Digital First Sale Doctrine Ante Portas - Exhaustion in the Online Environment

Author:Péter Mezei
Position:Associate Professor, Institute of Comparative Law, Faculty of Law, University of Szeged, Hungary
Pages:23-72
SUMMARY

The purpose of the article is to provide first a doctrinal summary of the concept, rules and policy of exhaustion, first, on the international and EU level, and, later, under the law of the United States. Based upon this introduction, the paper turns to the analysis of the doctrine by the pioneer court decisions handed over in the UsedSoft, ReDigi, the German e-book/audio book cases, and the... (see full summary)

 
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Digital First Sale Doctrine Ante Portas
2015
23
1
Digital First Sale Doctrine Ante Portas
Exhaustion in the Online Environment
by Peter Mezei* Associate Professor, Institute of Comparative Law, Faculty of Law, University of Szeged,
Hungary; Adjunct Professor (dosentti) of the University of Turku, Faculty of Law, Finland.
© 2015 Peter Mezei
Everybody may disseminate this ar ticle by electroni c means and make it available for downlo ad under the terms and
conditions of the Digita l Peer Publishing Licence (DPPL). A copy of the license text may be obtaine d at http://nbn-resolving.
de/urn:nbn:de:0009-dppl-v3-en8 .
Recommended citation: Pete r Mezei, Digital First Sale Doc trine Ante Portas: Exhaust ion in the Online Environment, 6 (2015)
JIPITEC 23, para 1.
Keywords: Digital Exhaustion; Umbrella Solution; Usedsoft; ReDigi; WCT/WPPT; CJEU
judges of the referred cases are not the final stop in
the discussion. The UsedSoft preliminary ruling and
the subsequent German domestic decisions highlight
a special treatment for computer programs. On the
other hand, the refusal of digital exhaustion in the
ReDigi and the audio book/e-book cases might be in
accordance with the present wording of copyright law;
however, they do not necessarily reflect the proper
trends of our ages. The paper takes the position that
the need for digital exhaustion is constantly growing
in society and amongst businesses. Indeed, there are
reasonable arguments in favour of equalizing the
resale of works sold in tangible and intangible format.
Consequently, the paper urges the reconsideration of
the norms on exhaustion on the international and EU
level.
Abstract: The purpose of the article is to
provide first a doctrinal summary of the concept, rules
and policy of exhaustion, first, on the international
and EU level, and, later, under the law of the United
States. Based upon this introduction, the paper turns
to the analysis of the doctrine by the pioneer court
decisions handed over in the UsedSoft, ReDigi, the
German e-book/audio book cases, and the pending
Tom Kabinet case from the Netherlands. Questions
related to the licence versus sale dichotomy; the
so-called umbrella solution; the “new copy theory”,
migration of digital copies via the internet; the
forward-and-delete technology; the issue of lex
specialis and the theory of functional equivalence are
covered later on. The author of the present article
stresses that the answers given by the respective
A. Introduction
1 National legislators were led by their own domestic
interests when creating the original set of their
copyright systems.
1
It has been, however, universally
accepted that the interests of the right holders shall
be limited in some ways. It turned out to be necessary
to balance the interests of the right holders and the
society (consumers), further – and most recently –
the intermediaries (internet access providers, search
engines, hosting service providers, aggregators etc.),
in order to guarantee the effective operation of this
territory of law and businesses related thereto.2
2
The exclusivity of rights has been broken by
several legal instruments. Such an example is the
territoriality;3 the copyright term;4 the limits of
alienability of economic rights;5 the statutory6 and
compulsory licences;7 free use8 or fair use9/fair
dealing.10 Further, several types of works are per se
exempted from copyright protection.11 Exhaustion
belongs to the above list of limitations.
3 One of the exclusive rights granted to right holders
is the right of distribution. Under distribution, we
traditionally mean the transfer of the ownership of
the original work or its copy to the acquirer through
2015
Peter Mezei
24
1
sale, gift or barter.
