Disney's Stupid Lawsuit Against Redbox Results In Judge Saying Disney Is Engaged In Copyright Misuse

from the blowback dept

Well, well. For the past few months I've been meaning to write about Disney's silly lawsuit against Redbox, but other stuff kept coming up, and now a judge has ruled against Disney and said that Disney appears to be engaged in copyright misuse. This is in a case that Disney brought -- and it appears to be backfiring badly. Redbox, as you probably know, has kiosks where you can rent DVDs relatively cheaply. It's managed to stay alive despite the traditional DVD rental business disappearing most everywhere else. About a decade ago, Hollywood fought vigorously against Redbox, but the company survived (though being taken over by a private equity firm in 2016), relying heavily on first sale rights, enabling it to legally purchase DVDs and then rent them out.

Back in December, however, Disney sued Redbox over taking its business to the next level and including download codes that could be purchased at a Redbox kiosk. Though it took them basically forever, Hollywood studios have finally realized that offering online access with the purchase of movies is a good idea, but they only want the end consumer who is buying a DVD to get access to them. So, Redbox would buy the Disney "Combo Packs" that offered the DVD and a download code, and the would offer the paper codes in kiosks to let renters watch the movie online. They weren't just copying the code and letting anyone use it -- it was still a one-to-one limitation with the purchase in that they would buy the DVD with a paper code on it, and then stuff that paper code into their kiosk delivery pods. Disney argued that this was contributory copyright infringement, even though the code pointed to a legitimate/authorized version of the movie and was legitimately purchased.

Redbox hit back by arguing that the First Sale doctrine protected it (as it did with the physical rentals) and that it is free to use the codes in this manner as the legal purchaser. Disney's response to that was that First Sale does not apply to the download code because it's not the copyright-covered work.

But Redbox also hit back with a separate punch against Disney, arguing that it was engaged in copyright misuse, a concept we've discussed in the past, but that rarely shows up in cases these days (even though we've argued it should be used more often). The basic argument was that Disney was over-claiming what copyright allowed it to exclude in order to stamp out competition. And, (somewhat surprisingly), in the process of denying Disney's demand for a preliminary injunction, the court agrees that Disney is engaged in copyright misuse because it is using its copyright in the movies to restrict what happens to purchases.

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.

Because of this, the court finds that Disney has little chance of prevailing on its contributory copyright infringement claims and denies the injunction request.

The court then notes that it doesn't even need to get into the First Sale issues, but then suggests Redbox would have difficulty winning on a pure first sale argument, mainly because of the ReDigi decision that said you can't sell "used" MP3s. And then concludes that First Sale doesn't really come into play since it's the code that's at issue, rather than the copyright-covered content:

Notwithstanding ReDigi, the plain language of the statutes, and the important policy considerations described by the Copyright Office, Redbox urges this court to conclude that Disney’s sale of a download code is indistinguishable from the sale of a tangible, physical, particular copy of a copyrighted work that has simply not yet been delivered. Even assuming that the transfer is a sale and not a license, and putting aside what Disney’s representations on the box may suggest about whether or not a “copy” is being transferred, this court cannot agree that a “particular material object” can 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. Instead, Disney appears to have sold something akin to an option to create a physical copy at some point in the future. Because no particular, fixed copy of a copyrighted work yet existed at the time Redbox purchased, or sold, a digital download code, the first sale doctrine is inapplicable to this case.

There's a separate issue around whether or not Redbox's actions constituted a "breach of contract," and again the court is unimpressed. The key question is whether or not the text that Disney prints on its box about how "codes are not for sale or transfer" represents a contract. The court easily concludes that it does not:

The phrase “Codes are not for sale or transfer” cannot constitute a shrink wrap contract because, like the box at issue in Norcia, Disney’s Combo Pack box makes no suggestion that opening the box constitutes acceptance of any further license restrictions.... Although Disney seeks to analogize its Combo Pack packaging and language to the packaging and terms in Lexmark, the comparison is inapt. The thorough boxtop 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.

Of course, this almost certainly means that Disney is quickly reprinting the packaging on all its Combo Pack DVDs to make this language more legalistic to match the Lexmark standard.

Still, the court also notes that Disney makes other claims on the box that are clearly not true, which further undermine the claim that random sentences on the box represent a contract:

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.8 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.” ... 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.

While it's a bit disappointing to see the court buy into the ReDigi reasoning on First Sale, it's good to see it not buy the language on the box representing a contract and to call out the company for copyright misuse in leveraging copyrights to stifle other lawful activity. This case is likely far from over, though, so we'll see how things progress.

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Filed Under: copyright misuse, digital downloads, first sale, rental kiosks

Companies: disney, redbox