Disney Sees Red Over Ruling on Download Codes

Ever since sales of DVDs and Blu-ray Discs began their long eclipse behind the rise of more convenient digital alternatives the Hollywood studios have sought ways to extend the life of the high-margin disc business by finding ways to integrate disc sales with the broader digital economy.

The most systematic effort was the UltraViolet initiative. By creating an UltraViolet account, consumers could register their purchase of a DVD or Blu-ray Disc and obtain access to a digital version of the same movie, which they could then stream to connected devices without a DVD or Blu-ray drive, via participating streaming services.

Disney, which never joined the UltraViolet consortium, had its own version it called Disney Movies Anywhere (now re-christened simply Movies Anywhere and incorporating most of the former UltraViolet studios). Disney packaged its discs with an insert containing a code, which, when entered by the consumer in her online Movies Anywhere account allowed her to stream the movie through participating online services, or to download the movie onto up to eight registered devices.

DVD rental kiosk operator Redbox has likewise struggled with consumers’ declining appetite for DVDs and Blu-rays. It’s main strategy has been to keep its rental prices extremely low, which has often put it at odds with the studios, who by and large would prefer to see the low-end rental market wither away. But Redbox, too, has sought ways to make itself digitally relevant.

It’s solution? Unbundle what Disney had bundled.

While some studios have made a reluctant peace with Redbox and sell discs directly to the kiosk operator Disney has not. To obtain Disney titles, Redbox has been forced to purchase inventory through other retail channels, often in the form of Disney Combo Packs, which include a DVD, a Blu-ray Disc, and an insert with the code for Disney Movies Anywhere.

As part of its digital relevance efforts, Redbox started breaking up the combo packs, repackaging the Movies Anywhere insert in its own packaging, and offering the download codes for sale through its kiosks, at a discount to the price of the disc. Disney objected, but lacking any contractual vendor relationship with Redbox it had no leverage to stop it. So the studio sued the kiosk operator for copyright infringement.

“When Redbox’s customers download Copyrighted Works using a Code purchased from Redbox, they do so without authorization and in violation of Plaintiffs’ exclusive rights under copyright, including the right of reproduction,” Disney claimed in its complaint. “Redbox is contributorily liable for copyright infringement because it (a) has knowledge that its customers will be reproducing the Copyrighted Works without authorization when they use the Codes to download copies of those works, and (b) induces, encourages, or materially contributes to the violation of Plaintiffs’ rights through its unlawful resale of the Codes.”

The suit also charged Redbox with breach of contract for violating the “terms and conditions” it claims govern the purchase of the Combo Packs, which purport to prohibit transfer of the codes.

This week, a federal district judge in California dealt the studio a serious setback in the case by declining to issue an temporary injunction to stop Redbox from selling the codes.

Worse for Disney, the judge concluded that the studio had engaged in copyright misuse, subjecting it to at least the remote danger of losing the right to enforce its copyrights on its movies, as Redbox is now demanding.

According to Disney, the codes represent a limited license to distribute the movie, not the sale of another copy, governed by the terms and conditions of the Movies Anywhere service (along with those of the related service RedeemDigitalMovies.com). Those terms state that consumers are only authorized to use the codes if they are currently the owners and in possession of the physical discs the codes were packaged with. Anyone who obtained and used the codes separately, therefore, is violating the terms of the license and thereby infringing Disney’s copyright.

According to the court, however, “There can be no dispute [per the first sale doctrine] that Disney’s copyrights do not give it the power to prevent consumers from selling or otherwise transferring the Blu-ray discs and DVDs contained within Combo Packs. Disney does not contend otherwise. Nevertheless, the terms of both digital download services’ license agreements purport to give Disney a power specifically denied to copyright holders by § 109(a)…This improper leveraging of Disney’s copyright in the digital content to restrict secondary transfers of physical copies directly implicates and conflicts with public policy enshrined in the Copyright Act, and constitutes copyright misuse.” (Emphasis added.)

As to Disney’s claim that transfer of the codes violates the shrink-wrap license governing the Combo Packs, the court dismisses the language on the outside of the packaging as insufficient to establish an enforceable contract.

While the facts of the case are new, the situation is not. Disney’s real concern here is not copyright infringement as such, it’s the business model implications of severing the download codes from the physical discs.

The codes are a one-time pad. They can’t be re-used once they’ve been entered the first time, so transfer of a code does not result in any more copies than Disney itself has authorized. They can’t be used to circumvent technical protection measures on other copies. They’re simply a product key.

The problem for Disney is that bundling of the codes with the discs is intended to enhance the value of the discs as an incentive to purchase. If the codes can be obtained and used without having to purchase the discs, that incentive is undermined. Why buy the cow when you can get the milk without it?

Selling the codes at a discount could also undermine the market for streams and downloads in downstream windows.

But a copyright is not a guarantor of the copyright owner’s preferred business model. It’s a limited grant of specifically enumerated exclusive rights.

What Disney is trying to do in this case is to use copyright law to try to prevent outcomes adverse to its preferred business model. But its preferences are not among those exclusive rights.

We’ve seen this movie before. As far back as 2002, a group of studios sued SonicBlue over its Replay TV DVR, arguing that by automating consumers’ own ad-avoidance behavior somehow amounted to copyright infringement, an argument Fox revived more than a decade later in its unsuccessful lawsuit against Dish Network.

It’s a bad habit that invites skepticism of legitimate copyright claims. Copyright owners do themselves no favors by falling back on it.