Sony, Microsoft, and the Erosion of the First Sale Doctrine

by Mark Humphrey

During the Sony Corp. keynote address at the Electronic Entertainment Expo (E3) in June, the electronics giant made waves with a video clip titled “Official Playstation Used Games Instructional Video.” Created to explain how sharing games would work on the company’s forthcoming Playstation 4 (PS4) video game console, the video appeared ready to show a multi-step process. But within 22 seconds, the clip was over and the message clear – sharing games with friends on the PS4 was as simple as handing a game disc from one person to another. The crowd exploded in cheers.

The clip was in response to missteps made by Microsoft, Sony’s chief competitor, in unveiling its Xbox One console that same week. Microsoft announced that once a consumer purchased a game and played it on his or her console, the same copy would not be playable on a different console because it ­­would be digitally identified with the original user’s machine. The machine would also require a persistent internet connection in order to “verify” the console every 24 hours. This was to prevent consumers from selling games back to stores like Gamestop, which would then sell them at marked up but still discounted prices to other consumers – a practice that generates billions in annual revenue for these stores.

Microsoft’s gambit was a disaster. Analysts crowed that Sony “won” E3 in part because of its used games position. Many media outlets declared Xbox One dead on arrival if it featured such technology. The situation became so dire that Microsoft quickly backpedaled and scrapped the technology. It remains to be seen how damaging this will prove in the long run.

Such a situation arose because companies like Microsoft have both more and less control over their intellectual property than ever before. On one hand, IP in digital formats can be easily pirated absent protective measures. But technological and legal changes simultaneously give companies a great deal of power to control their products that didn’t exist just a few years ago.

Traditionally, the first sale doctrine has allowed someone who obtains title to a copy of a work to sell, lend, or lease it however he or she wishes, without the original copyright owner’s permission. But when the doctrine was created in 1908, it was concerned with the idea that first sale protection did not kick in until someone had obtained ownership over a physical copy. This made sense for decades, because IP was embodied in objects ranging from books and cassettes to DVDs and video game cartridges.

Yet as IP has increasingly become digitized, considerations that made sense for decades have become somewhat irrelevant. Streaming media, for instance, does not implicate first sale at all, simply because no physical copies change hands. When a movie or song ends, the consumer turns off his or her device as if he or she just watched a broadcast or listened to the radio. Any concept of “ownership,” as it is popularly understood, is not relevant in a streaming context.

Conversely, in digital downloading, the reproduction right is necessarily implicated when transferring a digital copy. First sale rights thus inescapably conflict with one of the key rights granted by copyright law. This is a twist that could not have been anticipated when the first sale doctrine was created over 100 years ago – and one that has not been completely resolved despite decades of debate and analysis.

Attempts to use contract law to limit the scope of first sale rights have also affected the doctrine’s modern applicability. In cases like Vernor v. Autodesk, courts have found that content creators can easily place restrictions on purchased products that transform outright sales into limited licenses and inhibit the consumer’s ability to freely distribute or even use something he or she purchased.

In each scenario, the first sale doctrine has limited relevance at best. As time goes on and technologies like streaming become the norm, the doctrine may be infrequently invoked, at best. It is thus the attorney’s job to properly advise clients on how best to protect IP without antagonizing consumers and making the same mistakes that Microsoft made at E3.

Just because restrictive means of protecting IP exist, that doesn’t necessarily mean that it’s in a client’s best interest to use them. For instance, if a client is selling a physical video game, the Vernor v. Autodesk decision allows it to create licensing agreements using a simple “cookbook recipe.” This test asks whether (1) the copyright owner specifies that the user is a licensee; (2) the copyright owner significantly restricts the user’s ability to transfer the software; and (3) the copyright owner imposes notable use restrictions.

Using this checklist, an attorney could draft an agreement stating that users may only install software on one computer or play a game on one machine, or could perhaps create an agreement stating that users are unable to transfer the software to anyone else, even if they have a physical copy in hand. But even though this is a potential option, is such stringent content protection really in the client’s best interest?

Consumer expectations relating to use and ownership differ widely depending on the type of media implicated. Degrees of ownership can be viewed as a sliding scale – the more tangible the media, the more of an expectation the consumer has that he or she should be able to do what he or she wants with it.

For example, if a client sells digital downloads, the consumer will most likely be receiving a revocable license with some form of digital rights management in place.  The client will be able to control use of the copy and prevent possible piracy. The client may also be able to take punitive action against consumers violating licensing agreements and terms of service, perhaps by canceling accounts and remotely wiping purchased copies from consumer devices. Indeed, companies from Amazon to Apple have such provisions written into their licensing agreements, warning consumers that their content can be remotely deleted at the company’s behest. The few times that such action has been undertaken, however, public outcry has been swift and vicious. Clients risk using such measures at substantial cost to their reputations.

However, when the item in question is a physical copy, the consumer’s expectation of ownership is at its strongest. Harkening to the origin of the first sale doctrine, the consumer traditionally expects to be able to do what he or she wants with something held in hand. In this scenario, draconian licensing restrictions must be even more carefully considered. Perhaps it’s because the consumer is suddenly holding a partially or entirely useless object due to licensing restrictions, but regardless, consumers do not take kindly to being told that they cannot use their physical property how they wish. Consumers certainly realize they can’t do certain things, like make illegal copies. But it’s news to them when they’re told they can’t lend or sell something they purchased. Microsoft’s fiasco is the paramount example of this. Consequently, an attorney should counsel a client against implementing drastic or unprecedented protections when a physical copy is involved, or at the very least, encourage the client to consider the very real cost of alienating consumers.

As mentioned earlier, none of this is implicated with streaming. And really, this appears to be where IP is headed in the next decade. Traditional notions of “sharing” and “ownership” may completely fall away in the next decade. At that point, attorneys will have new issues to deal with. The public performance right, for instance, could even replace the reproduction right as the popularly viewed linchpin of copyright law.

In the meantime, copyright is in a strange transition period where physical IP, streaming media, and downloaded content coexist in the same ecosystem. Moreover, longstanding norms like the first sale doctrine no longer uniformly apply. Ultimately, technology and the law appear headed for a convergence, giving more power than ever to content creators and distributors. Attorneys would do well to counsel their clients, in the interim, to not overreact to change and risk alienating and losing consumers.

That is certainly something that Microsoft executives and attorneys, fresh off their own overreach, ruminate about as the Xbox One’s November 22 release date approaches.

 

Mark Humphrey is a recent graduate of Southwestern Law School.

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