Redbox LogoDisney and Redbox have never really been best friends.

Disney, infamous for maintaining tight control over its intellectual property, has always been leery of Redbox. Redbox’s bright red kiosks have long threatened to disrupt not just the dvd rental/sale market, but the burgeoning download rental/sale market as well.

On December 17, 2017, Redbox inked a deal with Universal to allow it to purchase the studio’s DVDs wholesale and make them available for rental on the same day they are released. Redbox enjoys a similar arrangement with every other major studio, though some require a 7-day delay. The only exception is Disney, which has had no deal at all with Redbox since 2012.

But this shouldn’t come as a surprise because, earlier that month, Disney filed a lawsuit against Redbox alleging that the DVD rental service was violating their copyright.

But the issue they sued over wasn’t the rental of DVDs, but rather, the resale of digital codes.

It’s the bizarre story of a feud between two companies spilling into the courtroom and then tripping over what could be one the most important questions in recent copyright history.

Disney vs. Redbox: The Background

Disney LogoRedbox works the same way most brick-and-mortar DVD rental have worked, by working with studios to purchase wholesale copies of DVDs to rent out.

For DVD rental places this is a boon because the discs are much cheaper and they can be ready to rent out the same day they hit store shelves. For film studios, this gives them leverage over the rental companies to set prices, advertising terms and windowing.

Redbox, as of December 17, 2017, has such an agreement with every major film studio save one: Disney.

However, this doesn’t mean Redbox doesn’t carry Disney films. Without a wholesale agreement, Redbox simply sends its employees into retail stories to purchase copies of DVDs the same as any other customer.

While this is more expensive and more time consuming, it is the only way for Redbox to legally get Disney DVDs into its kiosks.

Redbox can do this because of the first sale doctrine. The first sale doctrine basically says that, once a copyright holder sells a copy of their work, the purchaser can do what they want with that copy (other than make other copies). They are free to sell, rent or give away the copy as they see fit. The first sale doctrine is why we have used record stores, libraries and, in this case, DVD rental kiosks.

But Redbox took this right of first sale a step farther. Many of the DVDs they legally acquired were combo packs, meaning that they had both the physical disc and a digital download code. Redbox, after buying the pack, would separate the disc out to be rented in their kiosks and then resell the card with the digital download code in their kiosks.

Disney, however, considered this a violation of their rights and, on December 1, 2017, filed a lawsuit against Redbox claiming contributory copyright infringement, breach of contract, tortious interference, false advertising and unfair competition.

A month later, Redbox hit back with a couterclaim that alleged copyright misuse, tortious interference, false advertising, and unfair competition. In its counterclaim, Redbox accused Disney of interfering with their legal purchase of Disney DVDs by threatening retailers into not selling copies to Redbox employees.

With that, the stage is set for a nasty legal fight that will likely test some of the thorniest areas of copyright law in the digital age.

The Case So Far

Despite the case being only a few months old, there’s already been a remarkable amount of movement on it.

In February, the judge ruled against Disney in its bid to get an injunction barring Redbox from reselling download codes. According to the judge, Disney placing “Codes are not for sale or transfer” on the box did not constitute a legally-binding contract with Redbox and the terms of service on their Movies Anywhere platform are unenforceable because they demand customers give up their first sale rights.

Last week, Disney responded to this defeat by filing an amended complaint. With it, Disney highlighted new language placed on its site to redeem the digital codes, which limits redemption to the original purchaser of the combo pack, and argues that, since the digital download doesn’t exist until after the code is entered, that there is no right of first sale in the code.

Redbox followed almost immediately with its own response and amended complaint. This time, Redbox added complaints that Disney employees had threatened Redbox employees with imprisonment and hired Anderson Merchandisers LLC (now named as a defendant) to thwart Redbox’s purchasing of Disney DVDs.

What’s clear is that this case is not going to be ending any time soon. But, as the two sides battle over the resale of digital codes, they walk into a dangerous and hotly-debated area of copyright law: What does first sale mean when the product is digital?

The First Sale Doctrine Online

The idea of the first sale doctrine was pretty simple when all copyrighted works were physical. We inherently understand what it means to lend or sell a physical work.

However, those terms lose a lot of their meaning when everything is digital. How do you sell a used ebook? How do you lend an MP3? When you do that with a physical work, no new copies are created. However, it can be nearly impossible to ensure that only one copy of a digital work remains after it is “sold” to a third party.

This exact issue was explored in the ReDigi case. ReDigi is (or at the moment was) a service that allowed people to “resell” legally-purchased MP3s that had been bought on iTunes. The idea was that a customer would sell their MP3 to ReDigi, who would use software to transfer the file and destroy the original on the seller’s computer.

The company was sued by Capitol Records, which won big in the lower court in April 2013. According to the court, the right of first sale simply did not apply to digital works. This was because illegal copying was inherent in the transfer of a digital work and there was no way for ReDigi to ensure that the original copy had been truly destroyed.

ReDigi appealed that ruling to the Second Circuit, with the appeal being heard in August 2017, we are currently waiting for the outcome of that appeal. ReDigi has since closed down and its home page has been replaced with a clock counting down how long they have waited for the verdict (currently at nearly 34 weeks).

Another case to look at the issue was Vernor v. Autodesk. Timothy Vernor purchased used Autodesk software and attempted to resell it on eBay, only to be subject to a large number of copyright notices filed by Autodesk. Vernor sued claiming that the first sale doctrine allowed him to resell the software.

Autodesk, however, argued that the people who sold the software to Vernor never owned a copy, but instead, only a license to the application. Since the first sale doctrine doesn’t cover licenses, that would make the original transfer unlawful as well as any subsequent sales.

The lower court sided with Vernor noting that the original sellers had a perpetual possession of the software. However, the 9th Circuit overturned that, saying that, while the license granted the original buyers may have been perpetual, it still imposed severe restrictions making it a transfer of license, not a sale.

But neither of these cases full address Redbox’s lawsuit. Redbox isn’t selling used MP3s nor is it selling copies of software. What it is doing is taking the physical card with a download code out of a combo pack and selling it via its kiosks. Nothing, even in the code itself, is being copied.

Disney is arguing that this is a violation of their license that says the codes are not for resale. As such, everyone who uses the code is violating their copyright and that makes Redbox liable for contributory copyright infringement. Furthermore, according to Disney, since the copyrighted work is created after the code is used, first sale doesn’t apply.

But that is where this case leaves us, at the intersection between first sale in the physical world and the digital. Can you resell a physical item, namely a card with a code, if it is used to create a digital one? That is the fundamental question of this case.

That, in turn, is why this case may be extremely important. It exists right at the boundaries of the first sale doctrine and raises serious questions about the physical distribution of digital goods.

That, in turn, is an issue that’s difficult to overstate the importance of, especially as we access more and more of our content digitally.

Bottom Line

First sale has taken a huge beating online. Barring a reversal from the Second Circuit in the ReDigi case (or the Supreme Court), first sale doesn’t really apply to digital works.

However, Redbox isn’t selling a digital work. They’re selling a physical code that is used to download a digital work. It might seem like a trifle of a distinction, but it’s crucial and may have a major hand in determining how digital works are distributed in the physical world.

As our digital lives and our physical lives become more intertwined, questions such as these become both more common and more important.

Right now, we’ve very early in this case but it’s going to be one to watch. Not just because it’s a legal blood feud, but because it’s addressing issues that are crucial to the future of content distribution.

So, strap yourselves in, we likely have a long way to go with this one.