Intellectual Property's First Sale Doctrine and the Policy Against Restraints on Alienation

Texas A&M Law Review Texas A&M Law Review

Volume 7 Issue 3

May 2020

Intellectual Property's First Sale Doctrine and the Policy Against Intellectual Property's First Sale Doctrine and the Policy Against

Restraints on Alienation Restraints on Alienation

Lorie M. Graham

Suffolk University Law School

, [email protected]

Stephen M. McJohn

Suffolk University Law School

, [email protected]

Follow this and additional works at: https://scholarship.law.tamu.edu/lawreview

Part of the Contracts Commons, and the Intellectual Property Law Commons

Recommended Citation Recommended Citation

Lorie M. Graham & Stephen M. McJohn,

Intellectual Property's First Sale Doctrine and the Policy Against

Restraints on Alienation

, 7 Tex. A&M L. Rev. 497 (2020).

Available at: https://doi.org/10.37419/LR.V7.I3.1

This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for

inclusion in Texas A&M Law Review by an authorized editor of Texas A&M Law Scholarship. For more information,

please contact aretteen@law.tamu.edu.

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ARTICLES

INTELLECTUAL PROPERTY’S FIRST SALE

DOCTRINE AND THE POLICY AGAINST

RESTRAINTS ON ALIENATION

By: Lorie M. Graham* & Stephen M. McJohn**

ABLE OF

ONTENTS

I. F

IRST

ALE AS

OOTED IN THE

OLICY

GAINST

ESTRAINTS ON

LIENATION

........................... 501

A. Early Cases ......................................... 501

B. Recent First Sale Developments in the Supreme

Court ............................................... 504

1. The Kirtsaeng Decision ......................... 504

2. The Lexmark Decision.......................... 506

II. H

ROADLY

OES THE

IRST

ALE

XTEND

IF IT IS

REVENT

ESTRAINTS ON

LIENATION

? ............ 509

A. Common Law View of Restraints on Alienation .... 511

B. “Reasonableness” of Restraints on Alienation ....... 514

III. W

HETHER

IRST

ALE

REEMPTS

ESALE

OYALTY

IGHTS FOR

RTISTS

................................... 520

A. Restraints on Alienation as Artists’ Moral Rights .... 521

B. Resale Royalties as Restraints on Alienation ......... 524

IV. “L

ICENSES

”

VOID

IRST

ALE

ESTRAINTS ON

LIENATION

............................................ 533

A. Vernor v. Autodesk, Inc. and its Aftermath ......... 534

B. Application of Vernor in Restraints on Alienation

Context ............................................. 536

V. C

ONCLUSION

............................................ 540

The first sale doctrine decouples intellectual property and physical

property. Suppose, at an auction at Sotheby’s, someone bought a

contemporary painting by Chuck Close.

The buyer now owns the

physical painting, but the copyright to the painting remains with the

owner of the copyright—the painter Chuck Close or whomever Close

DOI: https://doi.org/10.37419/LR.V7.I3.1

* Professor of Law, Suffolk University Law School.

** Professor of Law, Suffolk University Law School.

1. See Close v. Sotheby’s, Inc., 894 F.3d 1061, 1064 (9th Cir. 2018) (analyzing

whether first sale doctrine in federal copyright law preempted California’s Resale

Royalty Act).

497

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498 TEXAS A&M LAW REVIEW [Vol. 7

may have transferred the copyright to.

Absent the first sale doctrine,

if the buyer either sold the painting or displayed it to the public, the

buyer would potentially infringe the copyright in the painting.

The

the original, the first copy

) of the painting to the public and to

distribute copies to the public.

However, the first sale doctrine

provides that the owner of an authorized copy may display or

distribute that particular copy without infringing.

The distribution

right and display right no longer apply; these rights are “exhausted.”

Permission from the copyright owner is not required to resell

copyrighted works or to display them.

First sale permits a broad

swath of activity. Used bookstores, libraries, swap fests, eBay,

students reselling casebooks, and many more may rely on first sale to

protect their distribution of copyrighted works.

Museums, galleries,

archives, bookstores, and more can likewise display their copies of

copyrighted works without infringing under first sale. First sale (more

commonly called “exhaustion” in patent law

) also applies to

2. See 17 U.S.C. § 202 (2018) (“Ownership of a copyright, or of any of the

exclusive rights under a copyright, is distinct from ownership of any material object in

which the work is embodied. Transfer of ownership of any material object, including

the copy or phonorecord in which the work is first fixed, does not of itself convey any

rights in the copyrighted work embodied in the object; nor, in the absence of an

agreement, does transfer of ownership of a copyright or of any exclusive rights under

a copyright convey property rights in any material object.”).

3. “Potentially” because there exists the possibility of fair use. See id. § 107.

4. Id. § 101 (“The term ‘copies’ includes the material object, other than a

phonorecord, in which the work is first fixed.”).

5. See id. § 106(3) (“to distribute copies or phonorecords of the copyrighted work

to the public by sale or other transfer of ownership, or by rental, lease, or lending”);

id. § 106(5) (“to display the copyrighted work publicly”).

6. See id. § 109(a) (“Notwithstanding the provisions of section 106(3), the owner

of a particular copy or phonorecord lawfully made under this title, or any person

authorized by such owner, is entitled, without the authority of the copyright owner, to

sell or otherwise dispose of the possession of that copy or phonorecord.”); see also

§ 109(c) (“Notwithstanding the provisions of section 106(5), the owner of a particular

copy lawfully made under this title, or any person authorized by such owner, is

entitled, without the authority of the copyright owner, to display that copy publicly,

either directly or by the projection of no more than one image at a time, to viewers

present at the place where the copy is located.”).

7. See, e.g.,

HUBHA

HOSH

& I

RENE

ALBOLI

, E

XHAUSTING

NTELLECTUAL

ROPERTY

IGHTS

: A C

OMPARATIVE

OLICY

NALYSIS

6–7 (2018).

8. See, e.g., Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538–39 (2013)

(applying first sale to copies made abroad).

9. “Without the exhaustion doctrine, the market for reselling or renting products

would either not exist or would look very different.”

HOSH

& C

ALBOLI

, supra note

7, at 6.

10. See, e.g., Amelia Smith Rinehart, Contracting Patents: A Modern Patent

Exhaustion Doctrine, 23

ARV

. J.L. & T

ECH

. 483, 484 (2010) (“The patent exhaustion

doctrine, also known as the first sale doctrine, evolved in the United States during the

late nineteenth century to accommodate the free movement of patented goods in

commerce. In its simplest statement, the doctrine operates to ‘exhaust,’ or extinguish,

the exclusive rights of sale and use as to patented articles sold with the patent owner’s

authorization.”).

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2020] FIRST SALE DOCTRINE 499

patented products.

Someone who buys a patented product (such as a

pharmaceutical, computing device, or printer cartridge) can use or

resell that product without infringing the patent, even though the

patent owner has the rights to exclude others from using or selling the

invention.

First sale enables markets for resale or lease of patent

products, from printer cartridges to airplanes.

First sale has its limits. In copyright, it applies only to the rights to

distribute and to display the work.

The copyright owner also has the

exclusive right to make copies, to adapt the work, and to perform the

work publicly, which are not subject to first sale.

The painting buyer

would potentially infringe if the buyer made a copy of the painting

or adapted it into another artwork,

but the buyer could not infringe

the performance right, because one cannot perform a painting.

The

owner of a copy of a musical work may infringe if she performs it in

public, which is why bars need licenses to play copyrighted music,

even using copies they have purchased. The owner of a copy of a

movie may infringe if she adapted the movie, such as making a

sequel—or even dubbing the movie in another language. In patent,

first sale likewise would not authorize the purchaser of a product to

make additional copies. Similarly, first sale in patent would authorize

the buyer of a patented item to use it or resell it, but not to make

another one.

First sale is long-established, by statute in copyright and by judicial

interpretation in patent. The underlying policy of first sale, however,

has been unsettled.

First sale can be seen to rest on either of two

rationales.

The first is a contract-based, gap-filler approach. If

11. First sale applies also within trademark law but triggers significantly different

policy concerns. See David W. Barnes, Free-Riders and Trademark Law’s First Sale

Rule, 27

ANTA

LARA

OMPUTER

& H

IGH

ECH

. L.

J. 457, 458 (2011) (“The co-

incidence of consumers’ and trademark owners’ interests may provide legitimate

grounds for distinguishing trademark first sale doctrine from copyright and patent

first sale doctrine.”).

12. See, e.g., Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523,

1531–36 (2017) (holding that first sale overrides contractual provisions and that first

sale in patent law applies to transactions abroad).

13. 17 U.S.C. § 109(a) (2018).

14. Id. § 106(1)–(2), (4), (6).

15. Id. § 106(1).

16. Id. § 106(2).

17. Id. (giving the copyright holder the exclusive right “in the case of literary,

musical, dramatic, and choreographic works, pantomimes, and motion pictures and

other audiovisual works, to perform the copyrighted work publicly . . . [P]ictorial,

graphic, or sculptural works” are not included in the performance right).

18. See Bowman v. Monsanto Co., 569 U.S. 278, 280 (2013).

19. Ariel Katz, The First Sale Doctrine and the Economics of Post-Sale Restraints,

2014

BYU L. R

55, 141 (2014) (“Despite over a hundred years of adjudication,

courts have never been able to draw the exact contours of the first sale doctrine or

fully articulate its rationale.”).

20. First sale is also related to other doctrines that may be triggered by restraints

on resale. See Herbert Hovenkamp, Post-Sale Restraints and Competitive Harm: The

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500 TEXAS A&M LAW REVIEW [Vol. 7

someone sells a painting, one would expect an implicit agreement that

the buyer could display the painting or resell it, as both actions are

customary with artworks. To simplify transactions, the rights to resell

and display are automatically included in the transaction. The other

justification is the policy against restraints on alienation, borrowed

from the law of real property. Someone who sells property may not

impose unreasonable restraints on the buyer’s ability to resell the

property.

As transplanted to intellectual property law, once a party

voluntarily parts with a copy, she should no longer be able to control

what the buyer does with it. Hence, her rights are “exhausted” in that

particular copy. The underlying rationale is important for determining

the extent of the first sale doctrine. If first sale is a gap-filler, then the

parties could contract around it, agreeing that the property sold would

not be subject to first-sale rights.

If first sale is a policy-based bar

against unreasonable restraints on alienation, then first sale is

mandatory—it is not subject to the agreement of the parties but rather

is the opposite: a limit on the enforceability of their agreement.

Both strains can be seen in the case law. Two recent Supreme Court

cases, however, decisively rested first sale on the restraints-against-

alienation rationale, expressly rejecting the proposition that parties

can contract around first sale. This Article explores the implications of

those cases for the boundaries of first sale, focusing on two issues.

First, California’s resale royalty law required that artists receive 5% of

the proceeds on resale of their work.

The Ninth Circuit held that the

California statute was preempted by the first sale doctrine of federal

We conclude that, if first sale serves to prevent

unreasonable restraints on alienation, such resale royalty statutes

should be valid. Rather than an unreasonable restraint on alienation,

they permit resale, imposing a modest burden for a purpose entirely

consonant with copyright law: rewarding authors. Second, software

sellers have long avoided first sale by characterizing software sales as

mere licenses, while formally retaining ownership of the software after

First Sale Doctrine in Perspective, 66 N

.Y.U. A

. S

URV

. A

. L.

487, 511 (2011) (“As

they became more refined and technical, the developing doctrines of exhaustion,

antitrust, and misuse all addressed practices thought to be anticompetitive, such as

tying, but they also moved in different directions.”).

21. See, e.g.,

OSEPH

ILLIAM

INGER

, P

ROPERTY

281 (5th ed. 2017) (“However,

the current approach emerging in the courts is to refuse to enforce restraints on

alienation if they are unreasonable”).

22. See, e.g.,

HOSH

& C

ALBOLI

, supra note 7, at 19 (“Nonetheless, the answer

rests in part on the theory underlying the exhaustion doctrine. If exhaustion is

understood as an implied license, then express terms in a contract or other agreement

can defeat the exhaustion doctrine.”).

23. The statute was similar to laws in effect in such jurisdictions as France,

Germany, and Italy. See Marydale DeBor, Artists’ Residual Rights in the Tangible

Products of Creative Expression: A Survey of Legislation and an Analysis of the

Feasibility of Implementation in the United States, 2 J.L.

& C

. 111, 130 (1982).

24. See Close v. Sotheby’s, Inc., 894 F.3d 1061, 1064 (9th Cir. 2018).

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2020] FIRST SALE DOCTRINE 501

delivery to the buyer.

Courts have enforced transactions according

to the parties’ contract. We conclude, however, that such transactions,

which are intended to prevent resale of software, should be

characterized as sales in substance, triggering first-sale rights to resell

the software, overriding the contractual restraint on alienation.

I. F

IRST

ALE AS

OOTED IN THE

OLICY

GAINST

ESTRAINTS ON

LIENATION

The Supreme Court had left open the issue of the underlying policy

of first sale, whether first sale was a gap-filler in the contract of the

parties or rather a limit on how parties could allocate rights. The key

no claim in this case of contract limitation, nor license agreement con-

trolling the subsequent sales of the book.”

In 1941, in patent, the

Court simply stated first sale as self-evident:

Our decisions have uniformly recognized that the purpose of the

patent law is fulfilled with respect to any particular article when the

patentee has received his reward for the use of his invention by the

sale of the article, and that once that purpose is realized the patent

law affords no basis for restraining the use and enjoyment of the

thing sold.

The Court then took no patent first sale (also known as exhaustion)

cases for decades, leaving it to the lower courts to reckon with the

purposes of the doctrine.

A. Early Cases

The Court in Quanta Computer, Inc. v. LG Elecs., Inc. held that

first sale applied to patents on methods as well as patents on prod-

ucts.

The Court did not address, however, whether first-sale rights

could be limited by contract. Indeed, the Court did not provide gui-

dance as to the underlying policy goals of the first sale doctrine.

Quanta was decided in 2008 and, as the Court noted, its first decision

25. See David A. Rice, Licensing the Use of Computer Program Copies and the

URIMETRICS

J. 157 (1990) (discussing how

license agreements are used by software sellers to avoid the first sale doctrine).

26. Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350 (1908).

27. United States v. Univis Lens Co., 316 U.S. 241, 251 (1942) (citing Adams v.

Burke, 21 L.Ed. 700 (1873); Keeler v. Standard Folding Bed Co., 157 U.S. 659 (1895);

Motion Picture Co. v. Universal Film Co., 243 U.S. 502 (1917)).

28. Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 628 (2008) (“Nothing

in this Court’s approach to patent exhaustion supports LGE’s argument that method

patents cannot be exhausted.”).

29. Hovenkamp, supra note 20, at 492 (“The Supreme Court missed an opportu-

nity to make the law of post-sale restraints more coherent in its recent Quanta Com-

puter decision, where it reverted to a strict application of the first sale rule not clearly

related to any policy of furthering competition or innovation.”).

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502 TEXAS A&M LAW REVIEW [Vol. 7

on patent exhaustion since 1942.

In the absence of Supreme Court

guidance, lower courts held that contracts could effectively limit first

sale rights, such as by effectively prohibiting resale of the goods. The

leading case was Mallinckrodt, Inc. v. Medipart, Inc., which held that

the seller of a patented medical device (an “an apparatus for delivery

of radioactive or therapeutic material in aerosol mist form to the lungs

of a patient”

) could effectively prohibit the resale of the devices.

