Redbox Says Disney Engaging in Copyright Misuse to Protect Coming Streaming Service

Disney is seeking an injunction to prevent Redbox from disassembling "combo packs" and selling movie download codes separately.
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Redbox wants to turn a legal dispute over its sale of digital movie codes into a competition issue. The retailer is now defending itself from a lawsuit brought by Disney, and the first thing a California judge must decide is whether the Mickey Mouse giant is entitled to a preliminary injunction.

On Tuesday, Redbox suggested in court that Disney is engaged in copyright misuse and seeks "to stifle competition to more smoothly launch Disney’s own digital content streaming service, maximize the price other services like iTunes and Amazon (and their customers) pay for Disney movies, and secure a greater market share for Hulu — the viewing service Disney will control as part of its $52 billion acquisition of 21st Century Fox."

This lawsuit brought at the end of November by Disney is a provocative one that has a good chance of setting new precedent on some relatively untrodden terrain.

Disney objects to how Redbox disassembles "combo packs," which include a Blu-ray disc, a DVD and a code that can be redeemed through authorized digital outlets and is marked "not for sale or transfer." In Disney's eyes, this amounts to a breach of contract on the terms in which such "combo packs" are sold as well as contributory copyright infringement. The latter claim essentially posits that customers who acquire movie download codes from Redbox and then redeem them are committing an unlawful act.

This case has big stakes for a company like Redbox attempting to find its way after making it big by selling physical media in kiosks throughout the country. Distribution has evolved, and Redbox must adapt. And so, Redbox has hired a team of lawyers, including a former prosecutor in the Justice Department's antitrust division. It's too early to say whether Redbox will assert counterclaims or raise a stink as Disney seeks regulatory approval on the Fox acquisition, but the possibility of an injunction has caused Redbox to put forward a defense at this early juncture to protect an endeavor for which it says it has already incurred $700,000 in expenses.

According to Redbox, "An injunction that removes Redbox from the digital download market when the technology is emerging is also likely to cause permanent and unquantifiable harm to its ability to participate in that market — a harm that is amplified by Disney’s impending launch of its own streaming service."

Redbox argues that Disney's copyright claims are barred by the first sale doctrine, which provides that someone who lawfully acquires a copyrighted work is entitled to sell or dispose of their copy.

"Plaintiffs concede that Redbox may rent or resell the Blu-Rays and DVDs pursuant to the first sale doctrine, but absurdly assert that the code cannot be transferred unless it is transferred with the DVD and Blu-Ray disc," states Redbox's opposition brief. "They erroneously contend that the digital copy should be treated differently because the phrase 'Codes are not for sale or transfer' appears on some of the asserted packages. However, this phrase, which is often printed so small that it is barely readable, actually only appears on five of the 20 titles cited in the Complaint. The other 15 have no such restriction."

Redbox adds, "Even as to those packages that contain the phrase, the phrase still fails to transform the transaction from the sale of a digital copy into the sale of a license."

A test developed by the 9th Circuit to determine whether a software user is a licensee is invoked. Redbox says Disney fails to satisfy it.

"First, Plaintiffs did not specify that a user is granted a license," writes Redbox's lawyer Michael Geibelson at Robins Kapla. "Second, Plaintiffs do not significantly restrict the user’s ability to transfer the digital movie. For example, the digital movie code is freely sold by retailers, and Plaintiffs have produced no evidence that a separate license agreement was entered with those retailers to transfer the movie.... Third, the copyright owners impose no use restrictions other than the standard geographic limitation that is asserted on all media sold in the United States. Moreover, the phrase, 'Codes are not for sale or transfer,' plainly does not mean that a user cannot use the code to obtain the movie it purchased. As such, no restrictive license is present and Plaintiffs’ rights to control distribution are exhausted by the first sale doctrine."

In its bid for a preliminary injunction, Disney anticipated that a defense premised on the first sale doctrine would come. The plaintiff argued that the first sale doctrine was inapplicable because the movie download code "is not 'a particular copy' of a work. The Code is just that — a Code that, when redeemed in accordance with the applicable terms of service, allows an authorized user of the Code to obtain a digital download."

After running through more arguments, including how no enforceable contract limits the transfer of codes, Redbox raises the temperature even higher with the contention that Disney is engaged in copyright misuse. The defendant asserts that the imposition of unduly burdensome licensing agreements that restrict competition can violate public policy and constitute an impermissible expansion of a monopoly built upon copyright control.

"Here, Plaintiffs admit they do not sell digital movie codes as 'freestanding' products," states the opposition brief. "Instead, consumers are required to buy Combo Packs to obtain a digital movie code. They contend that, when consumers are allowed to buy codes sold from Redbox, they will sell fewer Combo Packs. This plainly demonstrates, and Plaintiffs admit, that they are attempting to prohibit downstream resale or transfer of their products. They are attempting to limit resale of physical DVD and Blu-ray discs, by requiring  consumers to retain them to access digital movies. And they admit that they are attempting to restrain competition because Redbox is competing downstream and offering lower prices. All of these misuse the limited monopoly in copyright."

Redbox then goes on to tell the judge how Disney is seeking to enforce two separate agreements restraining how its products are sold — one at the point of sale and one at the online distributor's.

"While, as discussed supra, Redbox disagrees and does not concede that any agreement exists, assuming, arguendo, that such restrictions were present in the marketplace, it would be anticompetitive and against public policy under the rule established in the foundational cases that recognize the copyright misuse defense in the Ninth Circuit," continues Geibelson.

Here's the full brief.

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