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Redbox, Misuse, and Theseus’s Ship

· March 8, 2018

A U.S. district court in California recently issued a decision in Disney v. Redbox that solidifies the copyright misuse defense while avoiding controversy on digital first sale.

Disney sells “Combo Packs” that include a Blu-ray disc, a DVD, and a slip of paper with an alphanumeric code that allows a user to stream and download the same film as on the discs from websites such as RedeemDigitalMovies.com or DisneyMoviesAnywhere.com. Small print on the exterior of the Combo Pack box states that “Codes are not for sale or transfer.” Additionally, the websites contain terms of use that provide that Disney retains the ownership of the codes and authorizes only their conditional use. Further, the terms of use provide that by redeeming a code, a user represents that he is the owner of the physical product that accompanied the code at the time of purchase; and that redemption of a code sold separately from the physical product is prohibited.

Redbox, the movie rental firm, offers an on-demand service that allows users to stream or download films. Redbox attempted to enter into a vendor agreement with Disney similar to its agreements with other studios, but Disney refused. Redbox responded by purchasing Combo Packs, removing the slips of paper with the codes, and then selling the slips of paper through the Redbox kiosks. Disney sued Redbox, alleging that the resale of the codes: 1) breached the contract Redbox entered into with Disney when it purchased the Combo Pack; and 2) constituted contributory copyright infringement in that it induced customers to make unauthorized copies of Disney’s works. The district court denied Disney’s motion for preliminary injunction, finding that it was unlikely to succeed on the merits of its claims.

Breach of Contract

The court had little trouble concluding that the phrase “Codes are not for sale or transfer” printed on the outside of the Combo Pack did not constitute a shrink wrap contract. The court held that “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.” Hence, the phrase conveys “Disney’s preference about consumers’ future behavior, rather than the existence of a binding agreement.”

Copyright Misuse

Disney’s contributory copyright infringement claim is based on Redbox encouraging consumers to make unauthorized reproductions when they downloaded films in violation of the website licenses. The court agreed with Disney that the websites’ terms of use clearly permitted consumers to download films only if they also owned the physical discs originally sold with the code. Thus, “by buying a standalone Disney code from Redbox and then redeeming the code on the licensed download service portals, end users necessarily violate the terms of the licenses.”

However, the court rejected the copyright infringement claim on the ground that Disney was attempting to misuse its copyright. The court noted that although the Copyright Act grants the copyright owner the exclusive right to distribute copies of a work, that right in a particular copy is exhausted after the owners sells that copy. Accordingly, “once a copyright owner transfers title to a particular copy of a work, the transferor is powerless to stop the transferee from redistributing that copy as he chooses.”

The court states that “there can be no dispute…that Disney’s copyrights do not give it the power to prevent consumers from selling or otherwise transferring the Blu-ray discs and DVDs contained within the Combo Packs.” Nevertheless, that is exactly what the websites’ terms of use purport to do. Under these terms of use, “Combo Pack purchasers cannot access digital movie content, for which they have already paid, … unless they forego their statutorily-guaranteed right to distribute their physical copies of the same movie as they see fit.” The court found that “this improper leveraging of Disney’s copyright in the digital content to restrict secondary transfers of physical copies implicates and conflicts with public policy enshrined in the Copyright Act,” and therefore constituted copyright misuse.

The court noted that Disney argued that consumers can contract away their redistribution rights. The court responded that Redbox had never contracted away these rights because the “not for sale or transfer” phrase printed on the Combo Pack box did not form a binding contract.

The court also rejected Disney’s argument that the misuse doctrine applies only to efforts to use copyright to control non-copyrighted works, as in Omega v. Costco, discussed here, where Omega tried to use copyright to prevent the sale of non-copyrighted watches. The court replied that the misuse defense “is not so narrow as Disney would have it.” The court added that “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 court explained that “the pertinent inquiry … is not whether the digital download services’ restrictive license give Disney power over some entirely unrelated product, but whether those terms improperly grant Disney power beyond the scope of its copyright.”

First Sale Doctrine

Having adopted Redbox’s misuse defense, the court rejected Redbox’s contention that the first sale doctrine itself permitted the sale of the download code. Relying on the 2013 decision in Capitol Records v. ReDigi, the district court agreed with Disney that the first sale doctrine did not apply to downloads because downloading implicated the reproduction right, not only the distribution right. The court also cited with approval the policy arguments in the Copyright Office’s 2001 DMCA Section 104 Report against a digital first sale right. Additionally, the court found that in this case, a copy—a particular material object—cannot “be said to exist, let alone be transferred, prior to the time that a download code is redeemed and the copyrighted work is fixed onto the downloader’s physical hard drive.” Rather, Disney just sold “something akin to an option to create a physical copy at some point in the future.”

The Redbox court correctly rejected application of the first sale doctrine in this case where “no particular, fixed copy of a copyrighted work yet existed at the time Redbox purchased, or sold, a digital download code.” However, as previously discussed in DisCo, the oral argument before the Second Circuit in the ReDigi appeal indicated that the panel was troubled by the implications of the lower court’s decision. The district court in Redbox simply accepted the ReDigi lower court’s conclusion that “the new version was not the same ‘particular copy,’ but rather an unauthorized reproduction of a copyrighted work.” The Second Circuit panel in ReDigi, however, was less certain that the copy that appeared on ReDigi’s server was a new copy as opposed to a transferred copy.

The issue with which the Second Circuit is wrestling is a reprise of the ancient philosophical paradox of Theseus’s ship. Plutarch describes it as follows:

The ship wherein Theseus and the youth of Athens returned from Crete had thirty oars, and was preserved by the Athenians down even to the time of Demetrius Phalereus, for they took away the old planks as they decayed, putting in new and stronger timber in their places, in so much that this ship became a standing example among the philosophers, for the logical question of things that grow; one side holding that the ship remained the same, and the other contending that it was not the same.

Similar puzzles have involved John Locke’s grandfather’s axe, where the handle and axe head have been replaced over time. Is it still his grandfather’s axe?

Good luck to the Second Circuit as it wades through this question. Fortunately, the Redbox court could more easily dismiss the first sale argument on the ground that there wasn’t a “particular copy” at the outset.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.