The Supreme Court took up first sale again in 2013, but once again

did not plumb the basis of the doctrine. The issue in Bowman v. Mon-

santo Co. was “whether a farmer who buys patented seeds may

reproduce them through planting and harvesting without the patent

holder’s permission.”

In general terms, the case raised the extent of

patent exhaustion in self-replicating patented products, such as the

seeds in Bowman or some software inventions.

The Bowman Court,

however, did not measure out the bounds of the judicially created pat-

ent exhaustion doctrine by fitting it to any underlying policy.

Rather,

the Court took a more formal approach, deeming that first sale by

definition could only apply to the actual item sold, not future genera-

tions springing from that item.

First sale in patent is a judicially cre-

ated doctrine with few Supreme Court cases, so it seems inapt to treat

it as a set rule to apply formalistically. The only policy consideration

given much weight was the slippery slope argument that if second gen-

eration seeds were subject to first-sale rights, then the first sale excep-

tion could swallow the entire bundle of exclusive rights.

Thus,

Bowman passed on an opportunity to decide what the primary policy

of first sale was. If first sale serves to put into effect the agreement of

the parties, then it was a clear case: Monsanto sold the seeds subject to

prohibitions on reuse of second-generation seeds, and so the farmer

would infringe by buying and planting second-generation seeds. If first

30. Quanta Computer, 553 U.S. at 627 (citing Univis Lens Co., 316 U.S. 241).

31. Mallinckrodt Inc. v. Medipart Inc., 976 F.2d 700, 701 (Fed. Cir. 1992), abro-

gated by Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017).

32. Mallinckrodt Inc., 976 F.2d at 709.

33. Bowman v. Monsanto Co., 569 U.S. 278, 280 (2013).

34. See id.

35. See id. at 284–85.

36. Id. (“Unfortunately for Bowman, that principle decides this case against him.

Under the patent exhaustion doctrine, Bowman could resell the patented soybeans he

purchased from the grain elevator; so too he could consume the beans himself or feed

them to his animals. Monsanto, although the patent holder, would have no business

interfering in those uses of Roundup Ready beans. But the exhaustion doctrine does

not enable Bowman to make additional patented soybeans without Monsanto’s per-

mission (either express or implied).”).

37. Id. (“But in short order, other seed companies could reproduce the product

and market it to growers, thus depriving Monsanto of its monopoly. And farmers

themselves need only buy the seed once, whether from Monsanto, a competitor, or

(as here) a grain elevator. The grower could multiply his initial purchase, and then

multiply that new creation, ad infinitum—each time profiting from the patented seed

without compensating its inventor.”).

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2020] FIRST SALE DOCTRINE 503

sale serves to protect against restraints on alienation, then the case

raised interesting issues about the extent of that policy. One could

argue that once patented seeds are sold, owners are free to use them

as they please, including selling the second generation of seeds, and

that buyers would therefore take them free of patent rights. The sec-

ond-generation seeds were lawfully made, and so would be subject to

first-sale rights, just as items made abroad are subject to first-sale

rights. Or one could argue that the rationale of opposing restraints on

alienation does not stretch so far—rather restraints on alienation ap-

ply only to the actual seeds sold and not to the offspring seeds. The

Court in Bowman steered clear of such debates, limiting its ruling to

what it characterized as a formal application of the doctrine to the

particular facts in front of it, reserving for future cases the general

boundaries of first sale.

As noted above, the key case for first sale in copyright law was

1908’s Bobbs-Merrill Co. v. Straus.

In that case, a publisher of The

Castaway, a novel, included a notice in each book directly after the

is licensed to sell it at a less price, and a sale at a less price will be

treated as an infringement of the copyright.”

The Court held the

restriction was not binding on future purchasers of the book:

In our view the copyright statutes, while protecting the owner of the

ate the right to impose, by notice, such as is disclosed in this case, a

limitation at which the book shall be sold at retail by future pur-

chasers, with whom there is no privity of contract.

The copyright owner’s exclusive right to sell the book did not entitle it

to attach conditions to copies sold that would bind future owners of

copies.

Rather, that first sale was all the exclusive right to vend cop-

ies included: “The owner of the copyright in this case did sell copies of

the book in quantities and at a price satisfactory to it. It has exercised

the right to vend.”

The Court in Bobbs-Merrill did not search for an

underlying rationale for so limiting the exclusive rights of the copy-

right holder. Rather, it simply interpreted the right to sell under the

statute to be limited to the right to sell a copy once, not to control the

38. Id. at 289 (“Our holding today is limited—addressing the situation before us,

rather than every one involving a self-replicating product.”).

39. See generally Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908).

40. Id. at 341.

41. Id. at 350.

42. Id. at 351 (“What the complainant contends for embraces not only the right to

sell the copies, but to qualify the title of a future purchaser by the reservation of the

right to have the remedies of the statute against an infringer because of the printed

notice of its purpose so to do unless the purchaser sells at a price fixed in the

notice.”).

43. Id.

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504 TEXAS A&M LAW REVIEW [Vol. 7

future sales of that copy.

The Court also rested on the lack of privity,

leaving open the enforceability of such restrictions.

The Court em-

phasized that the buyer had not agreed to any restrictions on further

sale, leaving open the issue as to whether the parties could effectively

limit the rights transferred: “It is not denied that one who has sold a

copyrighted article, without restriction, has parted with all right to

control the sale of it.”

So the case left open whether first sale rested

on an implied agreement (which the parties could alter by contract) or

a prohibition against restraints on alienation (which would nullify such

restraints). As in patent, the Supreme Court took few copyright first-

sale cases in the following decades and did not consider the underlying

rationale for the doctrine.

B. Recent First Sale Developments in the Supreme Court

1. The Kirtsaeng Decision

Awakening from its dogmatic slumbers, the Supreme Court more

recently took a more decisive approach. In Kirtsaeng v. John Wiley &

Sons, the Court held that the first sale doctrine authorized the impor-

tation of copyrighted works that were made abroad with the authori-

zation of the copyright owner.

A student from Thailand, studying in

the United States, noted that similar textbooks were sold at much

lower prices in foreign markets.

He engaged in arbitrage, importing

the books and reselling them in the United States.

The publisher

contended that books manufactured outside the United States were

not subject to first sale, as they had not been lawfully made under the

yond the scope of the United States copyright law under the principle

of territoriality.

The case triggered consideration of the relationship

among the copyright owner’s right of public distribution, including

44. Id. (“To add to the right of exclusive sale the authority to control all future

retail sales, by a notice that such sales must be made at a fixed sum, would give a right

not included in the terms of the statute, and, in our view, extend its operation, by

construction, beyond its meaning, when interpreted with a view to ascertaining the

legislative intent in its enactment.”).

45. See Hovenkamp, supra note 20, at 498 (“As the law stood in 1908, any post-

sale restraint on a patented or copyrighted article that was imposed by means of a

licensing restriction and enforced by an infringement action was unenforceable. How-

ever, the courts had not yet addressed the legality of restricted distribution agree-

ments under the Sherman Act.”).

46. Bobbs-Merrill, 210 U.S. at 350.

47. The Court did consider restrictions on resale in the context of antitrust, as

vertical restraints. See Hovenkamp, supra note 20, at 504 (“Most decisions that have

applied the rule have involved either tying arrangements or [resale price mainte-

nance], and the Court was typically not very subtle about noting that the first sale rule

and antitrust law pulled in tandem.”).

48. Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538–39 (2013).

49. Id. at 527.

50. Id.

51. Id.

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2020] FIRST SALE DOCTRINE 505

rights of importation, and the first sale doctrine’s limitation on the

public distribution right.

The Court resolved the conflict in favor of

first sale, holding that first sale was not limited to domestic sales or to

copies made in the United States.

Unlike in Bobbs-Merrill, the Court in Kirtsaeng did not simply ad-

dress the matter by technically applying the statutory exclusive rights.

Rather, the Court traced back the link between first sale and re-

straints on alienation historically:

The “first sale” doctrine is a common-law doctrine with an impecca-

ble historic pedigree. In the early 17th century Lord Coke explained

the common law’s refusal to permit restraints on the alienation of

chattels.

[If] a man be possessed of . . . a horse, or of any other

chattel . . . and give or sell his whole interest . . . therein

upon condition that the Donee or Vendee shall not

alien[ate] the same, the [condition] is voi[d], because his

whole interest . . . is out of him, so as he hath no pos-

sibilit[y] of a Reverter, and it is against Trade and Traffi[c],

and bargaining and contracting betwee[n] man and man:

and it is within the reason of our Author that it should

ouster him of all power given to him.”

Lord Coke’s “explanation,” as has been noted, is rather circular: re-

straints on alienation are void because they are void.

The Court did

add some economic policy to the bare statement: “With these last few

words, Coke emphasizes the importance of leaving buyers of goods

free to compete with each other when reselling or otherwise disposing

of those goods. American law too has generally thought that competi-

tion, including freedom to resell, can work to the advantage of the

consumer.”

So the Court hinted that the rationale rested on prevent-

ing anti-competitive behavior, but did not spell out why freedom to

resell goods would necessarily promote competition, rather than, for

example, simply causing the seller to limit its sales. The decision, how-

52. Id. at 528.

53. Id. at 525.

54. Id. (quoting

1 E. C

OKE

, I

NSTITUTES OF THE

AW S O F

NGLAND

§ 360 (1628));

see also Charles M. Gray, Two Contributions to Coke Studies, 72

U. C

. L. R

1127, 1135 (2005).

55. See, e.g., Glen O. Robinson, Personal Property Servitudes, 71

U. C

. L. R

1449, 1481 (2004) (“Coke’s locution (as well as his spelling) is archaic, yet, astound-

ingly, the circular style of reasoning can still be found in contemporary statements

that explain that restraints on alienability are ‘repugnant to the deed.’”).

56. Id. (citing Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886

(2007)) (restraints with “manifestly anticompetitive effects” are per se illegal; others

are subject to the rule of reason) (internal citations omitted); 1 P.

REEDA

& H.

OVENKAMP

NTITRUST

4, ¶ 100 (3d ed. 2006) (“[T]he principal objective of

antitrust policy is to maximize consumer welfare by encouraging firms to behave

competitively.”).

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506 TEXAS A&M LAW REVIEW [Vol. 7

ever, rested first sale firmly on the policy against restraints on

alienation.

The Kirtsaeng Court stated another reason that relied on the policy

against restraints on alienation: “The ‘first sale’ doctrine also frees

courts from the administrative burden of trying to enforce restrictions

upon difficult-to-trace, readily movable goods.”

The Court also

placed weight on commercial practices now embedded in United

States culture that depend on first sale and on the absence of re-

straints on alienation: “Associations of libraries, used-book dealers,

technology companies, consumer-goods retailers, and museums point

to various ways in which a geographical interpretation would fail to

further basic constitutional copyright objectives, in particular

‘promot[ing] the Progress of Science and useful Arts.’”

That sug-

gests a broader rationale than the promotion of competition.

2. The Lexmark Decision

The Supreme Court’s 2017 patent law decision in Impression Prod-

ucts v. Lexmark Int’l, Inc. hewed to Kirtsaeng and made the policy of

restraints on alienation the central core of the first-sale doctrine in

patent law.

In Lexmark, purchasers of printer cartridges agreed “to

use the cartridge only once and to refrain from transferring the car-

tridge to anyone but Lexmark.”

The Court held that first sale cannot

be limited by contract. The clause notwithstanding, it would not be

patent infringement if there was further use or resale of the car-

tridge—although the provision might be enforceable between the par-

ties as a matter of contract law.

Relying on Kirtsaeng, the Lexmark

Court also held that first sale applies to domestic and international

sales.

More than just a default rule subject to change by the parties,

under Lexmark, first sale became a nonwaivable effect of a sale.

Ac-

cordingly, any restrictions made in connection with the sale of a pat-

ented item may not be enforced through actions for patent

infringement (there being no more patent rights in the item sold), but

rather through contract alone.

This is not merely a shift in the basis

57. Katz, supra note 19, at 123 (“The majority solved the problem by opting for

international exhaustion, emphasizing the common law (rather than statutory) origin

of the doctrine, and evincing strong commitment to the continuing relevance of the

common law’s hostility to restraints on alienation.”).

58. Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 539 (2013).

59. Id. at 540 (quoting

U.S. C

ONST

art. I, § 8, cl. 8).

60. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1527 (2017).

61. Id. at 1525.

62. Id. at 1526.

63. Id.

64. Id. at 1529.

65. The court in Lexmark stated:

A patentee’s authority to limit licensees does not, as the Federal Circuit

thought, mean that patentees can use licenses to impose post-sale restric-

tions on purchasers that are enforceable through the patent laws. So long as

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2020] FIRST SALE DOCTRINE 507

for enforcing rights. Because only contract rights survive, the patent

holder cannot enforce restrictions against parties using the item that

are not parties to the sale, such as subsequent buyers, due to the priv-

ity requirements of contract law.

Although applying patent law

to first sale (more often called “ex-

haustion” in the patent context

), the Lexmark Court adopted the

rationale from Kirtsaeng and rested first sale on the policy against re-

straints on alienation:

This well-established exhaustion rule marks the point where patent

rights yield to the common law principle against restraints on alien-

ation. The Patent Act “promote[s] the progress of science and the

useful arts by granting to [inventors] a limited monopoly” that al-

lows them to “secure the financial rewards” for their inventions. But

once a patentee sells an item, it has “enjoyed all the rights secured”

by that limited monopoly. Because “the purpose of the patent law is

fulfilled . . . when the patentee has received his reward for the use of

his invention,” that law furnishes “no basis for restraining the use

and enjoyment of the thing sold.”

a licensee complies with the license when selling an item, the patentee has, in

effect, authorized the sale. That licensee’s sale is treated, for purposes of

patent exhaustion, as if the patentee made the sale itself. The result: the sale

exhausts the patentee’s rights in that item. A license may require the licen-

see to impose a restriction on purchasers, like the license limiting the com-

puter manufacturer to selling for non-commercial use by individuals. But if

the licensee does so—by, perhaps, having each customer sign a contract

promising not to use the computers in business—the sale nonetheless ex-

hausts all patent rights in the item sold. The purchasers might not comply

with the restriction, but the only recourse for the licensee is through contract

law, just as if the patentee itself sold the item with a restriction.

Id. at 1534–35 (citations omitted).

66. Note that first sale applies also in trademark law, but the context involves a

different set of policy concerns. See Barnes, supra note 11, at 460 (“While creators and

users have a co-incident interest in providing creators financial incentives to produce

intellectual property, users of copyrighted expressions and patented inventions seek

free access to those creations after creation. This is not entirely true of trademarks,

where consumers retain an interest in a single supplier’s exclusive use of a mark in

order to be sure that they are getting the particular brand of goods they desire.”); Au-

Tomotive Gold Inc. v. Volkswagen of Am., Inc., 603 F.3d 1133, 1138–39 (9th Cir.

2010) (“For example, a producer may purchase non-functioning Rolex watches and

refurbish them with non-Rolex parts, leaving only the original casing. Even if the

producer adequately explains the nature of the refurbished watches to purchasers, the

producer nonetheless infringes on Rolex’s trademarks by profiting from the Rolex

name. In such a case, the purchasers buy the watches in order to make others think

that they have bought a true Rolex watch.”) (citing Rolex Watch, U.S.A., Inc. v.

