Court Denies Disney Injunction Against Redbox

In what Redbox ‎director of marketing communications Kate Brennan calls “great momentum” for the kiosk disc rental operator, a federal court in Los Angeles on Feb. 20 rejected the Walt Disney Co.’s motion for a preliminary injunction to stop selling movie download codes.

Disney is the only studio that won’t sell product to Redbox. As a result, Redbox staffers buy Disney DVDs and Blu-ray Discs at retail, and then rent the discs while selling the codes – included in Blu-ray Disc combo packs – separately.

Last November, Disney filed suit, seeking to prohibit Redbox from selling codes to titles such as like Rogue One: A Star Wars Story and Moana at a discount to what digital copies sell for on Amazon or iTunes.

Disney argues that the sale of download codes violates copyright law. Disney includes a warning on combo packs that “codes are not for sale or transfer” – a warning underscored in the terms of use, which say the “sale, distribution, purchase, or transfer of digital copy codes …  is strictly prohibited.”

The judge, however, ruled that the warning does not constitute a contract restricting what a consumer can do with product purchased at retail.

In a critical finding, Judge Dean Pregerson ruled that “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.”

The preliminary injunction was granted because the court agreed with Redbox’s contention that Disney was unlikely to prevail on its case.  According to the ruling, “Disney has not demonstrated a likelihood of success on the merits of its contributory copyright infringement claim.”

“From Redbox’s perspective, the court’s decision was a common-sense application of the law of contracts to the unenforceable fine print on the outside of Disney’s combo packs,” Brennan said.

However, the court did rule that “at this stage of proceedings, it appears to the court that the First Sale Doctrine is not applicable to this case” – a critical cog in Redbox’s January countersuit against Disney, in which the kiosk operator maintains Disney digital codes should not be treated any differently than physical discs that it is legally entitled to rent.

The First Sale Doctrine, which video retailers used in the early 1980s to establish their right to rent videocassettes over strong studio opposition, says a copyright owner cannot prohibit a purchaser from reselling a copy of a work, such as DVD.

According to Pregerson’s ruling, “Redbox urges this court to conclude that Disney’s sale of a download code is indistinguishable from the sale of a tangible, physical, particular copy of a copyrighted work that has simply not yet been delivered.”

Specifically, the judge said that regardless what Disney’s representations on the disc case may suggest about whether or not a ‘copy’ is being transferred, he disagreed that a ‘particular material object’ exists, let alone could be transferred, prior to the time that a download code is redeemed and the copyrighted work is fixed onto the downloader’s physical hard drive.

Instead, Pregerson contends Disney appears to have sold something akin to an option to create a physical copy at some point in the future. Because no particular, fixed copy of a copyrighted work yet existed at the time Redbox purchased, or sold, a digital download code, the judge ruled the First Sale Doctrine inapplicable in the case.

The two parties will again square off in court on March 5, in a hearing on Redbox’s motion to dismiss the case.

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