Exceptions Consume The Rule: DVD & The First Sale Doctrine

By: Mitchell D. Kamarck

Periodical: The Business Of Film

Date: March 1997

Over the course of the last two years a battle has waged over the continued viability of the 'First Sale Doctrine' in the United States, a doctrine largely rejected by Western European countries in 1992. (See, Directive 92/100/EEC, O.J. No. L 346/61.) The First Sale Doctrine entitles the owner of a particular copy of a work to dispose of that copy in any manner the owner chooses without violating the copyright owner's exclusive right to distribute one's work. Thus, the purchaser of a work may sell, lease, loan or give away the copyrighted work as he or she could do with any other piece of personal property. The rental component of the First Sale Doctrine gave birth to various rental industries; the most prominent being the rental market for motion pictures on videocassettes. Due to the political clout of the videocassette rental industry, the Clinton administration bowed to pressure and retreated from recommending abolishing the First Sale Doctrine altogether in The Report of the Working Group on Intellectual Property Rights ('The White Papers').

Though the rental industry won the battle over The White Papers, it will lose the war with the advent of DVD. Unlike the videocassette format, the DVD format can exploit existing exceptions to the First Sale Doctrine: the rental records and computer software rental exceptions. Both of these exceptions were created in response to growing record and software rental markets that prevented the copyright owner from realizing the full value of a copy of the work upon the first sale of that work.

In 1984, in response to the widespread practice of renting phonorecords for 24 to 72 hours for fees of 99¢ to $2.50 per disc, the United States Congress enacted the Record Rental Amendment of 1984:  "The direct link between the commercial rental of a phonorecord and the making of a copy of a record without permission of or compensation to the copyright owner is the economic and policy concern behind this legislation. The Subcommittee has found that the nexus of commercial record rental and duplication may directly and adversely affect the ability of copyright holders to exercise their reproduction and distribution rights under the Copyright Act."(See, H.R. Rep. No. 987, 98th Cong., 2nd Sess. 2 (1984).) The Record Rental Amendment of 1984 provided that any 'act or practice in the nature of rental lease, or lending' of a phonorecord, subject to certain limitations, constituted an act of copyright infringement. (17 U.S.C. §109(b)(1).)

Once again, in 1990, the development of technology necessitated legislative action as Congress realized that the copyright owners of computer programs were not realizing the full value of their programs in the first sale of such programs due to the ability to copy such programs. In 1990, Congress enacted the "Computer Software Rental Amendments Act," creating a rental prohibition for "computer programs" to counter the users ability to make perfect copies of the computer program. The Copyright Act defines a computer program as 'a set of statement or instructions to be used directly or indirectly in a computer in order to bring about a certain result.' (17 U.S.C. §101.) Moreover, Congress recognized that software manufacturers had been unable to develop adequate safeguards to prevent illegal copying. Thus, the copyright owners in computer programs retained the "rental" right in their programs even after the programs were sold to the public.

While acknowledging the necessity to curtail the First Sale Doctrine as it applied to computer programs, Congress also  recognized that such programs have become an integral part of nearly every electronic devise such as "automobiles, personal computers, telefaxes, charter airplanes, apartment houses and condominiums." Thus, Congress did not extend the rental right exception in the Computer Software Rental Amendments Act to computer programs embodied in machine or products "and which cannot be copied during the ordinary operations or use of the machine or product."  (17 U.S.C. §109(b)(1)(B)(i).) Likewise, the rental right exception does not extend to computer programs used or embodied "in connection with a limited purpose computer that is designed for playing video games and may be designed for other purposes."

Already certain CD-ROM games manufacturers have attempted to utilize these two exceptions to the First Sale Doctrine to try to circumvent the First Sale Doctrine by arguing that the CD  -- ROM games constitute computer programs subject to the computer software rental exception (see, 15 Video Business at 1, April 14, 1995) or contain protectible copyrighted music subject to the rental records exception. (See, 'CD Videos Could Revive First Sale Doctrine Fight,' Video Week, October 11, 1993). This position has found some support in the Acting Register of Copyrights' Report 'The Computer Software Rental Amendments Act of 1990: The Nonprofit Library Lending Exemption to the Rental Right,' where the Acting Register suggests that the Computer Software Rental Amendments Act applies to CD-ROM if the search and retrieval software on the CD  -- ROM "is essential to gain access to the material stored on a CD-ROM."   However, the CD-ROM game manufacturers position regarding the First Sale Doctrine has never

been tested in the courts.

As the motion picture industry begins to exploit the new DVD technology as the potential successor to videocassettes, the industry will certainly look to the current exceptions to the First Sale Doctrine in developing product. For instance, just as record companies have coupled their music CDs with multimedia CD  -- ROM technology, like Fiona Apple's latest CD, motion picture DVDs can be coupled with music soundtracks. Thus, when you purchase a DVD of Fox's Romeo and Juliet, you would have the option of watching the motion picture or listening to the soundtrack. Likewise, using embedded software, a DVD could permit the viewer to choose the format for viewing from a typical pan and scan to a letterbox format. Using either technique, the motion picture company will provide greater value to the consumer while creating works that fall easily within the two existing exceptions to the First Sale Doctrine. The tools are in place for the end of the First Sale Doctrine war.

Does the eventual victory by the motion picture industry mean the end to the videocassette or DVD rental market? No. The rental market has become an unexpected but essential source of revenue especially in titles that have no 'sell through' appeal. Thus, while a title like Independence Day could generate substantial revenues in the 'sell through' videocassette market as opposed to the rental market, most titles need the rental market to generate significant videocassette revenue. If a consumer is unwilling to pay $7.00 to see a film in a theater, she won't be willing to pay $20.00 to own the film on DVD, even if the soundtrack is included, but she may be willing to pay $3.00 to rent it. Thus, studios will continue to sell the majority of titles to the rental market at its traditionally higher prices and the sale will include a license for the rental of the DVD. However, for titles with 'sell through' potential, the studios will sell to the 'sell through' market at the lower consumer price with no permission for rental and sell a different rental version to the rental market at a higher price but with a license for rental. To easily differentiate between the 'sell through' and rental versions, the studios will utilize some sort of color coded scheme for the actual DVD.

Ultimately, not only will the exceptions consume the rule, but the rule itself will cease to exist because of international pressures. Under Gatt, the United States must abolish the First Sale Doctrine for 'cinematic works' if there is evidence of widespread consumer copying. Moreover, the Chair of the Clinton administration's Working Group on Intellectual Property Rights recognized that an advantage of abolishing the First Sale Doctrine was the pressure from European trading partners whose suppliers collect royalties and want the United States to adopt a similar system. Thus, while the videocassette rental industry fights for the continued viability of the First Sale Doctrine and the motion picture industry exploits the exceptions to that doctrine, the doctrine itself is facing its extinction due to worldwide pressures.

Mitchell D. Kamarck, of counsel to Rosenfeld, Meyer & Susman, LLP, in Beverly Hills, California, specializing in intellectual property and entertainment-related litigation. Mitchell also teaches a course entitled Television Law & Practice and Policy at California State University - Los Angeles. He can be reached by email at mkamarck@rmslaw. com.

Our Litigation Department specializes in civil litigation at all levels of the judiciary, and has wide-ranging experience in litigating business, commercial and entertainment-industry related matters. We have extensive experience in accounting and partnership, antitrust, and securities and corporate litigation. Additional areas of emphasis include copyright and intellectual property, real estate and products liability litigation as well as in the appellate practice.

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