12
This exclusivity is broken by the
doctrine of exhaustion that was developed parallel in
the U.S. American and German copyright law around
the turn of the 19th and 20th centuries.13
4
Under the theory of exhaustion, the right holders
shall tolerate any future even for-prot
distribution of the original or the copy of their
protected subject matter, where the said content
was lawfully put into circulation with their consent
(that is, by them or by any other authorized
person14) through sale or any other form of transfer
of ownership.15 Consequently, since the doctrine of
exhaustion excludes the right holder’s control of
the downstream commerce, everyone might freely
dispose of the property of their unused books, CDs,
paintings, etc. This legal instrument serves as the
legal basis of second-hand stores, including online
portals like eBay. Furthermore – in some countries,
like in the United States of America – this doctrine
allows for the public lending by public libraries.
5
Without the principle of exhaustion, the right
holders would be allowed to control each and every
distribution of each and every physical object
incorporating their copyright protected expression,
and that could easily lead to anticompetitive
results.16 Such a monopoly shall not be acceptable
for several reasons. First, copyright statutes
have been heavily inuenced by the idea of the
termination of monopolies granted to publishers.
In order to guarantee this goal, both exclusive rights
and their limitations have been articially set by
law and their balance is constantly double-checked
by legislators, judges and academia. Furthermore,
copyrights do not amount to property over physical
goods.17 Indeed, lawfully acquired goods shall be
unconditionally controlled by their owners,
18
unlike
intangible copyrights existing in relation to these
goods (data carriers). The U.S. Copyright Act phrases
that perfectly: “[o]wnership of a copyright, or of any
of the exclusive rights under a copyright, is distinct
from ownership of any material object in which the
work is embodied. Transfer of ownership of any
material object, including the copy or phonorecord
in which the work is rst xed, does not in and of
itself convey any rights in the copyrighted work
embodied in the object; nor, in the absence of an
agreement, does transfer of ownership of a copyright
or of any exclusive rights under a copyright convey
property rights in any material object.”19 Exhaustion
thus aims to balance property rights over goods and
copyrights over intellectual creations;20 and ultimately
the free ow of goods.21
6
Since exhaustion is solely a limitation of the
distribution right, the right holder deserves fair
remuneration for any other use that is not bound
to the transfer of any xed copy or that is provided
as a service.22 For example, users shall pay for each
and every performance, display, broadcasting,
transmission or making available to the public, as
well as rental or lending of protected subject matter.
In the above instances, exhaustion is excluded since
no copy was sold, and no ownership was transferred
to the user after the rst lawful use of the said subject
matter. Similarly, the application of exhaustion is
limited by the fact that the use of any tangible copy is
bound to the physical location of that piece of work,
unlike any use offered as a service. To use a simple
example: a book might be read by one person at a
given time. However, the performance of the literary
work might be broadcasted to multiple people at the
same time and may be repeated at any time.23
7 It is cliché, but it is a matter of fact that legislators
and right holders face signicant challenges due
to the constant development of technology.24
During the 20th century, movie theatres offered
a brand new kind of experience for the people.25
Jukeboxes and similar machines allowed for a great
variety of public consumption of music.26 Radio and
television, as well as other devices (like the portable
walkman for the music industry,27 and video tape
recorders for the video industry
28
), revolutionized
the consumption of copyrighted contents in private
sphere. Photocopying and photographing have come
into general use, as well.
29
The standardization of
digital technologies (for example Compact Disc
[1983] and mp3 le format [1995]), especially
the spread of personal computers and internet
connection, was only the cherry on the cake. As
a reaction to the above developments, legislators
continuously expanded the scope of rights granted
to right holders worldwide.
8
Another event that determined the latest changes of
copyright law was the accelerating globalization. It
consequently led to the strengthening of the cross-
border nature of uses and the internationalization
of copyright law. One of the key facilitators of such
a phenomenon was the internet. Therefore, global
solutions are needed to meet the challenges of
copyright law.30 Developed countries or economic
communities, like the United States or the
European Union, have taken necessary steps to
manage the highest level of protection and rules of
enforcement,31 as it is most recently mirrored by the
ACTA negotiations.32
9 The history of the internet is coloured by hundreds
of vital debates that are due to the unauthorized use
of copyrighted contents. The principle of exhaustion
is no exception. The launch of online stores offering
used software, sound recordings, audio books or
e-books has raised new and pressing questions.
The most important one is whether the doctrine of
exhaustion that was originally developed to cover the
resale of physical/tangible objects shall be applicable to
contents sold in digital format via the internet.
