Disney Wins Injunction Against Redbox: Movie Download Codes Can't Be Sold Separately

A federal judge blesses the studio's revised licensing terms over "Combo Packs" which he concludes no longer runs afoul of a customer's right to resell physical discs.
Courtesy of Marvel Studios
'Black Panther'

Disney has prevailed on its second attempt to stop Redbox from selling digital codes that consumers can redeem at online outlets to access copies of Black Panther and other movies. On Thursday, a California federal judge granted a motion for a preliminary injunction.

This case has hardly been easy for the studio.

Redbox operates DVD rental kiosks in retail stores throughout the nation. But online streaming has disrupted the business now owned by the private equity giant Apollo Global Management. So Redbox got ahold of Disney's "combo packs," which include a Blu-ray disc, a DVD and a digital code, and disassembled it, offering only the download code at a cheaper price.

Disney was upset and filed a copyright lawsuit.

Maybe surprisingly, Redbox won the first round. In February, U.S. District Court Judge Dean Pregerson saw merit to Redbox's position that Disney had misused its copyrights to films such as Frozen and Star Wars.

The problem was in packaging that stated, "Codes are not for sale or transfer," which conditioned use on a user representing that he or she "is the owner of the physical product that accompanied the digital code at the time of purchase."

In the earlier decision, Pregerson analyzed whether restrictive license terms improperly granted Disney power beyond the scope of its copyright. Here, the issue was the first sale doctrine, which provides that someone who lawfully acquires a copyrighted work is entitled to sell or dispose of their copy. Pregerson wrote in his first decision the problematic nature of how Disney was improperly leveraging "digital content to restrict secondary transfers of physical copies" and said this "implicates and conflicts with public policy enshrined in the Copyright Act, and constitutes copyright misuse."

After the decision, Disney changed the language on its Combo Pack boxes, changed the download sites' terms of use and amended its complaint with a new attempt at an injunction. Black Panther became the first product incorporating the change. Now, Disney tells customers, "Digital code redemption requires prior acceptance of license terms and conditions," "The digital code contained in this package may not be sold separately" and more.

Disney positioned this as an enforceable "clickwrap" agreement that required affirmative assent. Redbox responded that post-purchase restrictions were unenforceable and that there was no contract formed at the point of sale. Further, Redbox argued that it can only be liable for contributory infringement if it had subjective intent to be a contributory infringer.

The judge sides with Disney.

"It is undisputed that Redbox has actual knowledge of the redemption sites’ clickwrap terms, which do appear to create a restrictive license," he writes.

Pregerson rejects the defendant's other arguments that Combo Pack purchasers obtain an ownership interest in a digital download and that the Black Panther language amounted to a deficient "boxtop" license agreement. The judge says that because Redbox did not obtain an ownership right to any digital content when it purchased the combo packs, Disney has adequately shown that it is likely to succeed on its claim that Redbox encouraged its customers to infringe Disney's copyrights by redeeming codes in violation of the license terms set forth on the redemption sites. He adds that these terms are available for review even before purchase and agrees with Disney of an "affirmative manifestation of assent in the form of a button click."

So then the analysis moves back to Redbox's defense that Disney has committed copyright misuse from misrepresentations surrounding a customers' ability to dispose of physical copies. Redbox argued that Disney's changes didn't cure the issue.

Pregerson disagrees.

"Downloaders no longer need affirm that they possess the physical discs, to which first sale rights would apply," he writes.

Redbox attempted to sway the judge that there was still ongoing misuse because the "digital code is rendered worthless" unless a Combo Pack owner foregoes the first sale rights associated with the physical discs.

"That statement is not accurate," retorts the judge. "Under the old terms, a Combo Pack owner who disposed of the discs was indeed left with a worthless code because continued possession of the discs was a condition of digital access. Now, however, digital access is conditioned not on possession of the discs, but on the manner of Code acquisition. A Combo Pack owner who disposes of the discs is left with the same digital access rights he or she always possessed. Although Redbox is correct that, because Codes are not separately transferable, a Combo Pack owner cannot transfer a Code if he or she disposes of the discs first, the right to transfer a separate Code is not protected by the first sale doctrine or any unconditional ownership rights. ... A copyright misuse defense, therefore, is unlikely to succeed."

The full decision can be read below.

After the ruling, Redbox patted itself on the back as an "advocate for the consumer" and issued a statement that interpreted the injunction to apply to only certain titles, like Black Panther, that contain new disclosures. Redbox asserts the right to sell codes to prior titles without the amended language. Redbox adds that it has "never attempted to sell, and had no plans to sell, digital codes for Black Panther" and that "Disney, therefore, has not been damaged by Redbox's business practices, and the ruling compels no change in Redbox's business practices."

"The same isn't true for Disney," Redbox adds. "In addition to having been forced to change misleading language on its packaging and its websites, Disney now must offer consumers the ability to return digital codes or Combo Packs for a refund if they disagree with digital license terms."