IP Law Daily Disney denied injunction barring Redbox from selling digital download codes
Thursday, February 22, 2018

Disney denied injunction barring Redbox from selling digital download codes

By Thomas Long, J.D.

Disney Enterprises, Inc., and related companies have been denied a preliminary injunction barring video rental service operator Redbox from selling or transferring digital download codes that allowed customers to download digital copies of Disney movies. The federal district court in Los Angeles determined that Disney was unlikely to succeed on the merits of its claims for contributory copyright infringement and breach of contract. With respect to the copyright infringement claims, the court held that Disney was unlikely to succeed because it appeared to have engaged in copyright misuse by improperly restricting purchasers of DVDs and Blu-ray discs of selling or transferring the products, as the purchasers were permitted to do freely under Section 109(a) of the Copyright Act. The court also determined that "Not for sale or transfer" language on the packaging of Disney’s DVDs and Blu-ray discs was not sufficient to create a "shrink wrap" license or contract binding Redbox (Disney Enterprises, Inc. v. Redbox Automated Retail, LLC, February 20, 2018, Pregerson, D.).

Plaintiffs Disney Enterprises, Inc.; Buena Vista Home Entertainment, Inc.; Lucasfilm Ltd., LLC; and MVL Film Finance LLC (collectively, "Disney") owned the copyrights to numerous well-known movies, including "Beauty and the Beast," "Frozen," and "Star Wars: Episode VII -The Force Awakens." Disney distributed its films in multiple formats through a variety of channels, including "Combo Packs," which bundled a DVD, a Blu-ray disc, and a piece of paper containing an alphanumeric code that could be inputted or redeemed at Disney’s websites RedeemDigitalMovies.com or DisneyMoviesAnywhere.com to allow a user to stream or download high-definition digital versions of the films. The exteriors of the Combo Pack boxes stated that "Codes are not for sale or transfer." The RedeemDigitalMovies and Disney Movies Anywhere websites set forth additional terms and conditions of use, purporting to prohibit consumers from redeeming digital codes that were sold or transferred separate from the original physical products.

Defendant Redbox Automated Retail, LLC ("Redbox") rented and sold movies to consumers via automated kiosks that dispensed DVD and Blu-ray discs. Redbox also offered a "Redbox on Demand" service that allowed consumers to stream or download movies owned by studios other than Disney. More recently, Redbox had begun to offer digital downloads of Disney movies in the form of download codes. Redbox did not have a vendor agreement with Disney. It obtained the download codes by purchasing Disney Combo Packs at retail stores and removing the piece of paper bearing the download code from Disney’s packaging. Redbox then placed that piece of paper into its own Redbox packaging and offered the code for sale at a Redbox kiosk.

Disney filed suit against Redbox, asserting that Redbox’s resale of Combo Pack digital download codes constituted contributory copyright infringement, was a breach of the contract that Redbox had entered into with Buena Vista when Redbox purchased Combo Packs, interfered with Disney’s contracts with RedeemDigitalMovie.com users, and violated California false advertising laws. Disney moved for a preliminary injunction enjoining Redbox from, among other things, selling or transferring Disney digital download codes.

Contributory infringement—copyright misuse. Disney alleged that Redbox contributorily infringed on Disney’s copyrights by enabling and encouraging individual consumers to violate the terms of use of Disney’s digital download websites, and in the process create unauthorized reproductions of Disney’s copyrighted works. The terms of service included in the Disney products met all the criteria for a restrictive license, the court said. The terms of the RedeemDigitalMovies license stated that Buena Vista owned all digital movie codes and that users may only use digital codes as authorized. The Movies Anywhere terms similarly specified that they comprised a license agreement and not an agreement for sale, and that the purchase of digital copy codes was strictly prohibited. By buying a standalone Disney code from Redbox and then redeeming that code on the licensed download service portals, end users necessarily violated the terms of the licenses, Disney contended, and therefore infringed upon Disney’s copyrights.