Michel Co., 179 F.3d 704, 707–10 (9th Cir. 1999)). But see Sebastian Int’l, Inc. v. Longs

Drug Stores Corp., 53 F.3d 1073, 1077 (9th Cir. 1995) (holding first sale applied to

trademarked goods, even if possible that consumers erroneously believed reseller was

affiliated with trademark owner).

67. Barnes, supra note 11, at 461 n.6. In patent law, the terms “first sale” and

“patent exhaustion” are used interchangeably. See 5

ONALD

S. C

HISUM

, C

HISUM ON

ATENTS

§ 16.03[2][a] (2005).

68. Lexmark, 137 S. Ct. at 1531–32 (quoting United States v. Univis Lens Co., 316

U.S. 241, 260 (1942); Keeler v. Standard Folding Bed Co., 157 U.S. 659, 661 (1895)).

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508 TEXAS A&M LAW REVIEW [Vol. 7

The Court then quoted Kirtsaeng for first sale’s “impeccable historic

pedigree.”

The Court further described first sale as a “venerable

principle.”

The doctrine was rooted in:

hostility toward restraints on alienation. That enmity is reflected in

the exhaustion doctrine. The patent laws do not include the right to

“restrain [ ] . . . further alienation” after an initial sale; such condi-

tions have been “hateful to the law from Lord Coke’s day to ours”

and are “obnoxious to the public interest.”

The Court then gave a modern example of Coke’s pronouncement:

Take a shop that restores and sells used cars. The business works

because the shop can rest assured that, so long as those bringing in

the cars own them, the shop is free to repair and resell those vehi-

cles. That smooth flow of commerce would sputter if companies that

make the thousands of parts that go into a vehicle could keep their

patent rights after the first sale. Those companies might, for in-

stance, restrict resale rights and sue the shop owner for patent in-

fringement. And even if they refrained from imposing such

restrictions, the very threat of patent liability would force the shop

to invest in efforts to protect itself from hidden lawsuits.

The Court noted that in antitrust cases, it had been no defense to a

charge of resale price maintenance that the goods were patented be-

cause the first sale exhausted the patent rights.

In its second holding, the Court in Lexmark rejected the argument

that the territorial nature of intellectual property limited first sale’s

effect to sales made within the United States. Rather, first sale applies

to any sale of an authorized item, regardless of where the sale oc-

curs.

The Court again rested principally on the policy against re-

straints on alienation:

69. Id. at 1532 (quoting Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538

(2013)).

70. Id.

71. Id. (quoting Straus v. Victor Talking Machine Co., 243 U.S. 490, 501 (1917)).

72. Id.

73. Id. at 1533 (“It is true that Boston Store and Univis involved resale price re-

strictions that, at the time of those decisions, violated the antitrust laws. But in both

cases it was the sale of the items, rather than the illegality of the restrictions, that

prevented the patentees from enforcing those resale price agreements through patent

infringement suits.”).

74. The Court made clear that exhaustion did not depend on a sale within the

United States:

The theory behind the Government’s express-reservation rule also wrongly

focuses on the likely expectations of the patentee and purchaser during a

sale. Exhaustion does not arise because of the parties’ expectations about

how sales transfer patent rights. More is at stake when it comes to patents

than simply the dealings between the parties, which can be addressed

through contract law. Instead, exhaustion occurs because, in a sale, the pat-

entee elects to give up title to an item in exchange for payment. Allowing

patent rights to stick remora-like to that item as it flows through the market

would violate the principle against restraints on alienation. Exhaustion does

not depend on whether the patentee receives a premium for selling in the

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2020] FIRST SALE DOCTRINE 509

Applying patent exhaustion to foreign sales is just as straightfor-

ward. Patent exhaustion, too, has its roots in the antipathy toward

restraints on alienation, . . . and nothing in the text or history of the

Patent Act shows that Congress intended to confine that borderless

common law principle to domestic sales.

There is irony in the statement that nothing in the Patent Act stated

otherwise—patent exhaustion is an entirely judge-made doctrine, so

the Patent Act does not say anything about patent exhaustion in the

first place. But the Court did make clear that its guiding principle for

exhaustion was the policy against restraints on alienation. The Court

noted that first sale is expressly stated in the Copyright Act, and it

took that as support for following Kirtsaeng on the international ex-

haustion principle: [T]here is a “‘historic kinship between patent law

and copyright law,’ and the bond between the two leaves no room for

a rift on the question of international exhaustion.”

Accordingly, a

patent holder has less power to partition markets for its patented item

because parties that acquire authorized items sold abroad may import

them into the United States without infringing the relevant patent.

The Court repeated the idea that first sale limits the patent or copy-

right holder to “one bite at the apple” when selling an item: “[T]he

right to exclude just ensures that the patentee receives one reward—

of whatever amount the patentee deems to be ‘satisfactory compensa-

tion’—for every item that passes outside the scope of the patent mo-

nopoly.”

The Court then ended with a piscine flourish: “Instead,

exhaustion occurs because, in a sale, the patentee elects to give up

title to an item in exchange for payment. Allowing patent rights to

stick remora-like to that item as it flows through the market would

violate the principle against restraints on alienation.”

After Kirt-

saeng and Lexmark, first sale rests on the policy against restraints on

alienation, and so serves as a limit on contracts involving patented or

copyrighted goods, not simply to fill a gap in the parties’ agreement.

II. H

ROADLY

OES THE

IRST

ALE

XTEND

IF IT IS

REVENT

ESTRAINTS ON

LIENATION

First sale is not a complete ban on restraints on alienation. The first-

sale doctrine in copyright provides by statute that the owner of an

United States, or the type of rights that buyers expect to receive. As a result,

restrictions and location are irrelevant; what matters is the patentee’s deci-

sion to make a sale.

Id. at 1538.

75. Id. at 1536.

76. Id. (quoting Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417,

439 (1984)).

77. Id. at 1537 (quoting Keeler v. Standard Folding Bed Co., 157 U.S. 659, 661

(1895)).

78. Id. at 1538.

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510 TEXAS A&M LAW REVIEW [Vol. 7

authorized copy may sell that copy

or display

that copy without

infringing the copyright holder’s exclusive rights to do the same. That

does not mean that, once sold, a copy passes to the owner free of the

relevant copyright. First sale eliminates the distribution right and the

display right of the physical copy purchased.

First sale leaves in ef-

fect the other exclusive rights: to make copies, to adapt the work, and

to perform the work in public. First sale also has limits keeping even

the distribution right in place for some transactions. It is impermissi-

ble for the owner of a copy of a computer program or music recording

to rent that copy out

for direct or indirect commercial gain. This is

to prevent businesses from providing short-term rentals to those wish-

ing not to use the copies during rental but rather to make unautho-

rized copies.

Restraints on alienation have been described as a “longstanding but

under-theorized concern;”

there is no generally accepted underlying

policy for the general hostility to restraints on alienation.

The

Court’s latest statements thus supply the view of the party with the

most power to govern the doctrine, at least in the largely federal area

of intellectual property.

The Court has quite firmly stated that the

first sale doctrine rests on the traditional common law policy against

restraints on alienation. The rationale for that policy is economic: to

keep property free of entanglements that could put friction in the

79. 17 U.S.C. § 109(a) (2018).

80. Id. § 109(c).

81. Specifically, that part of the display right pertaining to direct or projected dis-

plays, but not displays via other means, such as online. Id. § 109(c).

82. For example:

Notwithstanding the provisions of subsection (a), . . . neither the owner of a

particular phonorecord nor any person in possession of a particular copy of a

computer program (including any tape, disk, or other medium embodying

such program), may, for the purposes of direct or indirect commercial ad-

vantage, dispose of, or authorize the disposal of, the possession of that pho-

norecord or computer program (including any tape, disk, or other medium

embodying such program) by rental, lease, or lending, or by any other act or

practice in the nature of rental, lease, or lending.

Id. § 109(b)(1)(A).

83. Molly Shaffer Van Houweling, The New Servitudes, 96

. L.J.

885, 903

(2008).

84. See Robinson, supra note 55, at 1480 (footnote omitted) (“The common law

has invalidated restraints on alienation of property from time out of mind. The pedi-

gree of the rule may account for the paucity of reasons for it.”).

85. Restraints on alienation are distinct from servitudes which restrict use of the

property (and have been compared to intellectual property licensing terms which limit

use of the subject matter), but do not prevent its alienation; the two are related in that

both burden property, and so may increase transaction costs. See Van Houweling,

supra note 83, at 903 (“Most servitudes do not directly restrain transfer. They merely

limit the rights that can be acquired from any single owner. So a subsequent user who

wants to reassemble property rights into a useful bundle must tackle the transaction

costs involved in multiple negotiations. Often the problem is not so much restraint on

alienation as restraint on acquisition: every individual property stick can be sold; the

difficulty is buying a bundle that is useful to own.”) (footnote omitted).

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2020] FIRST SALE DOCTRINE 511

gears of commerce. That could be interpreted several ways. First sale

could be seen as minimizing transaction costs.

As in the Lexmark

example, if thousands of patent holders assert rights in the various

parts of a car, a repair shop might possibly have to transact with them

in order to repair the car. The opinions could also be seen as guarding

against leveraging power in one market into a separate market (which

can raise issues of antitrust or of patent misuse or copyright misuse).

The patent holder gets paid once when the item is sold and cannot use

that leverage later on in another market.

Another economic ratio-

nale might be hostility to price discrimination.

By extending fair use

to international first sales,

the decision prevented the rights holder

from charging one price in the United States and another price over-

seas and using the importation right to prevent arbitrage, where an

entrepreneur like Kirtsaeng might buy in a low-price jurisdiction and

sell in the high-price jurisdiction, taking away sales from the copyright

or patent holder.

A. Common Law View of Restraints on Alienation

The common law cases also looked to efficiency, albeit through a

slightly different lens. The typical restraint on alienation case arose in

86. See id. at 902–03 (“Inefficient but transaction-cost-insulated servitudes re-

present a species of the anticommons problem described by Michael Heller with re-

gard to fragmentation of property interests more generally. Servitudes divide rights in

a single parcel of land among multiple owners. If it is later desirable to consolidate

those rights in order to put the resource to its best use, fragmentation of the property

bundle (and the transaction costs involved in re-bundling) can make consolidation

difficult . . .”) (footnote omitted).

87. See, e.g.,

ETER

EZEI

, C

OPYRIGHT

XHAUSTION

AW AND

OLICY IN THE

NITED

TATES AND THE

UROPEAN

NION

11–13 (2018) (discussing several aspects

of this general policy).

88. On price discrimination in intellectual property, see generally

NTELLECTUAL

ROPERTY AND

RICE

ISCRIMINATION

, R

ESEARCH

ANDBOOK ON THE

CONOMICS

NTELLECTUAL

ROPERTY

(Peter Menell & Ben Depoorter, eds., 2019);

Michael Meurer, Copyright Law and Price Discrimination, 23

ARDOZO

L. R

(2001); Wendy J. Gordon, Intellectual Property as Price Discrimination, 73

.-K

ENT

L. R

1367, 1367–68 (1998).

89. Note that there are economic arguments in favor of permitting price discrimi-

nation. See Katz, supra note 19, at 77–78 (“The main benefits of price discrimination

are suggested to be threefold: (1) it increases output, thereby ameliorating some of

the inefficiencies otherwise associated with the exclusivity inherent in IP rights and

benefiting consumers with lower ability to pay who would not be able to obtain the

product if the seller could set only a uniform price; (2) increased output may contrib-

ute to achieving economies of scale and learning resulting in lower per-unit costs; and

(3) even when output under price discrimination is lower compared to uniform pric-

ing, the additional monopoly profit will encourage investment in R&D and innova-

tion and contribute to dynamic efficiency. In sum, the argument for price

discrimination is that it promotes allocative efficiency (i.e., leads to higher output and/

or lower costs) and dynamic efficiency (encourages innovation).”) (footnotes omit-

ted);

HOSH

& C

ALBOLI

, supra note 7, at 38 (“The economic rationale for price dis-

crimination is that uniform pricing leaves certain consumers excluded from the

market.”).

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512 TEXAS A&M LAW REVIEW [Vol. 7

a quite different context than those in intellectual property cases. Re-

straints on alienation were disfavored, among other reasons, because

they could reduce incentives for a property owner to devise more pro-

ductive uses of the property.

If a restraint on alienation prevented

change in the use of property or prevented the owner from selling the

improved property at an increased price, the property owner would

have little incentive to put resources into making the property more

productive or valuable. The same rationale applies to intellectual

property. If the rightsholder is unable to enforce restraints on the use

and ownership of items sold, that leaves owners free to make innova-

tive uses or improvements that the rightsholder had not come up

with.

So the policy against restraints on alienation could be seen as a

policy against transaction costs, leveraging into new markets (such as

the secondary market for compatible parts, as in Lexmark),

against price discrimination

(as in Kirtsaeng) or against restrictions

on new uses of property—all of which could be put under the um-

brella of economic efficiency.

It is worth noting that is not clear that first sale promotes any or all

of these values. Rules that bar sellers from using one kind of conduct

may simply channel sellers into even more inefficient behavior, rather

than opening up the market. Especially in this era of complicated

products, a seller that cannot rely on exclusive rights (because first

sale cuts them off) or contractual restrictions (because first sale super-

sedes them) may turn to using technological measures.

If Lexmark

cannot legally prevent resale of its printer cartridges, it may build the

cartridges (or the printer) so that the cartridges do not work after the

first use, or so that only Lexmark can refill them, or so that they trig-

ger ominous warning if refilled by a reseller (“Warning—non-compat-

ible ink cartridge detected”). In addition, restraints on alienation

could be efficient. The Supreme Court compared them to remoras,

fish that stick to sharks and whales.

But remoras are not necessarily

90. See, e.g.,

INGER

supra note 21, at 282 (“Allowing the current owner to sell or

transfer ownership of the property grants that owner both the liberty to move and the

power to obtain the economic benefits of the property by selling it and suing those

assets for other endeavors.”).

91. See Katherine J. Strandburg, Users as Innovators: Implications for Patent Doc-

trine, 79

U. C

OLO

. L. R

. 467, 474–78 (2008).

92. A related way to interpret that rationale is the antitrust prohibition on resale

price maintenance. See Katz, supra note 19, at 142 (citing

EITH

N. H

YLTON

, A

NTI-

TRUST

: E

CONOMIC

HEORY

OMMON

VOLUTION

261 (2003)).

93. Id. at 84 (“More generally, recognizing that the welfare effect of price discrimi-

nation is ambiguous, contemporary literature believes that there is no compelling ba-

sis for antitrust law to prohibit price discrimination.”).

94. See

HOSH

& C

ALBOLI

, supra note 7, at 16 (“Even if the principle of interna-

tional exhaustion applies to physical goods, geoblocking can prevent resale and reuse

of digital goods.”).

95. Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1538 (2017).

96. Remora,

NCYCLOPAEDIA

RITTANICA

, https://www.britannica.com/animal/

remora (last visited Jan. 10, 2020) [https://perma.cc/7ZLX-C25X].

\\jciprod01\productn\T\TWL\7-3\TWL303.txt unknown Seq: 17 14-APR-20 15:24

2020] FIRST SALE DOCTRINE 513

parasites, but rather they may have symbiotic relationships with

sharks and whales.

