An injunction bid against Redbox fails as the judge determines Disney is leveraging its copyright monopoly beyond the scope of its rights.

Disney has failed in its initial efforts to get a judge to stop Redbox from disassembling "combo packs" — a Blu-ray disc, a DVD and a movie download code which can be redeemed through authorized digital outlets. On Tuesday, a California federal judge denied Disney's motion for a preliminary injunction that would have enjoined Redbox from selling movie download codes separately. Even worse for Disney is the fact that the judge in rejecting the injunction bid comes to the conclusion that Disney has committed copyright misuse.

Disney brought the lawsuit in December and pushed for injunction with the warning that Redbox's activity was interfering with its relationships with its licensees and its customers and that Disney’s brand and ability to control distribution were being affected.

Redbox operates DVD rental kiosks in retail stores throughout the nation and has been attempting to figure out new ways to stay relevant amid rising streaming services. So Redbox went to retail stores and acquired "combo packs" for films including Beauty and the Beast, Frozen, Star Wars: Episode VIII — The Force Awakens and Guardians of the Galaxy Vol. 2. The company then removed the packaging and took the piece of paper bearing the download codes and then repackaged it for sale in its kiosks.

In response, Disney claimed these resales constituted contributory copyright infringement, a breach of contract, interference, false advertising and unfair competition.

What Disney pointed out was that inserts in the packaging stated, "Codes are not for sale or transfer," and that the RedeemDigitalMovies and Disney Movies Anywhere web pages additionally conditioned use on a user representing that he "is the owner of the physical product that accompanied the digital code at the time of purchase."

Redbox fought the injunction bid a number of ways. Among them was a submitted affirmative that posited that Disney was engaging in copyright misuse to protect its coming streaming service. Under the copyright misuse doctrine, copyright holders are not permitted to leverage their limited monopoly to allow them control of areas outside the monopoly.

Remarkably, in the order (read in full here), U.S. District Court Judge Dean Pregerson agrees with Redbox here even after acknowledging that the copyright misuse defense has most often come up in situations in which copyright control is used to obtain power over non-copyrighted goods or services.

"The copyright misuse defense, however, is not so narrow as Disney would have it," writes Pregerson. "Indeed, 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 pertinent inquiry, then, is not whether the digital download services’ restrictive license terms give Disney power over some entirely unrelated product, but whether those terms improperly grant Disney power beyond the scope of its copyright.”

Pregerson continues by noting that a copyright owner's exclusive right to distribute copies is exhausted once the owner places a copy of a copyrighted item into the stream of commerce. At that point, the transferor is powerless to stop redistribution.

"There can be no dispute, therefore, 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 Combo Packs," states the opinion. "Disney does not contend otherwise. Nevertheless, the terms of both digital download services’ license agreements purport to give Disney a power specifically denied to copyright holders.... 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. Accordingly, Disney has not demonstrated a likelihood of success on the merits of its contributory copyright infringement claim."

When this case was filed, many legal observers believed it would become an important one in the area of the first sale doctrine, which provides that someone who lawfully acquires a copyrighted work is entitled to sell or dispose of their copy. Indeed, Redbox attempted to essentially argue that a movie download code was no different than a used book in a secondhand bookstore.

But with respect to the movie download codes, that's not precisely the reason why Redbox prevails as Pregerson doesn't believe that the first sale doctrine defense is quite on point. If this case was purely about the resale of digital download codes, Disney may have succeeded.

According to the opinion, "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."

Redbox loses this point, but it does score other wins including on the judge's analysis of whether Disney is likely to prevail on the breach of contract claim.

Pregerson looks at the Combo Pack packaging language, how "codes are not for sale or transfer," and opines that it can't constitute a shrink wrap contract because the packaging "makes no suggestion that opening the box constitutes acceptance of any further license restrictions."

Perhaps Disney can amend its shrink wrap packaging to solve this, assuming it can also get beyond the judge's concerns about false language restricting the sale or transfer of physical products. Nevertheless, at this point of the case, not only has Disney lost the first important battle, but it's now being put on the defensive.

Although the judge only analyzed copyright misuse in his decision yesterday as an affirmative defense in the context of whether Disney is likely to prevail on its claims, Redbox has also filed its own claims against Disney and is contending that copyright misuse means that Disney should be punished. Among the punitive measures demanded by Redbox is that Disney lose the right to enforce movie copyrights "while illegally purporting to prohibit resale or rental of copies of those works."