Ctrl+alt+delete: Does the Bankruptcy Code Need a Reboot? the Eligibility of Consumer Digital Goods for Liquidation
| Publication year | 2014 |
CTRL+ALT+DELETE: Does the Bankruptcy Code Need a Reboot? The Eligibility of Consumer Digital Goods for Liquidation
Gene Goldmintz
The explosive growth of computers and the Internet at the end of the twentieth century sparked a fundamental change in the form of copyrighted materials. Books, films, music, and entertainment software have more recently been sold and bought as digital goods.
This Comment argues that the first-sale doctrine should apply to digital goods. These digital goods are typically sold in single lump sum payments determined by the quantity of the good, as opposed to a licensing fee determined by usage over time. The result is that these transactions are more similar to purchases rather than licenses. The first-sale doctrine should apply despite the naming conventions utilized in the End-User License Agreements accompanying these digital goods and the form-over-substance analysis favored by courts. Recognizing mass-market digital goods transactions as purchases would grant title of the copy of the digital good to the purchaser. The purchaser with title would be free to exercise the first-sale rights historically enjoyed in the physical world.
Even if courts refuse to recognize these transactions as purchases, § 365(f) of the Bankruptcy Code permits the assignment of these licenses as executory contracts. Through assignment, the trustee could sell off the licenses to third parties during the liquidation of the bankruptcy estate's property in chapter 7. In doing so, the bankruptcy policy of promoting the free assignability of assets and contracts would be respected. Finally, since most chapter 7 cases are no-asset cases, the resale of digital goods through assignment under § 365(f) would provide an additional source of returns to creditors.
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The Internet has enabled a nearly infinite amount of content available at the click of a mouse.1 Increased broadband penetration has brought enhanced connection speeds.2 This growth in Internet speed and access has brought digital networks to prominence as the dominant means for distributing copyrighted works.3
Digital distribution is the transmission of computer software, books, music, movies, and photos repackaged as digital media.4 Digital distribution has evolved beyond downloads to include apps and digital streaming.5 This evolution in delivery has fundamentally uprooted established business models in affected industries.6 For example, in 2012, as physical compact disk sales fell over 13% from 2011, digital album sales achieved 14.10% growth.7 This
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growth continued the shift that was already evident in 2011, when digital music sales exceeded physical sales for the first time, resulting in a 50.3% market share.8 In the book industry, Amazon's e-book sales have even cannibalized its own physical book sales.9
Digital media is commoditized and sold in the form of digital goods.10 The digital goods market for e-books, music, and entertainment software is dominated by Amazon,11 Apple,12 and Valve Corporation,13 respectively. These digital retailers exploit the favorable economics of digital catalogs which provide (1) limitless inventory; (2) infinite catalogs for both mass-market hits and niche offerings; and (3) decreased manufacturing and distribution costs.14
These benefits have been accompanied by an increase in control by rights holders over the ways in which consumers can use their purchases.15 This increased control limits consumer freedoms by (1) preventing consumers from purchasing or reselling digital goods through second-hand markets; (2)
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invoking privacy concerns; (3) hindering consumer innovation; and (4) inhibiting market efficiency through increased transaction costs.16
With technology outpacing legal developments, it is unclear what happens to these digital goods in chapter 7 bankruptcies. If these items were eligible for liquidation, they could generate returns for creditors, thereby promoting the bankruptcy policy of maximizing the value of the bankruptcy estate.17 This Comment argues that these digital goods should be eligible for (1) resale under the first-sale doctrine or, in the alternative, (2) assumption and assignment to third parties under § 365(f) of the Bankruptcy Code (the "Code") as property of the bankruptcy estate.