The Court’s reliance on economic factors is important. Restraints

on alienation, in their historical pedigree in real property, were most

often considered in cases involving real estate.

As the concern trans-

ferred to movable property, the cases often involved commercial mat-

ters like the transferability of stock certificates.

So how the doctrine

would be considered in some areas of intellectual property, especially

play.

100

Looking at the “historic pedigree” of the antipathy to restraints on

alienation throws some light on the Court’s reliance. The traditional

plaints against restraints on alienation are quite different from those

put forward in Lexmark:

Total restraints on the alienation of fee simple interests have con-

sistently been ruled to be unenforceable on the grounds that the

free alienation of property furthers important societal goals. Among

these goals are promoting the dispersal of property so that land

ownership is not concentrated in a small number of wealthy fami-

lies, ensuring that resources are controlled by the current owners

rather than past ones, and facilitating the transfer of property to the

owner who values the resource most highly.

101

Lexmark and Kirtsaeng do not stand for the proposition that first

sale overcomes any and all possible restraints on alienation. Where

the line might be drawn was not an issue in those cases because both

were blatant, complete restraints on alienation (no resale and no im-

portation, respectively). Were the restraints less blunt, then the ques-

tion could have arisen: whether the restraints were reasonable. Here,

there could be a different application to the first sale doctrine. In cop-

yright, first sale is a statutory rule.

102

Kirtsaeng simply dealt with a

matter of interpretation of the statute, whether first sale’s limitation

on the distribution right included the importation right (which is de-

fined as a supplement to the distribution right). In patent law, by con-

97. See id.

98. Cf. Robinson, supra note 55, at 1455 (“Thus few occasions arise for consider-

ing the validity of personal property servitudes as a matter of general common law.”).

99. See, e.g., Rafe v. Hindin, 29 A.D.2d 481, 484–85, 288 N.Y.S.2d 662, 665 (App.

Div. 1968) (holding that requirement for consent of other stockholder to transfer

stock certificate was an “unwarrantable and unlawful restraint on the sale of personal

property”).

100. See Robinson, supra note 55, at 1462 (“Moving from common law property to

intellectual property is a bit more difficult because of fundamental differences in the

property rights regimes.”).

101. Julia D. Mahoney, Perpetual Restrictions on Land and the Problem of the Fu-

ture, 88

. L. R

739, 774–75 (2002) (citing

OSEPH

ILLIAM

INGER ET AL

ROPERTY

: R

ULES

, P

OLICIES

AND

RACTICES

572 (2d ed. 1997)).

102. See 17 U.S.C. § 109 (2018).

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514 TEXAS A&M LAW REVIEW [Vol. 7

trast, first sale (exhaustion) is a judicially created doctrine,

103

and its

scope has long been unsettled.

104

Until Lexmark, the governing law

under Federal Circuit precedent was that patent exhaustion was effec-

tively a default rule, subject to rearrangement by the contract between

the parties to that first sale. In the leading case, Mallinckrodt, Inc. v.

Medipart, Inc., the Federal Circuit had held that restrictions in the sale

of a patented medical device could be enforced as a matter of patent

law against remote purchasers.

105

That holding was hard to reconcile

with the first sale generally, as it conflicted with the non-enforceability

of similar restrictions in such cases as Bobbs-Merrill.

106

Mallinckrodt

was overruled by the Supreme Court in Lexmark. After Lexmark,

however, the Court retained the power to define the scope of first sale

in patent. Additionally, even though copyright defines first sale by

statute, the Court has considerable leeway in interpreting the statute

(as demonstrated in Kirtsaeng), and in deciding the extent to which

first sale, as federal law, preempts contract and copyright law. Kirt-

saeng looked to general principles, rather than the particular language

of the copyright statute, in emphasizing the policy against restraints on

alienation.

107

B. “Reasonableness” of Restraints on Alienation

To accurately convey the rule and policies from the common law,

the rational underlying first sale would be that unreasonable restraints

on alienation are not effective. The “modern trend,” as embodied in

the Restatement, is that restraints on alienation are enforceable if rea-

sonable: “A servitude that imposes a direct restraint on alienation of

the burdened estate is invalid if the restraint is unreasonable. Reason-

103. First sale could also be applied judicially in state areas of intellectual property,

such as the right of publicity. See Nannette Diacovo, Going Once, Going Twice, Sold:

The First Sale Doctrine Defense in Right of Publicity Actions, 12

U. M

IAMI

. &

PORTS

L. R

57, 92 (1995).

104. First sale is also judicially created in trademark law, with similar questions

about its scope. See Barnes, supra note 11, at 458 (discussing Au-Tomotive Gold Inc.

v. Volkswagen of Am., Inc., 603 F.3d 1133, 1136 (9th Cir. 2010)) (“In May 2010, in

what appears to be the first case addressing the issue, the Federal Circuit Court for

the Ninth Circuit relied on the free-rider rationale to hold that the first sale rule was

not an affirmative defense in trademark post-sale confusion cases.”).

105. Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708–09 (Fed. Cir. 1992),

abrogated by Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017).

106. See Hovenkamp, supra note 20, at 501–02 (“The second historical exception to

first sale aggressiveness occurred more recently, when the Court of Appeals for the

Federal Circuit revived Justice Lurton’s attempt to make the doctrine turn on realistic

threats of monopoly. The Mallinckrodt case once again distinguished ‘conditional’

sales, which occur when the patentee places restrictions on the rights of purchasers,

thus conveying away less than its entire patent interest in the article in question.”)

(footnote omitted).

107. Katz, supra note 19, at 123 (“The majority solved the problem by opting for

international exhaustion, emphasizing the common law (rather than statutory) origin

of the doctrine, and evincing strong commitment to the continuing relevance of the

common law’s hostility to restraints on alienation.”).

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2020] FIRST SALE DOCTRINE 515

ableness is determined by weighing the utility of the restraint against

the injurious consequences of enforcing the restraint.”

108

The

Lexmark Court did not note this distinction, speaking only of the

“common law’s refusal to permit restraints on the alienation of chat-

tels.”

109

In Lexmark and Kirtsaeng, however, the reasonableness rule

may have been irrelevant. Both dealt with direct and complete re-

straints on alienation: a contractual prohibition against resale in

Lexmark and a bar against importation in Kirtsaeng. Reasonableness

may have seemed a moot point in those cases. But if restraints on

alienation are to be the key policy behind first sale, then the reasona-

bleness of a restraint should be germane to whether a limitation is

equivalent to first sale (for express preemption) and for whether it

conflicts with first sale (for conflict preemption).

110

The common law cases offer a spectrum of cases on the reasonable-

ness of restraints on alienation. For example, courts have differed in

the real estate area on whether due-on-sale clauses constitute an un-

reasonable restraint on alienation.

111

Similarly, courts are divided

about whether a right of first refusal is an unreasonable restraint on

alienation.

112

Courts look at whether the right of first refusal is rea-

sonably geared to protect an interest of the former owner. For exam-

ple, where there was a perpetual option to purchase in the event of

any offer for the property, which did not protect any interest of the

option holder geared to the land, the restraint was held unreasona-

ble.

113

A right to purchase a warehouse at a price well below market,

108.

ESTATEMENT

HIRD

)

ROP

.: S

ERVITUDES

§ 3.4 (

. L

NST

2000).

109. Lexmark, 137 S. Ct. at 1526.

110. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 168 (1989)

(applying patent preemption); see also 17 U.S.C. § 301 (2018) (providing for copyright

preemption of state law).

111. See Occidental Sav. & Loan Ass’n v. Venco P’ship, 293 N.W.2d 843, 845 (Neb.

1980) (“We are somewhat at a loss to understand how or why so many courts have

been willing to describe a ‘due on sale’ clause as a restraint on alienation and we are

unwilling to do so.”).

112. An unadorned right of first refusal (“ROFR”) is likely enforceable, but rights

of first refusal are often unreasonable where they set a below market option price or

have other restrictions that interfere with market sales. R. Wilson Freyermuth, Private

Transfer Fee Covenants: Cleaning Up the Mess, 45

EAL

ROP

. T

. & E

. L.J.

419,

436 (2010) (“Because of their minimal impact upon alienability, nearly all classic

ROFRs will satisfy the rule against unreasonable restraints on alienation.”).

113. See, e.g., Laska v. Barr, 2018 S.D. 6, ¶ 28, 907 N.W.2d 47, 55 (2018). (“The

Laskas need only receive a third-party offer to trigger the Barr Partners’ right to

purchase the property for $10,500 per acre, which right to purchase exists for eternity.

Because there is a significant interference with the Laskas’ ability to transfer the

property without a strong purpose justifying the restraint, the practical effect of the

restraint, if imposed, will prevent the long-term improvement and marketability of

Juffer Three. The court did not err when it held that the right of first refusal is an

unreasonable restraint on alienation and repugnant to the interest created.”); Iglehart

v. Phillips, 383 So. 2d 610, 615 (Fla. 1980) (“It is the generally accepted rule that a

fixed price repurchase option of unlimited duration, independent of the lease, is an

unreasonable restraint.”); Mo. St. Hwy. Comm’n v. Stone, 311 S.W.2d 588 (Mo. App.

1958); 6

MERICAN

AW O F

ROPERTY

§§ 26.63–.67 (A. J. Casner ed., 1952); see also

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516 TEXAS A&M LAW REVIEW [Vol. 7

in the event that the warehouse was no longer used, was an invalid

restraint on alienation.

114

By contrast, the right to match market rate

offers was held reasonable.

115

A key factor is maintaining incentives

to use the land productively:

116

“An option for a fixed price clearly

discourages any improvements of the land by the existing property

owner because he could never recover the value of the improvements

should the optionee exercise the option.”

117

A long-term option to

repurchase at a fixed price deadens the incentive to make the property

more valuable.

118

A right of refusal at market price, by contrast, pre-

serves the incentives to use the property productively.

119

The policy against restraints on alienation rested on real property

considerations:

The rule against restraints on alienation is based upon, among other

things, the desirability of keeping property responsive to the current

exigencies of its current beneficial owner and upon the desirability

of avoiding the retardation of the natural development of a commu-

AVID

A. T

HOMAS

, T

HOMPSON ON

EAL

ROPERTY

§ 2015 (1979); 7

AVID

HOMAS

, T

HOMPSON ON

EAL

ROPERTY

§ 3574 (1962).

114. Procter v. Foxmeyer Drug Co., 884 S.W.2d 853, 859 (Tex. App.—Dallas 1994,

no pet.) (“We conclude that $ 79,955.38 is unreasonable as a matter of law to pay for

real estate valued at approximately $550,000.”).

115. Lorentzen v. Smith, 2000-NMCA-067, 129 N.M. 278, 283, 5 P.3d 1082, 1087

(“The contractual rights of first refusal before us in this appeal are not forfeiture

restraints; they are merely preemptive provisions as described in Section 4.4 of the

Restatement. Thus, they are enforceable as long as the price and timing are reasona-

ble. The reasonableness of the price is self-evident: either matching a bona fide offer

for the 52-acre tract, or offering fair market appraised value for Lot One.”).

116. Camino Gardens Ass’n, Inc. v. McKim, 612 So. 2d 636, 642 (Fla. Dist. Ct. App.

1993) (“This provision reduces the incentive of mortgage lenders to finance the

purchase of this property because the lender will bear the burden of providing funds

and bear the risk of potential devaluation, while the Association receives all the bene-

fits of any appreciation in the property’s value. In essence, this repurchase option

amounts to a right of first refusal based on a fixed price rather than the fair market

value of the property. Pursuant to Inglehart [sic], such a provision is void as a matter

of law.”).

117. Iglehart v. Phillips, 383 So. 2d 610, 615 (Fla. 1980).

118. Cf. Randolph v. Terrell, 768 S.W.2d 736, 739 (Tex. App.—Tyler 1987, writ de-

nied) (“In our view, the option or right of first refusal provided by the deed at hand

was not reasonable in at least two respects. First, it provided that the grantors person-

ally could repurchase the lands at any time during their lifetimes for the same consider-

ation paid to them in 1959 by the grantee and secondly, no limit was placed on the

time allowed for the actual exercise of the option.”).

119. Old Port Cove Condo. Ass’n One, Inc. v. Old Port Cove Holdings, Inc., 954

So. 2d 742, 746 (Fla. Dist. Ct. App. 2007), approved, 986 So. 2d 1279 (Fla. 2008). The

court held:

The option right in this case is at market value. It states: “the Association

shall have the right of first refusal for the purchase of said real property

upon the same terms and conditions as are proposed for its sale by [Owner].”

[e.s.] Obviously from its plain text, the option is triggered only when Owner

proposes to sell the property. In offering to sell, Owner could either specify a

price or let buyers make the offer. Either way, it is market value that is the

basis for the option.

Id.

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2020] FIRST SALE DOCTRINE 517

nity by removing property from the ordinary channels of trade and

commerce.

120

In evaluating the reasonableness of a restraint, the Restatement sug-

gests looking at whether it really restrains the seller: “The standard

against which the impact of a restraint is to be measured is that of the

property owner free to transfer property at his or her convenience at a

price determined by the market.”

121

Courts and state legislatures have dealt with a restraint on aliena-

tion of real estate that is quite similar to a resale royalty right. “Pri-

vate transfer fee covenants” may provide that, when real estate is sold,

a percentage (usually around 1%) will go to the original developer of

the real estate, to a co-op association, or to some other party.

122

Whether such restraints are reasonable is unsettled. Professor

Freymuth classified them into three groups:

The first imposes a fee payable to an owners’ association to fund

community services, amenities, or both. The second imposes a fee

payable to a nonprofit organization to fund the organization’s oper-

ations or activities, which may or may not be directly or indirectly

related to the ownership of the affected lot. The third imposes a fee

payable to the developer for which the lot owner receives no contin-

uing services or benefits beyond acquisition of the land.

123

Until fairly recently, such fees were relatively uncommon. Because the

covenants likely did not “touch and concern” the land, they were gen-

erally unenforceable. The touch and concern requirement was lopped

off in the Third Restatement of Property in the year 2000, and develop-

ers and others began to use private transfer fee covenants.

124

Profes-

sor Freymuth suggested that transfer fee covenants to homeowners

associations would likely be reasonable, as they fund vetting of pur-

chasers, maintenance costs, and stability of the association.

125

Transfer

fee covenants to non-profits to support such efforts as local conserva-

tion efforts are also likely enforceable because they would benefit the

120.

61 A

. J

. 2

Perpetuities, Etc. § 88 (citing Venture Stores, Inc. v. Pac. Beach

Co. Inc., 980 S.W.2d 176 (Mo. Ct. App. W.D. 1998); Winecellar Farm, Inc. v. Hibbard,

27 A.3d 777 (N.H. 2011)).

121.

ESTATEMENT

HIRD

)

ROP

.: S

ERVITUDES

§ 3.4 cmt. c. (

. L

. I

NST

2019).

122. See generally Freyermuth, supra note 112.

123. Id. at 424.

124. Id. at 451 (“Under the traditional if-the-benefit-is-in-gross-the-burden-won’t-

run rule, a developer had little incentive to impose private transfer fee covenants.

Given their analytical similarity to quarter sales, courts were unlikely to enforce such

covenants against successors. In the wake of the Third Restatement, however, the use

of private transfer fee covenants has accelerated. The Third Restatement appears to

have encouraged the spread of such covenants by purporting to reject the traditional

prophylactic rule in favor of a reasonableness standard that presumes covenants are

reasonable.”) (footnotes omitted).

