Record Rental Exception to First Sale Doctrine Only Applies to Musical Works

In Brilliance Audio, Inc. v. Haights Cross Communications, Inc., the Court confronted the question of whether the record rental exception to copyright’s first sale doctrine, codified at 17 U.S.C. § 109(b)(1)(A), applies to all sound recordings, or only sound recordings of musical works. Specifically, this case asks whether the exception applies to sound recordings of literary works such as the audiobooks produced by Brilliance Audio (“Brilliance”). The United States Court of Appeals for the Sixth Circuit held that two exceptions exist to the first sale doctrine under trademark law and that Brilliance’s complaint, construed broadly, had alleged that these exceptions apply in the present case. However, the Court held that the record rental exception to the first sale doctrine for copyrights only covered musical works, not sound recordings of literary works. Thus, the Court reversed the dismissal of the trademark claims and affirmed the dismissal of the copyright claims.

Pursuant to exclusive agreements with publishers and authors for sound recording rights to their works, Brilliance produces two versions of audiobooks: one for the retail sales market (“retail editions”) and another for library and lending institutions (“library editions”). The company has federal trademark rights and copyrights in these works and filed suit against its competitors, Haights Cross Communications, Inc., et al., (collectively “Haights”), for infringing these rights by allegedly repackaging, relabeling, and remarketing the Brilliance retail editions as library editions. Under the first sale doctrine in copyright and trademark law, resale by the first purchaser of an original trademarked or copyrighted item is not infringement, and thus the district court below granted Haights’ motion to dismiss all claims under Fed. R. Civ. P. 12(b)(6) for failure to state a claim.

Upon appeal, the Court of Appeals recognized two situations in which the resale of a product does not fall under the first sale exception of trademark law. The first situation is when notice of repackaging is inadequate, and the second situation is when the resold product is materially different than those sold by the trademark owner. Both situations can result in consumer confusion and trademark value dilution. Construing Brilliance’s complaint broadly, the Court found that the company alleged both of these situations. While it is not clear that the retail editions and library editions of the audiobooks are materially different, materiality is a fact-based finding. Thus, the Court held that because Brilliance did not allege insufficient facts, the district court erred in dismissing the trademark claims under Rule 12(b)(6).

With regards to the first sale doctrine in copyright law, this case presents the novel issue of whether the record rental exception to the doctrine applies to all sound recordings or only sound recordings of musical works. The Record Rental Amendment of 1984 states that “unless authorized by the owners of a copyright in the sound recording . . . and . . . in the musical works embodied therein, . . .” a phonorecord owner may not rent out, lease, or lend the phonorecord for commercial advantage. 17 U.S.C. § 109(b)(1)(A). One reading of the statutory text requires obtaining permission from the copyright owner of any sound recording, as well as the consent of the copyright owner of a work being recorded if musical. Another reading of the text requires the consent of the copyright owner only in sound recordings containing musical works, as well as the permission of the copyright owner of the musical work. The Court chose this latter reading after looking to legislative history and policy rationales behind the rental record amendment. Given the context of the legislation and the time the Amendment was passed, the Court concluded that Congress meant to specifically address the rampant piracy in popular musical recordings. Where technology has led to a new class of works needing protection, such as computer software, Congress has amended the statute to exempt these works from the first sale doctrine. Thus, absent explicit Congressional action, the Court construed the statute narrowly to avoid upsetting the traditional balance between rights of copyright owners and personal property rights of individual owners of copies.

While Brilliance may be able to allege an exception to the first sale doctrine in its trademark claim, its audiobooks are not musical works protected by the record rental exception to the doctrine. Therefore, the Court affirmed the decision of the district court to dismiss the copyright infringement claims but reversed with respect to the trademark claims and remanded for further proceedings.

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