However, Redbox argued that Disney could not succeed on its infringement claims because it had engaged in copyright misuse. The affirmative defense of copyright misuse prevented copyright holders from leveraging their limited monopoly (that is, the exclusive rights of reproduction, display, etc.) to gain control of areas outside the monopoly. The court agreed with Redbox, finding that the license terms improperly granted Disney power beyond the scope of its copyright. Disney’s copyrights did not give it the power to prevent consumers from selling or otherwise transferring the Blu-ray discs and DVDs contained within Combo Packs. Nonetheless, the terms of both digital download services’ license agreements purported to give Disney a power specifically denied to copyright holders by the first-sale provision of 17 U.S.C. §109(a). The licenses required purchasers of the Combo Packs to give up their statutorily guaranteed right to distribute their physical copies as they saw fit, if they chose to access digital movie content. Disney’s attempt to restrict secondary transfers of physical copies directly implicated and conflicted with public policy embodied in the Copyright Act and therefore constituted copyright misuse, the court said. Therefore, Disney was not likely to succeed on the merits of its contributory infringement claim and was denied preliminary injunctive relief.

First sale doctrine. The court cautioned that, while Disney was unlikely to succeed in its contributory infringement claims, the first-sale doctrine of Section 109(a) did not apply to the digital download codes themselves, as opposed to the physical discs. Even if the transfer of the codes were characterized as a sale rather than a license, no "particular material object" could be said to exist, let alone to have been transferred, prior to the time that a download code was redeemed and the copyrighted work was fixed on the downloader’s hard drive. Instead, Disney had sold something like an option to create a physical copy in the future. This sort of sale was not subject to the first-sale doctrine, according to the court.

Breach of contract. Disney argued that Redbox entered into a contract with Disney when Redbox purchased and opened Disney Combo Packs that included, on the outside of the packaging, the phrase "Codes are not for sale or transfer." In the court’s view, Disney was unlikely to be able to show that the language at issue constituted a valid "shrink wrap" license or a "box-top" contract. Unlike cases in which a valid shrink wrap license was found, Disney’s Combo Pack box made no suggestion that opening the box constituted acceptance of any further license restrictions. In addition, the box-top language was not sufficient to constitute an enforceable contract that Redbox accepted by opening the box. The language on Disney’s packaging did not provide consumers with specific notice of the existence of a license and did not explicitly state that opening the package would constitute acceptance. Nor did the language set forth the full terms of the agreement, as did box-top contracts found valid in other cases. Moreover, language on the packaging of individual discs that stated "This product … cannot be resold or rented individually" was demonstrably false because it contradicted the Copyright Act’s first-sale doctrine. This language was unenforceable and conveyed nothing but Disney’s preference about consumers’ future behavior. At this stage, the accompanying "not for sale or transfer" appeared to play a similar role, the court said.

Additional claims. The court denied Disney’s request relief with respect to its claims that Redbox had tortiously interfered with Disney’s contracts with purchasers because Disney did not submit evidence of preexisting contracts between the redemption services and any users who subsequently bought a download code from Redbox. The court also declined to grant an injunction regarding Disney’s state-law false advertising claims because Disney was unlikely to succeed in showing that Redbox misled customers by omitting details about license restrictions, given that there were serious questions about the restrictions’ validity and enforceability. Moreover, Disney did not demonstrate that it had standing to assert false advertising claims in the absence of its own reliance on Redbox’s statements.

The case is No. CV 17-08655 DDP (AGRx).

Attorneys: Carolyn H. Luedtke (Munger, Tolles & Olson LLP) for Disney Enterprises, Inc., Buena Vista Home Entertainment, Inc., Lucasfilm Ltd. LLC, and MVL Film Finance LLC. Breton A. Bocchieri (Robins Kaplan LLP) and Donald W. Hawthorne (Axinn, Veltrop & Harkrider LLP) for Redbox Automated Retail, LLC.

Companies: Disney Enterprises, Inc.; Buena Vista Home Entertainment, Inc.; Lucasfilm Ltd. LLC; MVL Film Finance LLC; Redbox Automated Retail, LLC

MainStory: TopStory Copyright TechnologyInternet CaliforniaNews

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