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Summary:

How should the first sale doctrine apply to digital goods? Members of Congress came to New York to hear the opinions of publishing executives, librarians and others.

kids reading on ipad ebooks
photo: Scholastic

People can be surprised to discover that they don’t actually own the digital books and songs they buy, but that they instead rent them from large companies like Amazon and Apple. In response, Congress is asking whether copyright law should be changed to ensure people can resell or lend out their digital goods.

This week, the House Judiciary Committee heard testimony from publishing and technology executives as well as public interest groups over whether the government needs to update a long-standing rule known as “first sale” that lets people do what they want with works they lawfully purchased.

The short answer, based on this week’s hearing, appears to be no as members of Congress and those testifying appeared skeptical that people should have the same property rights in digital goods as they do in physical ones. But some suggested that it might be time for companies to do a better job of explaining to consumers about what they are allowed to do with the books and music they “buy.”

A centuries-old property right declines with digital

The “first sale doctrine” is a technical term, but all of us know what it is in practice. It is the right to sell, lend or give away used things without getting the permission of the copyright holder. First sale is what lets libraries distribute a paperback copy of The Hunger Games to hundreds of patrons, or people to sell used records or DVDs at a garage sale.

The rule, which basically ensures that there can be a legal market for secondhand goods, works by saying that copyright owners can’t control distribution of a work after it has already been sold. Part of English law for centuries, the U.S. Supreme Court affirmed it in a 1908 case involving a publisher that had put a sticker on its books saying “The price of this book at retail is $1 net. No dealer is licensed to sell it at a lower price” (the sticker trick didn’t work).

Despite its long pedigree, the power of the first sale rule has shrank dramatically in the digital age. The reason is that copyright owners, wary of how easy it is to copy and share works online, have found a way to make sure that no one technically buys a book, music album or video in the first place.

Rather than selling the books or songs outright, publishers are instead giving consumers a license to use the work. This means that there is no “sale” in the legal sense of the word, and so the first sale rule doesn’t apply.

While this licensing system gives publishers more control, it also means consumers can’t do many of the things they have always done with physical property: sell it, or lend it to friend or leave it to loved ones in a will.

A digital first sale right?

The House Judiciary Committee, which is in the process of reviewing U.S. copyright law, held a field hearing in New York on Monday to get the views of publisher John Wiley, the New York Public Library, and tech CEO John Ossenmacher among others as to whether Congress should require a digital resale right.

For practical purposes, a change in the law could mean giving consumers the right to sell their iTunes library, or to lend ebooks bought on Barnes & Noble to a friend.

The mood at the committee hearing, chaired by Rep. Bob Goodlatte (R-Va), was skeptical, however. Several of the witnesses pointed out that requiring first sale for digital media, which is so easy to exchange and reproduce, would likely bring major harm to the primary market for books and music. Others noted that second hand digital files don’t really become “used” or become deteriorated like books and records.

The only one to argue forcefully for a digital first sale right was Ossenmacher, who once offered a digital locker service called ReDigi that allowed people to sell songs to one another. A federal judge ruled the service liable for copyright infringement last year, rejecting ReDigi’s argument that its technology, which checks to make sure the original owner hasn’t kept a copy of what he or she is selling, made it eligible for the first sale rule.

Ossenmacher claimed at the hearing that technology like ReDigi’s makes it possible to create online equivalents of book and record stores. Although the members of Congress and other witnesses didn’t appear to agree, some did express concern that the current licensing system is too harsh on consumers.

Meanwhile, attorney Sherwin Siy of Public Knowledge, a consumer advocacy group, warned that publishers have started trying to get around the first sale doctrine in the physical world too. Siy pointed to the example of a legal textbook publisher who tried to impose a software-style license on its books, requiring students to return the books rather than resell them.

Overall, though, the most popular solution to the problem of diminished property rights appears to be better licenses.

licenses screenshot

Buy, rent or lease?

Companies that sell digital media often place a big “BUY” buttons to encourage people to make a purchase — even though consumers aren’t really buying anything, just obtaining a temporary right to use it.

This is a problem, according to UCLA Professor John Villasenor. At the hearing, he argued that the emergence of a “license-based ecosystem” for digital goods means that the first sale doctrine is largely irrelevant in the online world, but that the licenses in question are hopelessly complicated.

“I believe that content providers have at least an ethical obligation — and quite possibly a legal obligation under consumer protection laws — to clearly structure their offerings so that consumers are informed about restrictions accompanying their purchases of digital copies of copyrighted works,” he testified.

In Villasenor’s view, market forces may eventually lead companies like Amazon and Apple to compete with one another on the basis of their license terms — with companies trying to stand out by offering simpler and more advantageous offerings.

In practice, this might lead companies to place a “lease” button next to a more expensive “buy” option. In the “buy” scenario case, the company would provide tools to treat the digital good like an ordinary piece of property, letting the consumer resell it or give it away or bequeath it in a will (see also “3 ways to deal with digital music when you die“).