Digital First Sale Doctrine Ante Portas
2015
25
1
10
The present article aims to introduce the
relevant rules on and policies of exhaustion on
the international and EU level, and furthermore,
under the law of the United States (Part B). After
the normative frames of the doctrine, the pioneer
court decisions handed over in the UsedSoft, ReDigi,
the German e-book/audio book cases, further the
pending Tom Kabinet case from the Netherlands are
discussed (Part C). In Part D these court decisions will
be analysed through four distinct questions, with a
special focus on the applicability of the exhaustion
or rst-sale doctrine in the online world. These
questions are related, First, to the licence versus
sale dichotomy; second, to the so-called umbrella
solution; third, to the “new copy theory”, migration
of digital copies via the internet, forward-and-delete
technology; and nally, to the issue of lex specialis
and the theory of functional equivalence.
11
The author of the present article stresses that the
answers given by the respective judges of the above
cases are not the nal stops in the discussion. The
UsedSoft preliminary ruling and the subsequent
German domestic decisions highlight a special
treatment for computer programs but no other
subject matter. On the other hand, the refusal
of digital exhaustion in the ReDigi and the audio
book/e-book cases might be in accordance with the
present wording of copyright law; however, they
do not necessarily reect the present-day trends.
The paper takes the position that the need for
digital exhaustion is constantly growing in today’s
society and amongst businesses, and that there are
reasonable arguments in favour of equalizing the
resale of works sold in tangible and intangible format.
Consequently, the paper urges the reconsideration of
the norms on exhaustion both on the international
and EU level. These arguments – together with the
counterarguments – will be collected and introduced
in Part E.
12
As such, the above structure makes it clear that
two different concepts wrestle with each other.
The traditional, positivist (pro-copyright) vision
calls for the exclusion of the exhaustion principle
in the digital environment. On the other hand, a
constructive realistic notion urges the adoption of
a more exible treatment of the doctrine for the
sake of users’ rights and the development of online
economies. The present paper starts with the rst
concept and ends up with the second.
B. The theory of exhaustion/
first sale doctrine
I. International copyright law
13
The rst-ever international IP treaty that touched on
the copyright aspects of exhaustion was the TRIPS
Agreement of 1994. 33 Although the “Chairman’s
Text” of 1991 still recommended for the introduction
of both a general right of distribution and the
principle of exhaustion related thereto,34 these
plans failed after a lengthy preparatory work.35 The
nal text of the TRIPS Agreement referred to the
principle from a neutral aspect when it stressed that
“[f]or the purposes of dispute settlement under this
Agreement, subject to the provisions of Articles 3
and 4 nothing in this Agreement shall be used to
address the issue of the exhaustion of intellectual
property rights.”
36
Under these rules, all that the
signatories have to keep in mind is that they shall
apply the principle of national treatment and the
most-favoured-nation treatment when designating
the reach of exhaustion; furthermore, that any
dispute related to a domestic regulation shall not
be the subject to a dispute settlement procedure
under the WTO law. The latter does not forbid,
however, the initiation of legal proceedings in front
of domestic courts.37
14
The limited solution of the TRIPS Agreement
is partially due to the fact that the agreement
was nally concluded without any substantive
provision on a distinct right of distribution.38 On
the other hand, by 1994, only a few countries had
a settled regulation and case law on exhaustion/
rst sale doctrine. These countries set the frames
of the principle quite differently. Countries like
the Netherlands39 or Switzerland40 codied the
doctrine of international exhaustion. Likewise,
several developed countries, for example Australia
or New Zealand,41 and developing nations were
interested in a broad reach of the principle.42 Others,
like the United States43 or Germany44, advocated
for domestic/national exhaustion. The European
Economic Community accepted two directives
before 1994 that envisaged a Community-wide,
regional exhaustion.45 The contracting parties
opined differently on the principle, and the nal
text turned out to be the best compromise for the
signatories. Therefore the TRIPS Agreement did not
introduce any substantive obligation and provided
absolute freedom to the contracting parties to decide
whether they are willing to introduce a principle
of exhaustion, and if yes, whether it should have a
domestic, regional or international reach.46
15 The two Internet treaties of the World Intellectual
Property Organization (WIPO) from 1996 already
included positive norms on exhaustion.47 This is

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