125. Id. at 452.

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518 TEXAS A&M LAW REVIEW [Vol. 7

residents,

126

consistent with the general rule that charitable gifts may

include restraints on alienation.

127

Fees that benefit a charity with lit-

tle link to the real estate would be more borderline.

128

Private fee

covenants that simply provided a stream of income to the original de-

veloper, on the other hand, are likely unreasonable. The greatest fac-

tor is diversion of funds away from the continuing real estate to the

developer, in effect eroding the tax base.

129

The argument for reason-

ableness is that the fee allows the initial price to be lower, as the buyer

discounts the price by the future obligation to pay upon resale. But

buyers are unlikely to accurately gauge the necessary discount, given

the difficulty of forecasting how long they will own the property and

how its price will change.

130

Transfer fees may also add transaction

costs, accrued in identifying who now owns the transfer fee rights

(which themselves may have been transferred), figuring out how they

are accounted for at closing, and dealing with possible multiple trans-

fer fees.

131

Courts are still dealing with whether private transfer fees are en-

forceable.

132

In the meantime, state legislatures have enacted statutes

largely invalidating private transfer fees (that is, transfer fees payable

not to the homeowners association or to a non-profit such as a conser-

126. Id. at 426–27 (“While this fee will have an impact upon all buyers within Sun-

rise, the benefit to the general public (preservation of environmentally sensitive land

and environmental education) and to the individual Sunrise residents (potential en-

hancement in the value of lots within Sunrise created by proximity and/or access to

the conserved land) arguably may offset this impact.”).

127. Horse Pond Fish & Game Club, Inc. v. Cormier, 581 A.2d 478, 481 (N.H. 1990)

(“In other words, an express provision or condition against alienation contained in a

gift made to a charitable trust or charitable corporation may constitute a valid

restraint.”).

128. Freyermuth, supra note 112, at 427 (“Because the LCHF transfer fee provides

for no services or facilities benefitting owners within any development, one expects

such a covenant to have only a negative impact upon the value of the affected lots.

One might nevertheless defend the LCHF covenant as justified based upon its general

charitable purpose and the fact that its small fee only has a de minimis effect on the

land’s value.”).

129. Id. at 463–64 (footnote omitted) (“Finally, and most importantly, the financial

benefit that a private transfer fee covenant creates for the developer comes at the

public’s expense. To the extent that a private transfer fee covenant is enforceable

against successors, it reduces the value of the affected land. This reduction artificially

decreases the ad valorem tax base of the broader public community of which the

affected land is a part. Incremental sums that would have funded public goods in the

local community—such as public education, policing, fire protection, streets, sewers,

and other community services—instead are diverted into the pockets of private devel-

opers. Furthermore, this situation happens not by a public vote, but by private con-

tract. Sound public policy cannot and should not permit private action, taken outside

the community’s democratic processes, to divert the tax base for private benefit.”).

130. Id. at 457.

131. Id. at 462–63.

132. See, e.g.,

INGER

, supra note 21, at 285 (“Provisions that require future pur-

chasers to pay a fee to the original grantor also may well be struck down as unreason-

able restraints on alienation.”).

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2020] FIRST SALE DOCTRINE 519

vation group) in some forty-three states.

133

That posture leaves it

somewhat difficult to assess whether, by analogy, a resale royalty right

is an unreasonable restraint on alienation. If forty-three states have

effectively prohibited private transfer fees, then that could be seen as

a public policy determination that they are indeed unreasonable. On

the other hand, the fact that states needed to enact the ban by legisla-

tion rather than by judicial interpretation suggests that under the com-

mon law, the transfer fees would not be deemed unreasonable.

Looking to the underlying policy of first sale could also help courts

address boundary issues about the first sale doctrine. For example,

one question is: What dispositions of a work give first sale rights? First

sale applies if the work is sold, but does it apply if the work is given

away,

134

abandoned,

135

traded, or left in a will? In copyright, first-sale

rights go to the owner of an authorized copy, so all such transfers

would likely convey first-sale rights.

136

In patent, the doctrine is judge-

made, so courts would have to decide.

137

By considering the underly-

ing policy, the decision may be made less of an all-or-nothing choice.

If a copy is donated, first-sale rights will attach, but restrictions on the

gift may be more likely to be deemed reasonable than restrictions on a

commercially marketed item, just as restricted gifts of real estate for

such charitable purposes of environmental conservation or historical

preservation are more likely to survive judicial scrutiny.

138

133. Private Transfer & Development Impact Fees,

. A

’

EALTORS

, https://

www.nar.realtor/private-transfer-development-impact-fees (last visited Oct. 28, 2019)

[https://perma.cc/QW8K-5J3L].

134. See LifeScan Scotland, Ltd. v. Shasta Techs., LLC, 734 F.3d 1361, 1375 (Fed.

Cir. 2013) (“At bottom, a patentee has a choice as to how to secure its reward. A

patentee may ‘demand[ ]’ a particular price in exchange for an ‘article and the inven-

tion which it embodies.’ . . . Alternately, a patentee may choose to give that article

away for free in the hope of obtaining a future benefit, as LifeScan did here. But a

patentee cannot evade patent exhaustion principles by choosing to give the article

away rather than charging a particular price for it. Where a patentee unconditionally

parts with ownership of an article, it cannot later complain that the approach that it

chose results in an inadequate reward and that therefore ordinary principles of patent

exhaustion should not apply.”); Brilliance Audio, Inc. v. Haights Cross Commc’ns,

Inc., 474 F.3d 365, 373 (6th Cir. 2007) (holding first sale rights apply to items given

away).

135. For a paper concluding that first sale should apply to abandoned property,

such as the murals by the noted pseudonymous artist Banksy, see Dan Karmel, Off

the Wall: Abandonment and the First Sale Doctrine, 45

OLUM

. J.L. & S

. P

ROBS

353, 377 (2012) (“He had the choice of how, where, and when to release his works to

the public. Perhaps most importantly, he had the choice of whether to release his

works. He should not be able to subsequently place additional restrictions on what

may be done with them.”).

136. 17 U.S.C. § 109(a) (2018).

137. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1536 (2017)

(discussing how exhaustion is a common law doctrine applied by courts to the patent

statute).

138. Cf.

INGER

supra note 21, at 282 (“Restraints on alienation are generally al-

lowed when the holder of the property interest is a charity.”).

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520 TEXAS A&M LAW REVIEW [Vol. 7

Another issue of considerable practical importance is whether to

recognize “digital first sale.”

139

If someone owns a digital copy of mu-

sic or a movie, he or she might wish to sell it to someone over the

internet. If he or she simply sent a copy electronically, that would

likely not fit within the technical boundaries of copyright’s first sale

doctrine, which only apply to the copy that person owns.

140

The Sec-

ond Circuit recently held that first sale did not protect the operator of

an online service for selling used music, even where it sought to en-

sure that only one party would have a copy of the music once sold.

141

Economically, however, the transaction seems equivalent to selling an

authorized copy, provided the seller destroys his copy.

142

In sum, the

common law cases on the reasonableness of restraints on alienation

provide a guide toward interpreting first sale as motivated by the pol-

icy against restraints on alienation. The next Sections look at two live

issues on the extent of first sale: resale royalty rights for artists and

resale of software. Federal copyright law invalidates unreasonable re-

straints on alienation.

143

Can state law require payments to artists

when their works are resold? Can state contract law permit software

sellers to prevent resale of software, by characterizing transactions as

mere licenses, as opposed to sales?

III. W

HETHER

IRST

ALE

REEMPTS

ESALE

OYALTY

IGHTS FOR

RTISTS

Federal copyright law and patent law preempt state law in their re-

spective areas.

144

The extent of preemption (as with the extent of first

sale) is unsettled because the Supreme Court has taken few cases on

the question. The most recent intellectual property case on preemp-

tion was Bonito Boats, Inc. v. Thundercraft Boats, Inc.

145

in 1989, and

139. See, e.g.,

EZEI

supra note 87, at 92–148 (arguing that first sale should be

extended to the digital context).

140. See 17 U.S.C. § 109(a) (2018).

141. See Capitol Records, LLC v. ReDigi Inc., 910 F.3d 649 (2d Cir. 2018), cert.

denied, 139 S. Ct. 2760 (2019).

142. See id. at 658 (“In addition, even if ReDigi effectively compensated (by offset-

ting deletions) for the making of unauthorized reproductions in violation of the rights

holder’s exclusive reproduction right under § 106(1), nonetheless ReDigi’s process it-

self involves the making of unauthorized reproductions that infringe the exclusive

reproduction right unless justified under fair use. We are not free to disregard the

terms of the statute merely because the entity performing an unauthorized reproduc-

tion makes efforts to nullify its consequences by the counterbalancing destruction of

the preexisting phonorecords.”).

143. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1527 (2017)

(discussing how copyright’s first sale doctrine is rooted in the common law principle

against restraints on alienation).

144. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 168 (1989)

(applying patent preemption); 17 U.S.C. § 301 (2018) (preemption with respect to

other laws (providing for copyright preemption of state law)).

145. Bonito Boats, 489 U.S. at 168 (“By offering patent-like protection for ideas

deemed unprotected under the present federal scheme, the Florida statute conflicts

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the Supreme Court has never applied the statutory preemption provi-

sion in the Copyright Act, enacted in 1976.

146

A. Restraints on Alienation as Artists’ Moral Rights

Kirtsaeng and Lexmark both dealt with commercial actors attempt-

ing to leverage their intellectual property rights to control markets.

147

Kirtsaeng was an attempt to maintain price discrimination between

domestic and foreign markets.

148

Lexmark effectively dealt with the

ability to prevent aftermarket competition, as well as following Kirt-

saeng with respect to international dimensions.

149

The doctrine of re-

straints on alienation might play out differently in the context of

artworks. In the realm of art, many countries have long recognized the

moral rights of artists to prevent distortion of their works, to receive

proper attribution of their authorship, and other protections of the

author’s artistic claims.

150

The United States extended moral rights to

a set of artists in order to join the leading international copyright

with the strong federal policy favoring free competition in ideas which do not merit

patent protection. . . . We therefore agree with the majority of the Florida Supreme

Court that the Florida statute is preempted by the Supremacy Clause.”) (internal cita-

tion and quotations omitted).

146. See David E. Shipley, Droit De Suite, Copyright’s First Sale Doctrine and Pre-

emption of State Law, 39

ASTINGS

OMM

. & E

. L.J.

1, 4 (2017) (“The high court

has not addressed a preemption issue in the general field of intellectual property since

the Bonito Boats decision in 1989, and it has never addressed a preemption issue

arising under section 301 of the Copyright Act of 1976.”).

147. See Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 540 (2013); Lexmark,

137 S. Ct. at 1529.

148. Note that whether price discrimination should be prohibited is a debated ques-

tion. Price discrimination may be beneficial to both sellers and buyers, by allowing

transactions at a range of prices to different sorts of buyers. In addition, even where

price discrimination is harmful, prohibiting it may simply channel sellers to even more

harmful practices. See, e.g., Copyright Act of 1976—First Sale Doctrine—Kirtsaeng v.

John Wiley & Sons, Inc., 127

ARV

. L. R

348, 353 (2013) (“In this case, because

the first sale doctrine, the Court’s decision will primarily impact the method by which

price discrimination.”).

149. See Lexmark, 137 S. Ct. at 1534–37 (discussing Kirtsaeng, 568 U.S. 519).

150. “That artists have certain ‘moral rights’ in their work is a doctrine long recog-

nized in civil-law countries but only recently imported into the United States.” Kelley

v. Chi. Park Dist., 635 F.3d 290, 296 (7th Cir. 2011). Moral rights are generally

grouped into two categories: rights of attribution and rights of integrity. Carter v.

Helmsley-Spear, Inc., 71 F.3d 77, 81 (2d Cir. 1995) (citing

ALPH

E. L

ERNER

UDITH

RESLER

, A

419–20 (1989)). “Rights of attribution” generally include

the artist’s right to be recognized as the author of his work, to publish anonymously

and pseudonymously, to prevent attribution of his name to works he did not create,

and to prevent his work from being attributed to other artists. See id. “Rights of integ-

rity” include the artist’s right to prevent the modification, mutilation, or distortion of

his work, and in some cases (if the work is of recognized stature), to prevent its de-

struction. Id. at 81–82.

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522 TEXAS A&M LAW REVIEW [Vol. 7

treaty, the Berne Convention.

151

The Visual Artists Rights Act of 1990

(“VARA”) affords artists positive rights of attribution: “to claim au-

thorship of that work” and “to prevent the use of his or her name as

the author of any work of visual art which he or she did not create.”

152

This Act also prohibits misattribution, giving the right “to prevent the

use of his or her name as the author” of the work if it has been dis-

torted or modified, if that would be “prejudicial to his or her honor or

reputation.”

153

The Act further provides protection to the work itself,

providing the artist the right “to prevent any intentional distortion,

mutilation, or other modification of that work which would be preju-

dicial to his or her honor or reputation, and any intentional distortion,

mutilation, or modification of that work is a violation of that right.”

154

For some works of a particular status, there is an additional right of

integrity “to prevent any destruction of a work of recognized stature,

and any intentional or grossly negligent destruction of that work is a

violation of that right.”

155

The VARA, notably, is limited to a subset

of authors, giving rights only to the author of a “work of visual art,”

156

which is defined in considerable detail to include a “painting, drawing,

print, or sculpture, existing in a single copy, in a limited edition of 200

copies” or certain photographs, likewise limited to 200 signed copies

or fewer.

157

Similarly, under the California statute, the author’s rights

151. See Graeme W. Austin, The Berne Convention As a Canon of Construction:

Moral Rights After Dastar, 61

N.Y.U. A

. S

URV

. A

. L.

111, 115 (2005) (“When the

United States finally joined the Berne Convention, the first ‘true’ multilateral conven-

tion on copyright, in 1988, its obligations included compliance with article 6bis which,

among other things, announces authors’ right ‘to claim authorship’ to their works.”)

(footnotes omitted).

152. 17 U.S.C. § 106A (2018);

H.R. R

. N

101–514, at 2 (1990), as reprinted in

1990 U.S.C.C.A.N. 6915, 6924.

153. 17 U.S.C. § 106A.

154. Id.

155. Id. § 106A(a)(3)(B).

156. Id. § 106A.

157. The Copyright Act defines a “work of visual art” as:

(1) a painting, drawing, print, or sculpture, existing in a single copy, in a

limited edition of 200 copies or fewer that are signed and consecutively num-

bered by the author, or, in the case of a sculpture, in multiple cast, carved, or

fabricated sculptures of 200 or fewer that are consecutively numbered by the

author and bear the signature or other identifying mark of the author; or

(2) a still photographic image produced for exhibition purposes only, ex-

isting in a single copy that is signed by the author, or in a limited edition of

200 copies or fewer that are signed and consecutively numbered by the

author.

A work of visual art does not include—

(A)(i) any poster, map, globe, chart, technical drawing, diagram, model,

applied art, motion picture or other audiovisual work, book, magazine,

newspaper, periodical, data base, electronic information service, electronic

publication, or similar publication;

(ii) any merchandising item or advertising, promotional, descriptive,

covering, or packaging material or container;

(iii) any portion or part of any item described in clause (i) or (ii);

(B) any work made for hire; or

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2020] FIRST SALE DOCTRINE 523

are not transferable, but may be waived—in the sense only that the

artist and buyer may agree that the artist will be entitled to more than

5% of future sales, which one could consider an usual meaning of the

word “waiver.”

