District court denies Disney’s motion for preliminary injunction seeking to enjoin Redbox from reselling download codes that allow end users to download or stream Disney films, finding that Disney was not likely to establish that Redbox’s actions constituted breach of contract, and that restrictive terms of Disney’s digital download services’ license agreements likely constitute copyright misuse.

Disney, which owns the copyrights in numerous well-known movies, distributes its films in multiple formats through a variety of channels, including DVD and Blu-ray disc sales, and on-demand and subscription streaming services. Among Disney’s offerings are “Combo Packs,” which are sold in boxes featuring large-type text reading “Blu-ray + DVD + Digital HD,” and include a Blu-ray disc, a DVD and a piece of paper containing an alphanumeric code that can be inputted and redeemed at the websites RedeemDigitalMovie.com and DisneyMoviesAnywhere.com to allow a user to stream and download the film in digital HD.

The exteriors of the Combo Pack boxes contain text stating, “Codes are not for sale or transfer.” Very fine print at the bottom of the boxes further indicates that, with respect to “Digital HD,” “Terms and Conditions apply.” The RedeemDigitalMovie.com and DisneyMoviesAnywhere.com websites set forth additional terms and conditions of use. Among other things, the RedeemDigitalMovie.com terms of use stated that, by redeeming a code, a user “represents that [he] is the owner of the physical product that accompanied the digital code at the time of purchase.” The DisneyMoviesAnywhere.com terms of use provide, inter alia, that a customer can enter authorized codes “from a Digital Copy enabled … physical product that is owned by [that consumer],” and that the sale, distribution, purchase or transfer of digital codes is “strictly prohibited.”

Defendant Redbox Automated Retail LLC is a company that rents and sells movies to consumers via tens of thousands of automated kiosks that dispense DVDs and Blu-ray discs. Recently, Redbox began to offer digital downloads of Disney movies in the form of download codes. Because Redbox does not have a vendor agreement with Disney, it acquires digital codes by purchasing Combo Packs at retail outlets, removing the piece of paper bearing the download code from Disney’s packaging and reselling the code at a Redbox kiosk.

Disney sued Redbox in November 2017, alleging that Redbox’s resale of Combo Pack digital download codes (i) constitutes contributory copyright infringement, insofar as it encourages end users to make unauthorized reproductions of Disney’s copyrighted works; (ii) is a breach of the contract that Redbox enters into when it purchases Combo Packs; (iii) interferes with Disney’s contracts with RedeemDigitalMovie.com users; and (iv) violates California false advertising and unfair competition laws. Disney moved for a preliminary injunction enjoining Redbox from selling or transferring its digital download codes.

The district court denied Disney’s motion for a preliminary injunction, finding that it was unlikely to prevail on the merits of its claims. First, with respect to Disney’s breach of contract claim, the court held that the question was whether the language “Codes are not for sale or transfer” appearing on the outside of Combo Pack packaging was an enforceable license, such that Redbox’s decision to open the Combo Pack packaging constituted acceptance of that license. The court held that, at the preliminary injunction stage, this language was not sufficient to create an enforceable license, because the Combo Pack box “makes no suggestion that opening the box constitutes acceptance of any further license restrictions.” According to the court, the language at issue “does not identify the existence of a license offer in the first instance, let alone identify the nature of any consideration, specify the means of acceptance, or indicate that the consumer’s decision to open the box will constitute assent.” The court also held that the presence of other “similarly assertive but unquestionably non-binding language on the Combo Pack boxes” cast further doubt that the language “not for sale or transfer” communicated the terms of a valid offer. Specifically, the packaging also stated that “[t]his product cannot be resold or rented individually” — which the court stated was contrary to the Copyright Act’s First Sale doctrine.

With respect to Disney’s “contributory copyright infringement” claim, the court stated that “[a] copyright licensee infringes upon a copyright if he exceeds the scope of his license” and acknowledged that by buying a stand-alone digital code from Redbox, and then redeeming that code on Disney’s licensed websites, “end users necessarily violate the terms of the licenses …”

Nevertheless, Redbox argued that Disney cannot demonstrate a likelihood of success on the merits because Disney has engaged in “copyright misuse” — an affirmative defense to an infringement claim — and the court agreed. While the court acknowledged that the copyright misuse defense “often applies to situations in which copyright holders attempt to use their copyright to obtain some power over other, non-copyrighted goods or services” — which was not the case here — the defense is not so narrow and “extends to any situation implicating the public policy embodied in the grant of a copyright.”

Here, the Copyright Act gives copyright owners the exclusive right to distribute copies of the copyrighted work, but that right is exhausted once the owner places a copy of a copyrighted work into the stream of commerce by selling it. According to the court, there can be no dispute 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 in the Combo Packs. However, the court said, pursuant to the RedeemDigitalMovies.com and DisneyMoviesAnywhere.com terms of use,

Combo Pack purchasers could not 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.

According to the court, this “improper leveraging” of Disney’s copyright “to restrict secondary transfers of physical copies” conflicts with public policy enshrined in the Copyright Act and constitutes copyright misuse.

Finally, the district court held that the parties’ discussion of Disney’s “tortious interference” claim was undeveloped and derivative of the other arguments, and that Disney had submitted no evidence of pre-existing contracts between its licensed websites and users who subsequently purchased a download code from Redbox — a prerequisite for any “interference” claim. The court also held that Disney failed to demonstrate a likelihood of success on its false advertising and unfair competition claims because those claims were premised on Redbox misleading customers about the license restrictions Disney imposes on digital downloaders, and “significant questions remain about the validity and enforceability of those restrictions.”