A. The First-Sale Doctrine
Copyright law seeks to balance the exclusive rights of copyright owners with the public interest in access to information and advancement of the arts and sciences.18 These exclusive rights include the right to reproduce the copyrighted work, prepare derivative works, distribute copies, and perform or display the work publicly.19 To meet this goal, the legal doctrine of exhaustion limits rights holders' power over their works when a copyrighted work is transferred from the rights holder to a transferee.20
Section 109 of the Copyright Act is the statutory embodiment of the first-sale doctrine.21 The first-sale doctrine allows owners of legally purchased copies of copyrighted works to redistribute those copies, whether through
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resale, gift, donation, etc.22 This limitation on an author's exclusive rights strikes "a balance between the artist's right to control [her] work . . . and the public's need for access."23 Without the first-sale doctrine, copyright owners could restrict everyday transactions that would not otherwise involve them.24 The first-sale doctrine prevents such interference by severing the copyright owner's exclusive distribution right whenever it transfers title to a particular copy of a work.25
The first-sale doctrine provides four benefits: (1) access, (2) preservation, (3) privacy, and (4) transactional clarity.26 First, the first-sale doctrine promotes access by lowering costs and increasing availability of copyrighted works.27 The copyrighted goods are more affordable and accessible through second-hand markets beyond the copyright owners' control.28 Second-hand markets pressure copyright owners to lower prices for their works.29 The availability of these works is broadened through the geographic dispersion of second-hand markets, as well as the willingness of these markets to serve customers beyond the copyright owners' primary customer bases.30
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Additionally, the reduced costs of purchasing previously-owned works allow second-hand markets to experiment with alternative access models, such as rentals or product sampling.31
Price competition facilitates access to copyrighted works by compelling copyright owners and second-hand markets to lower their prices. Since the copyright owner can only set the price for the initial sale of a copy of the work, second-hand markets have discretionary authority to set prices.32 The price competition within these markets drives prices down, which ultimately benefits the consumer.
Second, the first-sale doctrine preserves and maintains the circulation of publicly accessible works.33 The preservation of these copyrighted works occurs by ensuring their availability. Copyright owners may cease production of a work, thereby terminating the public's ability to obtain new copies. This decision may be cost-related. For example, a publisher may determine that the demand for a work is insufficient as compared to the costs involved in creating, storing, distributing, and marketing copies to consumers.34 In this scenario, the first-sale doctrine allows for continued access to these works by sale, rental, or borrowing, even though production of new copies may no longer be economically viable for the copyright owner.35
Besides economic reasons, new copies may no longer be available because the copyright owner refuses to supply the work or decides to recall distributed copies. The copyright owner's refusal may be due to dissatisfaction with some aspect of the work, such as quality or an outdated authorial message.36 Additionally, if the creator has transferred copyright ownership to a corporate author or publisher, the copyright owner may recall the work if it is antithetical
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to the current moral or political climate.37 When the copyright owner takes such measures, the first-sale doctrine provides an alternate way for the public to maintain access to previously distributed copies of the work.
Third, the first-sale doctrine protects consumer privacy by permitting owners of lawfully purchased copies to transfer their copies without requiring the copyright owner's permission.38 If consent were required, the copyright owner could monitor, record, and possibly restrict the transfer of copies.39 This privacy protection takes on greater importance when considering works that may be controversial or unpopular.40
Fourth, the first-sale doctrine provides transactional clarity by removing restrictions on the transfer of copyrighted goods.41 This transactional clarity simplifies information costs and improves market efficiency by removing idiosyncratic restrictions, which restrain each second-hand seller.42 Complying with such restrictions imposes additional costs on the initial purchaser as well as any downstream transferees. These additional costs may discourage consumers from lawfully acquiring a copy or choosing to ignore the restrictive terms entirely.43
B. Software End-User License Agreements
While the first-sale doctrine governs the secondary distribution of copyrighted works, it is generally not applicable to transactions involving digital goods. This is because digital retailers typically structure the transaction as a license, not a sale. Industry practice requires consumers to agree to the terms of the digital retailer's End-User License Agreement ("EULA"), which dictates the terms of the transaction.44 These EULAs generally prohibit
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copying, reverse engineering, renting, and transferring the software.45 Typically, EULAs refer to...
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