158

The VARA raises the question of whether restraints on alienation

would be enforceable if they served the artistic-control purposes sup-

ported by VARA instead of the market-control purposes at issue in

Kirtsaeng and Lexmark.

159

The VARA could be seen as a recognition

of the general principle that the artistic integrity of artists may be rec-

ognized and so that agreements with respect to the integrity of

artworks should be enforced. Consistent with that recognition, rights

under the VARA may not be transferred—a restraint on alienation

built right into the Act itself.

160

One could also look at how the Court

recognized the first-sale interest of “libraries, used-book dealers, tech-

nology companies, consumer-goods retailers, and museums.”

161

the same token, the Court could recognize the special reliance of art-

ists on using agreements to structure their artistic works.

On the other hand, the VARA could also be characterized instead

as a carefully limited exception to the general principles of copyright

law. The rights under VARA have meticulously limited boundaries;

the works to which the VARA applies are a small section of the uni-

verse of copyrighted works, and the rights are nontransferable and

savable. In this view, the VARA would not support an extension of

artist’s right by reading another exception into the statutory first sale

doctrine.

If the policy behind first sale is to prevent restraints on alienation,

then the policy would not extend to bar rules that do not qualify as

restraints on alienation. As courts have recognized, “not every imped-

iment to a sale is a restraint on alienation.”

162

In addition, reasonable

restraints on alienation might still be effective.

17 U.S.C. § 101 (2018).

158. Compare

. C

ODE

§ 986(a) (2007) with 17 U.S.C. § 106A(e) (“Transfer

And Waiver.—(1) The rights conferred by subsection (a) may not be transferred, but

those rights may be waived if the author expressly agrees to such waiver in a written

instrument signed by the author.”).

159. But see Austin, supra note 151, at 126 (discussing preemption in intellectual

property as applied by the Supreme Court) (“Indeed, the Court has recognized that

some of the requirements that states may impose on the marketing of goods under

such circumstances in order to avoid confusion are not preempted.”).

160. 17 U.S.C. § 106A(e).

161. Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 540 (2013).

162. Occidental Sav. & Loan Ass’n v. Venco P’ship, 293 N.W.2d 843, 845 (Neb.

1980) (“It is true that the possibility of acceleration may impede the ability of an

owner to sell his property as he wishes; nonetheless, not every impediment to a sale is

a restraint on alienation, let alone contrary to public policy. It is a fact that zoning

restrictions, building restrictions, or public improvements may impede the sale and

substantially affect the ability of an owner to realize a maximum price. Yet no one

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524 TEXAS A&M LAW REVIEW [Vol. 7

B. Resale Royalties as Restraints on Alienation

A case that tees up those issues is Close v. Sotheby’s, in which the

Ninth Circuit held that the federal Copyright Act preempted a state

resale royalty act.

163

Section 301(a) of the Copyright Act states that

federal law preempts all state law rights that are “equivalent” to “any

of the exclusive rights within the general scope of copyright.

164

The

California Resale Royalties Act (“CRRA”) granted artists 5% of the

proceeds in the event of resale of their artwork.

165

The seller was re-

quired to pay 5% of the sale to the artist

166

or, if the artist could not

be located, the California Arts Council.

167

The Council would attempt

to locate the artist, and if unsuccessful after seven years, could use the

funds to acquire art for public buildings.

168

The Act applied to sales in

California and sales outside California by California residents (the lat-

ter provision, however, had been held invalid as contrary to the Dor-

mant Commerce Clause under the United States Constitution

169

). The

rights were limited to “a work of fine art,” defined as “an original

painting, sculpture, or drawing, or an original work of art in glass.”

170

The CRRA did not apply to sales for less than $1,000, or works by an

artist who died before 1983.

171

The right was not perpetual, rather

lasting until the twentieth anniversary of the death of the artist.

172

The

right could not be waived, other than by an agreement to pay a

greater royalty than 5%.

173

suggests that such restrictions or covenants as a class, are invalid simply because they

affect the ease with which one may dispose of one’s property.”).

163. Close v. Sotheby’s, Inc., 894 F.3d 1061, 1064 (9th Cir. 2018). For discussion of

the enactment and background of the California statute, see DeBor, supra note 23.

164. 17 U.S.C. § 301(a) (2018) (“On and after January 1, 1978, all legal or equitable

rights that are equivalent to any of the exclusive rights within the general scope of

medium of expression and come within the subject matter of copyright as specified by

sections 102 and 103, whether created before or after that date and whether published

or unpublished, are governed exclusively by this title. Thereafter, no person is entitled

to any such right or equivalent right in any such work under the common law or

statutes of any State.”).

165. Close, 894 F.3d at 1064. The statute provided: “Whenever a work of fine art is

sold and the seller resides in California or the sale takes place in California, the seller

or the seller’s agent shall pay to the artist of such work of fine art or to such artist’s

agent 5 percent of the amount of such sale.”

. C

ODE

§ 986(a) (West 2007).

For discussion of the act generally, see DeBor, supra note 23.

166.

. C

ODE

§ 986(a).

167. Id

§ 986(a)(2).

168. Id. § 986(a)(5).

169. In an earlier decision, the Ninth Circuit had held that the application of the

statute to out-of-state sales was invalid under the Dormant Commerce Clause, but

that provision was separable from the rest of the statute and so did not invalidate the

entire statute. Sam Francis Found. v. Christies, Inc., 784 F.3d 1320, 1320–23 (9th Cir.

2015).

170.

. C

ODE

§ 986(c)(2).

171. Id. § 986(a)(7), (b)(2)

;

Sam Francis Found., 784 F.3d at 1322.

172.

. C

ODE

§ 986(a)(7).

173. Id. § 986(a).

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2020] FIRST SALE DOCTRINE 525

The Ninth Circuit held that the California statute was preempted on

the grounds that it conflicted with copyright law’s first sale doctrine:

Although the CRRA’s resale royalty right and § 106(3)’s distribu-

tion right are not coextensive, they are equivalent. The two rights

differ in that one grants artists the right to receive a percentage pay-

ment on all sales of artwork after the first, while the other grants

artists the right to receive full payment on the first (and only the

first) sale. But, at root, both concern the distribution of copies of

artwork and define artists’ right (or lack thereof) to payment on

downstream sales of those copies.

174

The court ultimately relied on the policy against restraints on aliena-

tion, as in Kirtsaeng and Lexmark:

The CRRA expands the federal distribution right because, whereas

the first sale doctrine limits artists’ right to payment to the first sale,

the CRRA grants artists an unwaivable right to a 5% royalty on all

downstream sales. See Cal. Civ. Code § 986(a). Indeed, the CRRA

is designed precisely to alter the first sale doctrine by affording art-

ists a right to at least some measure of payment on every sale after

the first. At the same time, the CRRA also restricts the federal dis-

tribution right by forbidding artists from fully alienating copies of

their artwork. In effect, the CRRA creates an inalienable restraint

on alienation.

175

Note that the restraint in Close was of a much different nature than in

Kirtsaeng and Lexmark. In Kirtsaeng, the copyright holder argued that

the distribution right should prevent the owner of a copy, which had

been made with permission of the copyright holder, from importing it

into the United States.

176

In Lexmark, the copyright holder argued

that the owner of a printer cartridge, who had purchased it from the

original buyer, was restrained from alienating that printer cartridge

because the original buyer had agreed not to resell it.

177

In both cases,

the intellectual property holder was seeking to prevent the party from

transferring ownership of the property.

178

In Close, by contrast, the

resale royalty right only came into effect if the party was able to alien-

ate the artwork.

179

If the party resold an artwork, they then became

obliged to remit 5% of the sale proceeds to the artist.

180

The question

would then become whether that rule, which is not a prohibition but

rather sort of private tax, is an unreasonable restraint on alienation.

174. Close v. Sotheby’s, Inc., 894 F.3d 1061, 1070 (9th Cir. 2018).

175. Id. at 1071.

176. See Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 526–27 (2013).

177. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1525 (2017).

178. See id.; Kirtsaeng, 568 U.S. at 526–27.

179. Close, 894 F.3d at 1070.

180. Id.

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526 TEXAS A&M LAW REVIEW [Vol. 7

Ironically, fine artists depend little on copyright; buyers are not in-

terested in copies.

181

If copyright law preempts state law giving rights

to artists, such as resale royalty rights, then on balance copyright may

be a net loss for them.

182

Viewed broadly, the Copyright Act itself is a

variety of restraints on alienation. The Act makes quite clear that a

physical copy of a work is separate from the copyright in the work,

and the copy may be sold and resold without selling the copyright.

183

The Ninth Circuit rejected the distinction between requiring pay-

ment on resale and prohibiting resale: “Even though there are differ-

ences in how the CRRA and § 106(3) affect artists’ right to

payment—one requires a royalty on all sales after the first, and the

other contemplates full alienation upon the first sale—there is signifi-

cant overlap between the two for the reasons explained above.”

184

That all-or-nothing view of first sale seems to prove too much. An

artist could certainly lease the copy, and retain ownership, meaning

that first sale does not require that all the payment be made at once.

Likewise, the property could be sold on credit, with the property itself

serving as collateral, in which case payments would be spread out over

time.

185

If payments were not made, the artist could repossess the art-

work, a powerful restraint on alienation.

The Close court also had to contend with some contrary legislative

history, a subsequent House Report stating in clear terms: “For exam-

ple, the law will not preempt a cause of action for a misattribution of a

reproduction of a work of visual art or for a violation of a right to a

resale royalty.”

186

The court simply declined to recognize the state-

ment as persuasive authority, on the grounds that it came long after

the Act was passed and “at best, represent[ed] the House’s under-

181. See Laura A. Heymann, Copyright and the Single Work,

OTWELL

(Nov. 28,

2018) (discussing Amy Adler, Why Art Does Not Need Copyright, 86

. W

ASH

. L.

313 (2018)) (Fine artists generally “have little to no desire to sell multiple copies

of their work, and the number of artists who can count on licensing their work for

derivative uses (museum postcards or calendars, for example) is few.”); see also Brian

Frye, Andy Warhol’s Pantry, 8

KRON

NTELL

. P

ROP

. J.

17 (2015).

182. See generally Heymann, supra note 181.

183. See 17 U.S.C. § 202 (2018) (“Ownership of a copyright, or of any of the exclu-

sive rights under a copyright, is distinct from ownership of any material object in

which the work is embodied. Transfer of ownership of any material object, including

the copy or phonorecord in which the work is first fixed, does not of itself convey any

rights in the copyrighted work embodied in the object; nor, in the absence of an

agreement, does transfer of ownership of a copyright or of any exclusive rights under

a copyright convey property rights in any material object.”).

184. Close, 894 F.3d at 1071.

185. A “transfer of copyright” is defined to include hypothecation, meaning using

the copyright as collateral. See 17 U.S.C. § 202 (“A ‘transfer of copyright ownership’

is an assignment, mortgage, exclusive license, or any other conveyance, alienation, or

hypothecation of a copyright or of any of the exclusive rights comprised in a copy-

right, whether or not it is limited in time or place of effect, but not including a nonex-

clusive license.”).

186. Close, 894 F.3d at 1072 (citing

H.R. R

. N

101-514, reprinted in 1990

U.S.C.C.A.N. 6915, 6931 (1990)).

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2020] FIRST SALE DOCTRINE 527

standing—right or wrong—of how existing law might intersect with

the changes proposed in VARA.”

187

In addition, the Ninth Circuit, in the 1980 case of Morseburg v.

Balyon, had long ago held that the CRRA was not preempted by the

1909 Copyright Act because it did not conflict with the Act: “A resale

royalty is not provided by the 1909 Act; no hostility toward such a

royalty is expressed by the Act; and, on the facts before us, the obliga-

tion to pay a resale royalty does not impermissibly restrict resales by

the owners of works of fine art.”

188

Close first held that Morseburg

was simply irrelevant to its analysis of express preemption under the

1976 Act because Morseburg dealt with implicit conflict preemption

under the 1909 Act.

189

Although Morseburg was indeed decided

under a different version of the Copyright Act, its holding that the

CRRA did not “impermissibly restrict”

190

resales could be relevant to

whether the CRRA impermissibly restricted the first sale right to re-

sell copies.

The court in Close noted that preemption under the 1909 Act might

be a live issue, to the extent sales fell between the CRRA’s effective

date, January 1, 1977, and the 1976 Act’s effective date, January 1,

1978.

191

The court cast some doubt on its earlier holding but declined

ruling on the issue, rather remanding the case to see if there were any

sales during that period that were still at issue in the case.

192

The court

also declined to rule on the issue of whether CRRA represented an

unconstitutional taking.

193

Although signaling that CRRA seemed

similar to other restrictions that had been held permissible, the court

did not decide the question, as it had been made moot by defendant’s

successful copyright preemption attack.

194

187. Id.

188. Morseburg v. Balyon, 621 F.2d 972, 978 (9th Cir. 1980); see also DeBor, supra

note 23.

189. Close, 894 F.3d at 1072 (“Furthermore, our reasoning in Morseburg derived

from the Supreme Court’s decision in Goldstein, and that case was grounded in a

different era of federal copyright law, before the Copyright Act even had an express

preemption provision. Morseburg did not pretend to speak to the preemptive effect of

the 1976 Act and does not control our express preemption analysis here.”).

190. Morseburg, 621 F.2d at 978.

191. Close, 894 F.3d at 10

74.

192. Id. (“In sum, Morseburg’s reasoning would be suspect today, but it is not

clearly irreconcilable with intervening higher authority. It therefore controls our anal-

ysis of plaintiffs’ claims arising under the 1909 Act. We conclude that plaintiffs’ claims

concerning sales occurring between the CRRA’s effective date of January 1, 1977, and

the 1976 Act’s effective date of January 1, 1978 are not preempted. On remand, the

district court should determine if any of plaintiffs’ claims arise between January 1,

1977, and December 31, 1977.”).

193. Id. at 1075.

194. Id. (“In some respects at least, the droit de suite resembles legislation imposing

rent control, setting a minimum wage, or requiring a zoning permit. All of these mea-

sures impose real economic costs on people or businesses and may result in a wealth

transfer to someone else, but they are not, for that reason alone, a governmental

taking.”).

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528 TEXAS A&M LAW REVIEW [Vol. 7

An initial question unexamined by the court in Close would be

whether the resale royalty right even constitutes a restraint on aliena-

tion as opposed to a servitude of some sort.

195

As defined by the Third

Restatement of Property, “Direct restraints include absolute prohibi-

tions on some or all types of transfers, including leases, prohibitions

on transfer without the consent of another, prohibitions on transfer to

particular persons, requirements of transfer to particular persons, op-

tions to purchase land, and rights of first refusal.”

196

There is a good

argument that the CRRA resale royalty right is only an indirect re-

straint on alienation, one permitting alienation but “reducing the

amount the owner might otherwise realize on a sale of the prop-

erty.”

197

The Third Restatement of Property would uphold such restric-

tions unless irrational, but many courts have stuck with the more

demanding standard of reasonableness.

198

But even assuming the resale royalty right qualifies as a restraint on

alienation, the question remains whether it is a reasonable restraint.

