Democracy & Technology Blog First Sale in the Digital Age

The House Judiciary Committee examined the “first sale” doctrine at a recent field hearing in New York City as part of the committee’s comprehensive review of copyright. The first sale doctrine made perfect sense during the Industrial Age, but in some respects it’s problematic for the Digital Age. Consumers have the right to give away, lend or sell a book that they own, thanks to a 1908 Supreme Court decision that was subsequently codified by Congress at 17 U.S.C. ยง109(c). There’s no dispute that “[p]hysical copies of works in a digital format, such as CDs or DVDs, are [covered] in the same way as physical copies in analog form.” However, consumers with an Internet connection are downloading more and more digital content from remote servers pursuant to license agreements. And the first sale doctrine does not apply to digital files that are transmitted from machine to machine, according to the Copyright Office, because transmission results in two copies (one on each machine).

Digital Transmissions

ReDigi is a company that allows users to “transfer title of their lawfully acquired, pre-owned digital goods to a willing buyer or charity without making copies.”

With ReDigi’s recently patented software, an individual can transfer ownership of a legally purchased music file, without duplication. ReDigi’s media manager software not only verifies that the each file is legally purchased, but further requires removal of any additional archival or personal copies that the user may have kept on connected devices as part of the sale process.

ReDigi’s founder and CEO, John Ossenmacher, argued for extending the first sale doctrine to electronic copies at last week’s hearing.

The secondary market provides an outlet for copyright goods no longer used by their owner and provides value to that person and at the same time may make a copyright good available to someone who may not have been able to purchase the goods at the “new” price. A secondary market in digital will lessen the divide between the haves and the haves-less and will free up billions of dollars of currently locked up value on peoples personal computers and devices.

However, even if the first sale doctrine were extended to electronic copies, the doctrine does not cover licenses that are personal and non-transferable.

Some want to extend the first sale doctrine to cover licenses. The European Court of Justice recently did just that. In 2012, the court ruled that “[e]ven if the license agreement prohibits a further transfer, the rightholder can no longer oppose the resale of that copy.” This sounds like it would be pro-consumer, but it’s not.

Emery Simon from BSA | The Software Alliance identified some of the consumer benefits that licensing fosters owing to the fact there is a contractual relationship between lessees and lessors. These include: entitle customer licensees to patches and other updates for improved functionality and to fix security vulnerabilities, permit the customer licensee to install the software on more than one computer, and/or offer different features and charge fees that reflect the customer’s situation (e.g., students, home users, businesses) and that accommodate different customer needs (e.g., per-use, per-user, per-device).

Licensing makes it easier for content creators to offer a variety of features and prices that reflect the customer’s needs and desires, because there’s less chance someone who’s entitled to buy at a lower price will turn around and compete for potential customers who can and will pay more. A recent Supreme Court case illustrates this point.

Kirtsaeng v. Wiley & Sons (2013)

Supap Kirtsaeng moved from Thailand to the U.S. in 1997 to study mathematics. While at Cornell University, Kirtsaeng asked his friends and family in Thailand to buy copies of foreign edition English-language textbooks at Thai book shops, where they sold at low prices, and mail them to him in the U.S., where he would sell them for a profit.

Stephen M. Smith, President and CEO of Hoboken, NJ-based Wiley, published some of those textbooks. Smith explained at the hearing that affordability is key to capturing sales, and charging prices that reflect the economic differences between countries is essential to participation in diverse markets.

Both the foreign buyer and the U.S. seller benefit from market segmentation. Consumers overseas can purchase copies of copyrighted works that they value at a price that is reasonable for their market. The U.S. seller gains effective access to a market which would otherwise not sustain an unsuitably higher price point.

The U.S. Supreme Court ruled that the first sale doctrine was triggered at the time Kirtsaeng’s friends and family purchased the textbooks in Thailand, effectively prohibiting creators from segmenting markets between countries. In her dissenting opinion, Justice Ruth Bader Ginsburg pointed out,

Because economic conditions and demand for particular goods vary across the globe, copyright owners have a financial incentive to charge different prices for copies of their works in different geographic regions. Their ability to engage in such price discrimination, however, is undermined if arbitrageurs are permitted to import copies from low-price regions and sell them in high-price regions.

It may seem counter-intuitive, but asking mathematics students in the U.S. to pay a higher price for the same textbook than their counterparts in Thailand is actually good for everyone, because–as Smith explains–it allows the publisher to recoup it’s investment and extend production costs over a broader number of transactions. The alternative is to raise the price in Thailand and reduce overall sales. That would mean allocating price increases amongst a smaller number of transactions, leading to higher prices for mathematics students everywhere.

The same dynamic applies to digital content leasing, which make it easier for creators to charge lower prices for students and nonprofits, because they they can be prohibited from reselling the content to anyone who would otherwise be willing to pay a higher price. But leases also make it possible for creators to charge lower prices overall, because used copies aren’t competing for market share with new copies.

The first sale doctrine limits the size of the market for creators and artists, because they receive nothing from resale. This forces them to charge higher “new” prices: Although copies can be produced at virtually zero cost, fixed costs still need to be recovered.
When the first sale doctrine was established in 1908, it was not possible to create a perfect copy with the click of a button and deliver it anywhere in the world in seconds. As John Villasenor remarked at the hearing,

the first sale doctrine has historically worked in part because physical copies of works degrade with use, because they cannot be traded instantly and temporarily among parties separated by thousands of miles, and because it is impossible to loan a paperback book to a friend while simultaneously keeping it on your own bookshelf.

But imagine if a web-based service matched one million music fans with the owners of music copies that are sitting unused on their hard drives–anywhere in the world, in real time. According to Villasenor,

In practice, the majority of loan requests could be handled with access to an inventory of only a few hundred copies of the song. If this approach were carried to its maximally efficient extreme, a recording artist could only sell a number of copies of a song equal to the maximum number of people listening to it at any one time. This would dramatically reduce the market for digital music sales.

The “Haves and the Haves-Less”

Reducing the size of the market is not the way to reduce prices. As firms increase the volume of production, they typically find ways to reduce cost per unit of output. Scale economies ultimately benefit consumers, because lower costs lead to lower prices. John D. Rockefeller, Sr. and Bill Gates made their fortunes by selling petroleum products and software at affordable prices. As their sales increased and their cost-per-unit decreasesed, and they responded by charging lower prices.

The only way a new digital first sale doctrine will help John Ossenmacher “lessen the divide between the haves and the haves-less,” and “free up billions of dollars of currently locked up value on peoples personal computers and devices” is if content creators charge higher “new” prices. In the absence of a secondary market, creators and artists can charge a lower price because they can address larger market. This is the beast way for reducing the divide between the haves and the haves-less, and Congress should be very cautious about extending the reach of the first sale doctrine.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.