Indeed, such a future might not be that far off since Amazon already offer lending options to some Kindle customers. What’s more, both Apple and Amazon have obtained patents describing a used marketplace for digital goods. Here’s an image from Amazon’s US Patent no. 8,364,595.

patent for used amazon books

The “parade of horribles” after the Kirtsaeng case

The New York hearing also provided an opportunity for publishers to ask Congress to rewrite first sale rules in the wake of a well-publicized 2013 Supreme Court decision called Kirtsaeng.

The case, brought by publisher John Wiley, challenged the right of so-called “gray market” importers to buy books overseas and then import them back into the U.S. for resale.

The case attracted widespread attention in part because libraries feared that a change in the rule would make it illegal to lend a large portion of their collections, and because some feared that a change in the law would let copyright owners exert control over backyard garage sales. Citing this “parade of horribles,” the Supreme Court ruled against Wiley.

In response, Wiley CEO Stephen Smith told the hearing that Congress should amend copyright law to say that unauthorized importing is forbidden, but that domestic distribution is not — a situation that he claims would not harm libraries and used bookstores.

Greg Cram, Associate Director of Copyright at the New York Public Library, testified, however, that Congress should not disturb the Kirtsaeng ruling. According to the NYPL, the right path for Congress is: “Protect first sale for physical items and monitor evolving digital business models.”

The Bottom Line

When it comes to digital goods, there appears to be little hope of using traditional property rights to protect consumers purchases and to ensure a second-hand market. As a result, many of today’s consumers will have far weaker rights in their libraries and digital music collections than previous generations, and the right of “first sale” will become less familiar.

This isn’t necessarily a bad thing, given how cheap and easy it is to find and distribute digital media. The problem for now, however, is that consumers’ control of the the media they purchase depends largely on the whims of large companies who use contracts to tell people what they can and can’t do with media they lawfully bought.

In a perfect world, these companies will soon compete with each other to give consumers more rights and to be more transparent in their licenses. If they don’t Congress will have to rewrite copyright and consumer protection laws to substitute for property rights lost in a digital world.

This story was amended on June 7 to note ReDigi was “liable for copyright infringement” not “shuttered”.

  1. good article.
    The problem isn’t media company whims, it’s lack of digital media contract clarity from the consumer side (which is hampered by the media companies).

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    1. Thanks for the comment, hortron. That’s a good point, and one Villasenor (the UCLA prof) made repeatedly.

      I agree that the contracts need to be changed from an intimidating block of legalese into simple language that explains what the consumer is — and is not — getting when they “buy” digital media

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  2. Paul Hayden Friday, June 6, 2014

    Does anyone have a short, simple statement that could be displayed during checkout or upon placement in a cart that would explain the “lease” vs. “buy” rights concept for a buyer? As a small publisher, we’re on our own when it comes to protecting our rights and maintaining business in order to continue publishing. It would never really stop someone from passing on or reselling, but at least it would help educate the consumer.

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    1. David Chisnell Friday, June 6, 2014

      Use the word lease or license instead of buy or purchase on the sales medium, if you are only licensing the work.

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  3. Good question, Paul Hayden. If you find one, let us know — these sort of problems are also easier to explain if you can show someone a proposed solution.

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  4. garry ramsay Friday, June 6, 2014

    Well written and comprehensive article

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  5. Great article and sigh… One more thing to be depressed about. Companies will never give ground on this, just as they lag in cutting costs or passing on savings to customers from efficiencies in digital content distribution and collude to keep prices high. Why should they? In an era of money is speech and revolving doors, they effectively own the political and regulatory bodies that are intended to keep them in check. There are few alternatives for customers, who are largely passive on the status quo. Surely, this situation will get vastly worse before it has any remote hope of getting better.

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  6. Hi Jeff, I am actually quite a bit more optimistic that you seem to be, so lets explore why. The bottom line is the fact the copyright belongs to the works not the medium of delivery. Rights holders have attempted to contract around the law, which already has been corrected with software “licenses” in the EU they are indeed treated as they should be – a sale. We have feedback from thousands of users that quite clearly states that they believe they own and should own digital PURCHASES. Also, there was significant testimony about the BUY button and process itself being comletely identical to a physical purchase. It is great you are getting the word out, but for the consumers with literally billions of dollars of their hard earned cash already spent on digital purchases I believe our government will consider peoples property rights as sacred (part of our Constitutional right) and insure that the law is transparent to method of delivery as it ALWAYS has been. Also, think of the millions of people who today buy used physical books and media, to legislate out, and to eliminate this market disenfranchises a major portion of our people, we are certainly not going to let that happen lightly, just because some holders may want to shift the copyright balance. Also, the issues of copying that had been mentioned are smoke screens, if you license it, can’t pirates still continue to copy and post the works, in fact they are even more incentivized to do so since the works intrinsically, to the user, have no economic value to protect. If you would like to see a clear statement from our team please check here: http://newsroom.redigi.com/redigi-ceo-john-ossenmacher-on-digital-first-sale-report-for-congress/
    Thank you! John