The economic policies against restraints on alienation (transaction

costs, price discrimination, and leveraging intellectual property rights

into another market) in the Lexmark opinion would not seem to apply

with great force to the CRRA resale right. In a sense, transaction

costs would not be directly affected. Unlike other settings where it

would be necessary to negotiate with the rights-holders, the CRRA

freely permits resales. So there would not be transaction costs in the

sense of Lexmark—those “remoras” sticking to the item as it flows

through the market

199

—where it might be necessary to negotiate with

a rights-holder before selling the property—or to negotiate with many

rights-holders before selling some property. The 5% resale royalty,

however, could be seen as a transaction cost in more general terms,

similar to a tax. If sellers must pay 5% of sales to artists, then there

could be fewer sales of fine art—or at any rate fewer sales of fine art

in California. But those sorts of transaction costs would not seem to

make the resale right “equivalent” to the copyright exclusive right of

public distribution. However, the existence of the 5% resale royalty

right could lead owners to sell the works in other states—outside the

195. Cf. Van Houweling, supra note 83.

196.

ESTATEMENT

HIRD

)

ROP

.: S

ERVITUDES

§ 3.4 (

. L

NST

2000).

197. Id. § 3.5 (“Many servitudes indirectly affect the alienability of property by lim-

iting the numbers of potential buyers or by reducing the amount the owner might

otherwise realize on a sale of the property. If the servitude is validly created under

Chapter 2, and is not otherwise invalid under the rules stated in this Chapter, the fact

that the servitude results in some diminution in return to the owner, or some reduc-

tion in the potential market for the property, is not sufficient justification for refusing

to give effect to the intent of the parties to create the servitude.”).

198. See generally

INGER

supra note 21, at 285 (“Provisions that require future

purchasers to pay a fee to the original grantor also may well be struck down as unrea-

sonable restraints on alienation.”).

199. Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1538 (2017).

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2020] FIRST SALE DOCTRINE 529

reach of CRRA—which could certainly entail more transaction costs,

in a broad sense.

200

The fact that the 5% goes to the artist rather than the state does

tend to make the resale right a little more like the copyright holder’s

exclusive right of distribution. Although the artist does not have the

right to prevent others from distributing the work (as under copy-

right), the artist maintains leverage to demand 5% if the work is sold.

That does give the artist some control over distribution of authorized

copies.

With respect to price discrimination, that would hardly seem to be a

factor with the resale right. An artist might engage in price discrimina-

tion, perhaps by making works that were deemed as special for high-

end buyers and more mundane works for a lower price. The resale

right would hardly facilitate that. The statute could result in a mode of

price discrimination, whereby the artist arranged to sell works out of

state (or create them out of state) in order to avoid CRRA, which

might encourage some buyers to pay more. Likewise, the artist might

even create some works in categories not covered by CRRA, so that

buyers would not be subject to the resale royalty obligation. But that

would not allow the artist to profit from price discrimination in the

way that a seller who sells the same product to different buyers at

different prices can.

In that vein, a key distinction between the resale royalty right and

the restraints in Kirtsaeng and Lexmark is that the resale royalty right

applies to the original artwork, not copies.

201

The restraint in Kirt-

saeng would have allowed the publisher to sell copies of the book at

one price in the United States and another price in other markets,

with no fear that books could move from one market to the other. The

restraint in Lexmark would have allowed the patent holder to control

the market for refurbished printer cartridges. The resale royalty right

applies not to an entire market of paintings, but to individual paint-

ings. Indeed, the entire question springs from the fact that the Copy-

right Act defines “copy” to include the original work.

202

Unlike other

authors, painters do not make an original and then sell as many copies

as they can. Rather, they make the original and sell it, meaning any

appreciation in value goes to the subsequent owner, not the original

author. The resale royalty is a modest attempt to preserve some of

200. See DeBor, supra note 23, at 128–29 (discussing how implementation of resale

rights in Paris caused dealers to move sales to London).

201. First sale applies to the original and to copies, because the Copyright Act de-

fines “copy” to include the original. 17 U.S.C. § 101 (2018) (“Copies” are material

objects, other than phonorecords, in which a work is fixed by any method now known

or later developed, and from which the work can be perceived, reproduced, or other-

wise communicated, either directly or with the aid of a machine or device. The term

“copies” includes the material object, other than a phonorecord, in which the work is

first fixed.”) (emphasis added).

202. Id.

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530 TEXAS A&M LAW REVIEW [Vol. 7

that value for the original artist.

203

The ability of an artist to engage in

price discrimination, as in Kirtsaeng, is very limited. A painter could

sell his or her best work at a certain price, and also produce lower-

quality works for lower prices (or sell both paintings and sketches, or

sculptures and miniatures), but such practices would have limited

market effect, and could easily harm the reputation of the artist.

Likewise, the CRRA resale royalty right would not permit artists to

extend their rights in the artwork to other markets. In theory, a seller

could bundle a CRRA-protected artwork with other merchandise and

then apportion the price in a way to minimize the CRRA payment

due. But that would not give the seller any market power in the mar-

ket for the second item. Rather, it would simply be a matter of CRRA

compliance. So it could be lumped into a broad conception of “trans-

action costs,” in the sense of costs that might be incurred to avoid the

CRRA obligations.

Looking to the policy of courts in restraint on alienation cases, the

resale royalty again seems less like a restraint on alienation. Courts

are concerned with whether the prohibition has real force as prevent-

ing further transfers of the property. A 5% resale royalty right would

provide a little friction, but relatively small. Read broadly, Close

would conflict with the sales tax effective in most states. In many

states, if an artwork is sold, the seller is obliged to remit a percentage

to the state or local authorities. Sales taxes often exceed 5%.

204

seems unlikely that courts would hold that the federal copyright and

patent statutes preempt the various state sales taxes. So the restraint

on alienation must somehow rest upon the fact that the 5% is owed

not to the state, but rather to the artist.

If the resale royalty is deemed a restraint on alienation, albeit a

rather mild one, the question then becomes how that fits into the pre-

emption analysis. Lexmark and Kirtsaeng did not concern preemption

but rather the extent of first sale itself. Those cases considered the

policy of restraints on alienation as being an underlying policy of first

sale. In the preemption analysis, a court could consider again restraint

on alienation as the policy behind first sale, but then use that for a

different question: whether the state law at issue is equivalent to, or

conflicts with, federal copyright’s right of public distribution, as lim-

203. See Shipley, supra note 146, at 6 (“Over time, as an artist’s reputation grows

and his or her works appreciate in value, the person who stands to gain from subse-

quent sales of those appreciated paintings and sculptural works is the collector, not

the visual artist who created the work. Resale royalty laws address this disparity in

how copyright law protects and rewards visual artists compared to authors, composers

and other creators. Hence, droit de suite can be justified as compensation for the lack

of a marketable reproduction right for many works of fine art.”).

204. For example, the sales tax in Cook County, Illinois, for General Merchandise

is 6.25%. See What is the Sales Tax Rate in Illinois?,

. R

EVENUE

https://www2.illi

nois.gov/rev/questionsandanswers/Pages/139.aspx (last visited Oct. 24, 2019) [https://

perma.cc/V52Y-CUWR].

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2020] FIRST SALE DOCTRINE 531

ited by the first sale doctrine.

205

Lexmark and Kirtsaeng interpreted

the first sale doctrine broadly, in order to limit the restraints on alien-

ation in those cases.

206

That does not mean that the cases stand for the

proposition that all restraints on alienation are contrary to the first

sale doctrine, and so should be preempted. That would be true only if,

under Lexmark, all restraints on alienation were subject to the first

sale doctrine. But such a broad preemptive effect of the Copyright

Act would disturb commercial practices immensely. Using property as

collateral is, in the very broad sense, a restraint on alienation, because

the debtor cannot now sell the property free and clear of the security

interest, without paying off the creditor.

207

Leases are inherently re-

straints on alienation where property is delivered but the possessor

has only the rights under the lease, and cannot further transfer the

property away. Many other examples come to mind readily.

In addition, if state legislation is the guide, then California’s act in

legislating the resale royalty act would seem to support its reasonable-

ness. Lastly, we must acknowledge the irony that a state statute would

be preempted under state law on the theory that the rule provided by

the state law was unreasonable under state law. A resale royalty right

is much less restrictive, for example, than a due-on-sale clause. Such a

clause provides that if collateral is sold before the loan is paid off, the

entire amount of the loan becomes due.

208

The resale royalty right is quite distinguishable from the resale price

minimum set by the publisher in Bobbs-Merrill. First, the resale right

is 5% of sales, so the owner is free to sell at whatever price she

chooses. A resale minimum, by contrast, prevents any sale below the

the item in the hands of the copyright owner. Second, the 5% royalty

is set by the state for all artworks. That means that the copyright

owner exercises no control, and also means that, because other works

205. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 168 (1989)

(applying patent preemption); 17 U.S.C. § 301 (2018) (providing for copyright pre-

emption of state law).

206. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1536–37

(2017); Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538–39 (2013).

207. See U.C.C. §§ 9-610, 615 (

. L

NST

. & U

NIF

. L

OMM

’

, amended

1998).

208. See, e.g., Occidental Sav. & Loan Ass’n. v. Venco P’ship, 293 N.W.2d 843, 844

(Neb. 1980) (“While ‘due on sale’ clauses take a number of forms, essentially they are,

in form, similar to the clause involved in the instant case, which provided ‘[I]n the

event of a sale of said premises without the written approval of said [lender], then the

whole indebtedness hereby secured shall, at the option of said [lender], immediately

become due and collectible without further notice, and this mortgage may then be

foreclosed to recover the amount due on said note or obligation . . . .’”). However, the

court in that case did not hold the due on sale clause to be invalid: “We must find, as a

matter of law, that ‘due on sale’ clauses are neither direct nor indirect restraints on

alienation and, therefore, are not void as such.” Id. at 848.

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532 TEXAS A&M LAW REVIEW [Vol. 7

are subject to the same 5% resale royalty, sellers in that market will

not be at a competitive disadvantage.

209

One could argue that the resale royalty is similar to a private trans-

fer fee, which commentators have argued would be an unreasonable

restraint on alienation.

210

There are also distinctions to be made be-

tween the resale royalty right and the private transfer fee. One could

argue that the resale right is a little like the fee to a homeowner’s

association rather than a pure private fee to the original developer.

The argument that the right facilitates the creation of works and their

original sale is much stronger. A developer presumably will seek to

sell the property at a market rate, perhaps discounted by the future

transfer obligation. The developer then shares in the general real es-

tate market’s rise in price (if any). An artist likewise may sell at a

market rate, but a much different sort of market. The new, unknown

artist will likely get low prices and could reasonably hold on to the

artworks in the hope that in the future their price will increase, inde-

pendent of the increase in the price of art generally. The payments to

the artist help the artist continue his career producing more art in his

oeuvre. In short, the public policy of encouraging artists at the begin-

ning of their careers seems stronger than the likelihood that private

transfer fees will realistically make real estate development and sales

less pricey.

The resale royalty right is closer to the sort of restraints on aliena-

tion that courts have upheld as reasonable. The right does not prevent

alienation but rather imposes a 5% fee on resale. The fee itself does

not obstruct resale in the way that a right of refusal or option to repur-

chase at a below market rate would. Rather, the fee depends on there

being a sale at the market rate. The right also serves a purpose aligned

with copyright, providing an incentive to creators. In the same vein,

the right is analogous to purposes underlying restraints that have been

held valid, because it serves to protect the interests of artists who may

sell their work early in their career. The artist is far from the rights-

holders in Kirtsaeng and Lexmark, who sought to leverage their rights

into control over a separate market.

211

Finally, the resale royalty right

209. The contrary view would be that any restriction on resale is contrary to first

sale. See Shipley, supra note 146, at 22 (“Subsequent rulings have said that this free-

dom includes the right to resell the goods for whatever price the buyer deems appro-

priate, without regard to the wishes of the copyright holder. The law is at odds with

these principles because it gives California artists an advantage not enjoyed by other

artists, and it disadvantages California art dealers against those outside the state. Cop-

yright owners cannot use their rights to fix resale prices in downstream markets.”).

210. Amy Kathleen Lewis, Comment, Developing Disaster: How Developers Are

Using a Covenant to Steal from Homeowners and Why the States Should Stop Them,

KLA

. L. R

377, 386–87 (2012).

211. Shipley, supra note 146, at 27. Because a 5% royalty is minimal control as

compared to the 100% prohibitions in Kirtsaeng and Lexmark, those cases are distin-

guishable. For the view that the resale royalty is sufficient control to conflict with first

sale, see id. (“In addition, as discussed in connection with conflict preemption under

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2020] FIRST SALE DOCTRINE 533

was not a product of a rights holder including restrictive language in a

contract. Rather, it was a statute enacted by the state of California for

policy reasons. The common law rule against unreasonable restraints

on alienation is largely state law.

212

It would be difficult to say that

under California property law, the resale royalty statute itself was an

unreasonable restraint on alienation.

The fact that the resale royalty is a general requirement under state

law rather than one created by a particular artist also would weigh in

favor of reasonableness. As noted above, it indicates that the state

deemed the policy reasonable, and reasonableness of restraints on

property is a classic state law issue. In addition, the state-created na-

ture of the right greatly reduces a great problem with restraints on

personal property. If the transferor of real estate creates a restraint on

real property, it will generally be in the deed of transfer, which will be

recorded in the real estate records, putting future transferees on no-

tice.

213

But the transfer of personal property generally does not re-

quire recording of an instrument (with such exceptions as automobile

titles or UCC filings to perfect a security interest in personal prop-

erty).

214

Future transferees of personal property may not be on no-

tice.

215

In addition, if restraints were generally permitted, potential

transferees might expend considerable research before acquiring

property to check if it was subject to restraints, increasing transaction

costs. But a state-created resale royalty right for artwork does not suf-

fer from such a notice problem. Merchants in the California art mar-

ket should be readily aware of such a requirement, just as they would

be expected to know of any applicable sales tax. The resale royalty

right, even if it barely qualifies as restraint on alienation, should be

deemed reasonable and so not run afoul of the first sale doctrine.

IV. “L

ICENSES

”

VOID

IRST

ALE

ESTRAINTS

LIENATION

The first sale doctrine permits the owner of a piece of property to

sell it, even if the property embodies a copyrighted work or a patented

invention. Copyright and patent owners in some industries have at-

tempted to distribute products while avoiding first sale rights in order

the Supremacy Clause, recent Supreme Court decisions hold that the first sale doc-

trine as codified in section 109(a), not only governs, but also forbids, efforts to control

downstream sales.”) (footnote omitted).

212. See, e.g.,

INGER

supra note 21, at 278–83 (discussing common law develop-

ment using cases applying state law).

213. See, e.g., id. at 528–54 (discussing deeds and recording statutes).

214. See U.C.C. § 2-401(1) (

. L

NST

. & U

NIF

. L

OMM

’

1998

) (“Subject

to these provisions and to the provisions of the Article on Secured Transactions (Arti-

cle 9), title to goods passes from the seller to the buyer in any manner and on any

conditions explicitly agreed on by the parties.”).

215. See generally Peter Menell & Michael Meurer, Notice Failure and Notice Ex-

ternalities, 5 J

. L

EGAL

NALYSIS

1 (2013).

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534 TEXAS A&M LAW REVIEW [Vol. 7

to control the secondary market for the product. Software transac-

tions are often characterized as licenses, rather than sales, in order to

avoid first sale. A software company will, for a price, deliver a copy of

software.

