Most of you serious music fans have at least one. At some point, you were diving through the dollar bins of a used record store and came across an unfamiliar album by your favorite artist, bearing a label such as “Promotional Use Only – Not for Sale.” These Promotional CDs are routinely mailed in advance of their commercial release by record companies to a select group of music critics, disc jockeys and other music industry folks. What a find! But then you notice some fine print:

PROMOTIONAL USE ONLY – NOT FOR SALE. THIS CD IS THE PROPERTY OF THE RECORD COMPANY AND IS LICENSED TO THE INTENDED RECIPIENT FOR PERSONAL USE ONLY. ACCEPTANCE OF THIS CD SHALL CONSTITUTE AN AGREEMENT TO COMPLY WITH THE TERMS OF THE LICENSE. RESALE OR TRANSFER OF POSSESSION IS NOT ALLOWED AND MAY BE PUNISHABLE UNDER FEDERAL AND STATE LAWS.

Standing in the record store, questions flash through your head: Is it legal for the record store to sell it? Is it legal for me to buy it? And most importantly, if I buy it, do I own it? This album is a must-have collector’s item of which no just legal system would deprive me. Right?

Well, right, said the Ninth Circuit on January 4, 2011 in UMG Recordings, Inc. v. Augusto.

While you were thinking about what was and wasn’t legal, that guy thumbing through the next bin over may very well have been Troy Augusto, an entrepreneur specializing in music memorabilia. Augusto scoured used music stores for rare promotional CDs and sold them on Ebay, under the name “Roastbeastmusic." In May, 2007, music giant UMG sued Augusto for copyright infringement, alleging that he had violated UMG’s exclusive right to distribute its copyrighted work. Augusto countered by arguing that he was protected by the first sale doctrine. The District Court for the Central District of California, and eventually the Ninth Circuit, agreed with Augusto.

The first sale doctrine, as set forth in 17 U.S.C. § 109, allows the owner of a phonorecord to “sell or otherwise dispose” of his or her copy without permission of the copyright owner. In other words, you can resell your CDs after you buy them. UMG argued that since it had given away the CDs in the first place, there was no first “sale” so the doctrine didn’t apply. The Ninth Circuit made short work of this argument, holding that once the CDs were mailed by the record companies, they entered the “stream of commerce” and were subject to the first sale doctrine, even if they were given away for free.

But what about the purported licensing language quoted above, which was printed on many of UMG’s Promotional CDs? As previously reported on this blog, the Ninth Circuit had recently held that "shrink-wrap" language restricting a user’s ability to transfer computer software had the effect of creating a license only and not a transfer of ownership, thus avoiding the first sale doctrine. So how is this different? The Ninth Circuit gave two principal reasons:

1. The circumstances of the distribution. Unlike the software, the CDs were dispatched without any prior arrangement with the original recipients. Thus, there was no real attempt by UMG to track or retain control over them. Without such control, simple unsolicited receipt of the CDs by the original recipient was insufficient evidence of acceptance of the license agreement, and therefore no license was created.

2. The Unordered Merchandize Statute, 39 U.S.C. § 3009, provides that unordered merchandise sent through the mail “may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without any obligation whatsoever to the sender.” Although this statute was intended to protect consumers from unconscionable sales and billing techniques, the Ninth Circuit held that it also allowed the reselling of Promotional CDs.

The full scope of the ruling remains to be seen. The Court seems to have left open the possibility that a record company might come up with a system by which it retains sufficient control over a Promotional CD so that it was creating a license and not a transfer. For example, what if UMG had tracked individual Promotional CDs and somehow recorded the acceptance of recipients on-line? However, such a system might require a quantum shift in the way in which music is promoted and, in any event, it’s still unclear to what extent such a license would restrict the activities of persons like Mr. Augusto, who were not the original recipients.