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  7. Nissan B Thomas Friday, June 6, 2014

    I tend to believe that the first sale doctrine should be preserved for digital goods, with a caveat, that obviously in practical terms, the first sale doctrine for digital goods would work differently than for physical goods. I am envisioning a platform, for instance google play or itunes, amazon etc. since a sale is actually a lease, then provide consumers the ability to share files ( akin to Napster) based upon a subscription or charging additional costs for this capability allowing the consumer who bought the digital good to realize some income from the leasing out of the digital good that was purchased. Additionally, the right owners would get a percentage of the “lease” income, and the of course the platform the provides the service. Create protections within the digital platform that say, a lessee would only have access to the work on a limited, say 48 hour or 72 hour basis, then the access terminates. Include protections from preventing downloaded and copying the work by the lessee. I just believe that in this instance, as opposed to how the first sale doctrine works for physical products, in the digital world creating a concept whereby the buyer/lessor makes some incremental income, just as they would if it was a physical good, but the rights owners make money, which they don’t under the current first sale doctrine system, and the platform would take a piece. This is the time to think outside the box, developing new alternative ways to monetized human activity via the internet, and providing rights owners protections against unauthorized distribution of their content. It can work, it can happen, just the ideas I see on most forums like these are stale.

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    1. Thanks for the thoughtful comments, Nissan B Thomas. You offer some interesting ideas that could provide fresh opportunities for consumers and rights-holders IF they could be implemented. I’m not saying they couldn’t, but it would require an unprecedented level of trust and cooperation between the content owners and the platforms — plus the financial infrastructure on the back end to make it all work efficiently.

      Not impossible, but very hard. But I like your suggestion to think big rather than just focus on the limitations.

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    2. Do publishers and authors see any relationship between digital distribution and online marketing? Or do they believe these are isolated in the real world, as they are in organizational silo? How about the relationship between online marketing and online payment?

      There are digital media producers (e.g. Minecraft developers) who allow and track “unpaid” user growth as a pipeline for payment. As long as both the paid & unpaid channels are growing at comparable rates, distribution & marketing are in good shape.

      There are digital media producers (e.g. Star Citizen game developers) whose “advances” for production financing are coming from consumers purchasing in-game objects like ships. To the tune of tens of millions of dollars.

      For the moment, publishers can plausibly claim to be representing author interests, even if the math of royalties vs. marketing and production value-add is opaque. What happens when cryptocurrencies are widely accepted, and consumers can “tip” their favorite authors directly without paying either retailer or publisher? Can publishers write contracts to prevent authors from accepting donations? What happens to book contracts when the size of direct revenue streams exceed those from traditional retail?

      There are many variables at stake in this debate. How many large corporations have squeaky clean track records of consumer service, author representation, talent development, market development, technology and media innovation? Consumers want to have direct relationships with their favorite authors – which companies enable this today?

      As for rights of sale, what would a book lover do with the money from the sale of their used book? Most likely, buy another book. Result: original buyer builds relationship with new author, used-book buyer builds relationship with a new author. This is a MARKETING activity. Markets are more efficient with higher velocity of trading. The 2nd-hand customer, by definition, was not already a loyalist / whale / Tier 1 fan. What are publishers doing to replace this important market function, for digital books? Relying on Amazon & Google discovery algorithms for “related books”? No business conflict there!

      Re: perfect reproductions of digital books. How about creating value-add offerings for buyers of new digital media? Used books would not include those offerings. Many value-adds are possible :) Some can even be sold directly from the author’s WordPress site..

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  8. Art Brodsky Friday, June 6, 2014

    ReDigi has not been ‘shuttered.” It’s still around, despite the lawsuit.

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    1. Thanks for your comment, Art Brodsky. I’ve changed the language above to reflect that.

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  9. Maria E. Schneider Saturday, June 7, 2014

    I’m a writer and I can tell you it’s a difficult business. Many readers honestly want to “share” their ebooks because they loved them, but they don’t understand that by sharing, selling or giving them away, it really hurts author income. Digital copies can be sent out by the thousands and they do not deteriorate. Authors only make money when readers buy a copy. If readers or resellers can suddenly make copies and sell or give them away, there is no way for an author to protect her income.

    Most writers, including myself recognize that having a copy of a book, in print and ebook, in a library is a different beast–it’s a lending facility and the library must pay for the copy or a license for the book. There’s simply no need to allow people to legally give away or sell digital copies–there are already lawful ways anyone can read just about any book out there.

    The system isn’t perfect, but if the laws don’t protect a writer’s ability to make a living, we cannot continue to write books.

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  10. Whaaaa…..??? My horse could have baby horses; don’t tell me my car can’t have baby cars! RIPOFF!!!!!!

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    1. OniItTodayonBluRay Saturday, June 7, 2014

      There is such a thing as a used car market. “Own it today on blu-ray!”

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