeed, copyright misuse need not even be grounded in anti-competitive behavior, and extends to any situation implicating “the public policy embodied in the grant of a copyright.” The pertinent inquiry, then, is not whether the digital download services’ restrictive license terms give Disney power over some entirely unrelated product, but whether those terms improperly grant Disney power beyond the scope of its copyright.
The copyright misuse in this case was that the agreement prevented the owner of the discs from exercising their right in § 109(a) to dispose of the hard copies in any way they chose:
RedeemDigitalMovies requires redeemers to represent that they are currently “the owner of the physical product that accompanied the digital code at the time of purchase,” while the Movies Anywhere terms of use only allow registered members to “enter authorized … Copy codes from a Digital Copy enabled … physical product that is owned by [that member].” Thus, Combo Pack purchasers cannot access digital movie content, for which they have already paid, without exceeding the scope of the license agreement unless they forego their statutorily-guaranteed right to distribute their physical copies of that same movie as they see fit. This improper leveraging of Disney’s copyright in the digital content to restrict secondary transfers of physical copies directly implicates and conflicts with public policy enshrined in the Copyright Act, and constitutes copyright misuse.
There is an important footnote: “At argument, Disney suggested that consumers can contract away their redistribution rights. To the extent Disney suggests that that occurred here, that argument has no merit, for the reasons described in the breach of contract discussion, above.” It’s not clear to me how the court thought it had previously addressed this point, but it’s a pretty important one. By saying that non-transferability of the code impairs the transferability of the discs, the court is saying that the statutory provision for exhaustion trumps the right to freely contract.
When can parties contract around user rights in the Copyright Act and when may they not do so? I have no idea. We know from Bowers v. Baystate Techs., 320 F.3d 1317, 1326 (Fed. Cir. 2003) that private parties can contractually waive their right to reverse engineer software, a type of use that is a fair use of copyright. What is it that is qualitatively different with exhaustion that prevents Disney from contracting it away? Or was it simply poor contract drafting, not writing the limitation as a condition on the grant of the license that allows the creation of the local copy by the user?
It’s more surprising when you consider that, from a copyright perspective, the three versions, DVD, Blue-Ray and digital, are all the same copyrighted work, simply on different media, which I’ll call a meta-copy. There are valid business reasons for offering three ways to view the same work rather than selling the three different versions separately. Is it wrong of Disney to want to ensure that there is only one user for a single meta-copy?
I predict a reversal on appeal.
Disney Enters., Inc. v. RedBox Automated Retail, LLC, No. CV 17-08655 (AGRx), (C.D. Cal. Feb. 20, 2018).
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