216

The contract will provide that the copy of software re-

mains the property of the software maker and is delivered subject to

the terms of a license.

217

The license allows the purchaser to possess

and use the software but imposes restrictions.

218

Most importantly, the

purchaser will not have the right to resell the software.

219

Courts have

enforced the parties’ agreements according to their terms, meaning

that those copies are not subject to first sale. This Section reexamines

this reasoning in the light of Kirtsaeng and Lexmark.

A. Vernor v. Autodesk, Inc. and its Aftermath

The leading case discussing the difference between software licens-

ing and sales is Vernor v. Autodesk, Inc.

220

Vernor bought copies of

AutoCAD software—sophisticated computer-aided design software—

from parties that had acquired the software from Autodesk.

221

Vernor

resold the software on eBay.

222

The question was whether first sale

authorized him to resell the software, or whether he was infringing

Autodesk’s right to distribute copies of its copyrighted work to the

public. Autodesk distributed the software under a licensing agree-

ment, which provided among other things that the copy of the

software remained the property of Autodesk and could not be

resold.

223

The Vernor court, drawing from earlier cases, formulated a three-

part analysis: “First, we consider whether the copyright owner speci-

fies that a user is granted a license. Second, we consider whether the

software. Finally, we consider whether the copyright owner imposes

notable use restrictions.”

224

Under this approach, the court held the

transaction to be merely a license, not a sale. First, the agreement was

216. See, e.g., Vernor v. Autodesk, Inc., 621 F.3d 1102, 1104 (9th Cir. 2010).

217. Id. (“The SLA for Release 14 first recites that Autodesk retains title to all

copies. Second, it states that the customer has a nonexclusive and nontransferable

license to use Release 14. Third, it imposes transfer restrictions, prohibiting customers

from renting, leasing, or transferring the software without Autodesk’s prior consent

and from electronically or physically transferring the software out of the Western

Hemisphere. Fourth, it imposes significant use restrictions.”).

218. Id.

219. Id. (“Third, it imposes transfer restrictions, prohibiting customers from rent-

ing, leasing, or transferring the software without Autodesk’s prior consent and from

electronically or physically transferring the software out of the Western

Hemisphere.”).

220. See id.

221. Id. at 1105.

222. Id.

223. Id. at 1104.

224. Id. at 1110–11.

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clearly labelled a license, as opposed to a sale.

225

Second, in the

court’s view, there were significant restrictions on transfer: transfer

was prohibited.

226

Third, the court held there were notable use restric-

tions: “The SLA also imposed use restrictions against the use of the

software outside the Western Hemisphere and against modifying,

translating, or reverse-engineering the software, removing any propri-

etary marks from the software or documentation, or defeating any

copy protection.”

227

Accordingly, because Autodesk reserved title in

the parties’ agreement, the court held that its customers were mere

licensees who did not become owners of the software, meaning that

Vernor did not become an owner of an authorized copy of the

software, and first sale did not authorize resale by Vernor.

228

Other courts have followed Vernor.

229

Indeed, courts have enforced

such terms so enthusiastically that only extreme attempts by copyright

holders to condition transfer of copies have been invalidated. In UMG

Recordings, Inc. v. Augusto,

230

the restrictions on further transfer

were not in a browsewrap or clickwrap agreement, or even obtained

for consideration. Rather, a music publisher gave away promotion

CDs of music, bearing the following “promotional statement”:

This CD is the property of the record company and is licensed to

the intended recipient for personal use only. Acceptance of this CD

shall constitute an agreement to comply with the terms of the li-

cense. Resale or transfer of possession is not allowed and may be

punishable under federal and state laws.

231

Unlike Vernor, the Augusto court held the restriction did not prevent

the passing of title to the recipients.

232

Accordingly, as owners of au-

thorized copies, they were entitled to sell them under first sale.

233

Au-

225. Id. at 1111.

226. Id. (“Autodesk retained title to the software and imposed significant transfer

restrictions: it stated that the license is nontransferable, the software could not be

transferred or leased without Autodesk’s written consent, and the software could not

be transferred outside the Western Hemisphere.”).

227. Id.

228. Id. at 1111–12 (“Thus, because Autodesk reserved title to Release 14 copies

and imposed significant transfer and use restrictions, we conclude that its customers

are licensees of their copies of Release 14 rather than owners. Both CTA’s and Ver-

nor’s sales infringed Autodesk’s exclusive right to distribute copies of its work.”).

229. Stephen McIntyre, Game Over for First Sale, 29

ERKELEY

ECH

. L.J.

1, 18

(2014) (citing cases) (“The Ninth Circuit has been especially prolific in articulating

how copyright owners can avoid the pitfall of actually selling goods to their

customers.”).

230. UMG Recordings, Inc. v. Augusto, 628 F.3d 1175, 1180 (9th Cir. 2011).

231. Id. at 1177–78.

232. Id. at 1183.

233. Id. at 1180 (“We conclude that, under all the circumstances of the CDs’ distri-

bution, the recipients were entitled to use or dispose of them in any manner they saw

fit, and UMG did not enter a license agreement for the CDs with the recipients. Ac-

cordingly, UMG transferred title to the particular copies of its promotional CDs and

cannot maintain an infringement action against Augusto for his subsequent sale of

those copies.”).

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536 TEXAS A&M LAW REVIEW [Vol. 7

gusto, however, did not question the enforceability of clauses that

limit transfer of title and restrict further transfer.

234

Rather, Augusto

simply held that the recipients had not agreed to such clauses,

235

contrast to software cases, where the users had ordered and paid for

the software and agreed to the terms.

236

B. Application of Vernor in Restraints on Alienation Context

The Vernor decision gives effect to the agreement between the par-

ties and cannot be faulted as a matter of contract law.

237

Kirtsaeng and

Lexmark, however, provide that federal copyright law will override

inconsistent contract law in order to prevent contractual restraints on

alienation from interfering with the first sale doctrine.

238

Now that the

policy against restraints on alienation is the key to first sale, Vernor’s

framework bears reexamination. The three-part test gives effect to the

parties’ agreement, but would be inapt under restraint against aliena-

tion scrutiny.

The first step, whether the copyright owner specifies that a user is

granted a license, would be of no weight. Unreasonable restraints on

alienation are not enforceable, regardless of how the parties charac-

terize them. Indeed, a contract will rarely have a clause entitled “re-

straint on alienation.” Rather, courts will look through the legal form

the parties choose, rather looking to the substance of the transaction.

Looking at form over substance is consistent with commercial transac-

tion law generally. Software transactions like the one in Vernor are

generally considered subject to Uniform Commercial Code Article 2

on the sale of goods. To give effect to the sale, the UCC overrides

contractual reservations of title if in effect a sale is what the parties

enter into: “Any retention or reservation by the seller of the title

(property) in goods shipped or delivered to the buyer is limited in

effect to a reservation of a security interest.”

239

A security interest

would be of no significance in cases where the software had been fully

paid for, and so there was no debt to secure.

240

234. Id. (“Particularly with regard to computer software, we have recognized that

cense to use the particular copy of software and do not acquire title that permits

further transfer or sale of that copy without the permission of the copyright owner.”).

235. Id. at 1182 (“Because the record here is devoid of any indication that the re-

cipients agreed to a license, there is no evidence to support a conclusion that licenses

were established under the terms of the promotional statement.”).

236. Id. at 1181.

237. See Vernor v. Autodesk, Inc., 621 F.3d 1102, 1104 (9th Cir. 2010).

238. Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1532–35 (2017);

Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538–39 (2013).

239. U.C.C. § 2-401(1) (

. L

NST

. & U

NIF

. L

OMM

’

1998).

240. See U.C.C. § 9-513(b)(1) (Debtor may require filing of termination statement

relating to security interest if “there is no obligation secured by the collateral covered

by the financing statement and no commitment to make an advance, incur an obliga-

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An argument has been made that software licenses are indeed se-

curity interests. Where a software license transfers copies of software

but purports to retain ownership of the copies, one could recharacter-

ize the transaction as transferring ownership of the software subject to

a security interest.

241

Even if the transaction is not a sale on credit, so

there is no money debt to be secured by the software, one could argue

that the software is collateral to secure the obligations of the buyer to

comply with the license.

242

If the buyer breaches, then the software

could be repossessed. The license will contain an agreement not to

transfer the software to anyone else: reselling the software would con-

stitute a breach and trigger the right to repossess the software.

That argument would not survive after Lexmark. The Court held

that contractual restraints on alienation would be overridden by the

federal first sale doctrine.

243

The security interest argument does noth-

ing more than provide a means for contract law (granting of a security

interest) to give effect to a property right to restrain alienation. A

security interest gives a right to repossess collateral if a debt is not

paid, and becomes nugatory once the debt is paid.

244

The security in-

terest view of anti-transfer clauses, by contrast, would apply where

there is no debt, would last permanently, and would serve no purpose

other than to prevent transfer of the software. It would allow software

sellers to negate first sale with a one-line clause in the sales contract,

exactly what Lexmark held ineffective. And it would not be limited to

software, so sellers of books, music, paintings, and every other type of

copyrighted work could benefit. First sale would become an option at

the choice of copyright holders, whereas Lexmark quite clearly made

first sale a restriction on patent holders, with reasoning relying on and

applicable to copyright.

245

When we look at how such a security interest would play out, its

effect as a restraint on alienation becomes quite clear. Suppose that

the retention of title was treated as the retention of a security interest

and that the contract contained an anti-transfer clause. If the software

tion, or otherwise give value.”). The security interest could be significant if, as dis-

cussed in the next paragraph, it secured a contingent obligation.

241. See John F. Duffy & Richard Hynes, Statutory Domain and the Commercial

Law of Intellectual Property, 102

. L. R

1, 72 (2016) (“A court ruling in Vernor’s

favor on the first sale doctrine would have had to view the software copies as physical

goods that can be bought and sold. That viewpoint would trigger application of the

UCC, and a court applying the UCC would almost certainly have to rule that, if

Autodesk’s transfer of the software-on-a-disk is viewed as a sale, it would be a sale

subject to Autodesk’s retention of a security interest securing the obligations in the

purported license.”).

242. Id.

243. Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1532–35 (2017).

244. See U.C.C. §§ 9-610, 615 (giving creditor right to take possession of collateral

upon default and right to apply the proceeds of sale of collateral to the payment of

the secured debt).

245. See Lexmark, 137 S. Ct. at 1532–35.

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538 TEXAS A&M LAW REVIEW [Vol. 7

was resold, that would trigger a default, permitting the original seller

to repossess the software. What next? The original seller could not

simply keep the repossessed software. The UCC permits a repossess-

ing creditor only to resell the collateral with prior notice.

246

The re-

possessing creditor is not permitted to simply keep the repossessed

collateral, even if that was specifically allowed in the contract; the

UCC negates such a contract right of “strict foreclosure.”

247

Rather,

the repossessing seller would have to resell the software in a commer-

cially reasonable manner—in other words, in the same way software

vendors sell such software.

248

The security interest, in effect, would

simply amount to the original seller being entitled to monopolize the

resale market, to the exclusion of owners of authorized copies, exactly

what the first sale doctrine prohibits, as reflected in Kirtsaeng and

Lexmark.

249

The question also arises, what would the creditor do with the money

from reselling the software? It would be entitled to apply the money

to the debt, and then return any surplus to the debtor—the person

who had bought the software on resale (such as Vernor). So the result

would be that the second buyer (such as Vernor) would have its prop-

erty repossessed and sold to pay the obligation of the first buyer (who

resold to Vernor). Lexmark allows parties to use contract law to agree

between themselves about whether transfer is permissible, but does

not allow those contractual agreements to be binding on third parties

as a matter of patent infringement.

250

But that would be the effect, if

the transferred property, although no longer owned by a party to the

agreement, could be collateral for any breach of the agreement. The

measure of the debt would presumably be the damages from the

breach of the anti-transfer clause—which raises the question of how to

measure damages (or assess the reasonableness of a liquidated dam-

ages provision), where the only damage flows from reselling the prop-

erty, something that a non-party to the agreement should be required

to do.

To take things a little more broadly, accepting the security interest

argument would open the door to restraints on alienation generally.

As long as the restraint was included in a security agreement (for per-

sonal property) or mortgage (for real estate), then it could effectively

bar any further alienation of the property. But courts have long struck

246. See U.C.C. § 9-620 (permitting the creditor only to propose keeping the collat-

eral in satisfaction of the debt, which debtor may reject).

247. U.C.C. § 9-620.

248. See U.C.C. § 9-610.

249. See Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1532–33

(2017); Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 538–39 (2013).

250. See Lexmark, 137 S. Ct. at 1533 (“Once sold, the Return Program cartridges

passed outside of the patent monopoly, and whatever rights Lexmark retained are a

matter of the contracts with its purchasers, not the patent law.”).

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down restraints on alienation that were included in documents filed in

the real estate records, whether deeds or mortgages.

251

The second factor in the Vernor test is whether the copyright owner

significantly restricts the user’s ability to transfer the software.

252

contract law, this would be rightly considered in determining what

rights were transferred. But in considering whether the transaction is

an unreasonable restraint on alienation, the factor would cut in the

other direction. The test is equivalent to asking: To what extent has

the transferor imposed a restraint on alienation?

The third factor under Vernor is whether the copyright owner im-

posed notable use restrictions.

253

This factor, unlike the other two,

would remain relevant, in determining whether the transaction con-

veyed ownership, in substance. If a product were transferred under

strict limitations on use, then it might not qualify as a transfer of own-

ership because the recipient did not effectively become the owner of

the goods, but rather was merely a lessee or bailee of goods still be-

longing to the transferor. But that would take more than the sort of

restrictions in Vernor and other typical software transactions.

Autodesk’s agreement prevented its customers from “modifying,

translating, or reverse-engineering the software, removing any propri-

etary marks from the software or documentation, or defeating any

copy protection.”

254

Such provisions do little more than restate rights

that would accompany any sale of a copyrighted work, first sale not-

withstanding. Copyright gives the copyright owner a set of exclusive

rights: in short, (1) to make copies; (2) to adapt the work; (3) to dis-

tribute copies; (4) to perform the copyrighted work publicly; and (5)

to display copies to the public.

255

First sale insulates the owner of a

copy from two of those rights. She may distribute that copy or display

that copy. But first sale does not authorize her to make copies of her

copy, adapt it, or perform it in public. So first sale would not permit

Vernor to modify, translate, or reverse-engineer the software.

256

Re-

moving proprietary marks or defeating copy protection would like-

wise be barred by the anti-circumvention and copyright-information

protections of the Copyright Act.

257

Putting those sorts of restrictions

into the contract does not detract from the transfer of the software

being a sale of that particular copy.

The agreement in Vernor is a sale of the software with a restraint on

alienation. Whether first sale overrides that restraint should still de-

251. See, e.g.,

INGER

supra note 21, at 278–79 (discussing how courts strike down

disabling restraints on alienation included in deeds).

252. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1111 (9th Cir. 2010).

253. Id.

254. Id.

255. See 17 U.S.C. § 106 (2018).

256. Fair use might apply to some activity in those areas, especially if not for com-

mercial purposes. See 17 U.S.C. § 107(1) (2018).

257. Digital Millennium Copyright Act, 17 U.S.C. § 1202 (2018).

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540 TEXAS A&M LAW REVIEW [Vol. 7

pend on whether the restraint was a reasonable restraint. Autodesk

made a number of policy arguments against applying first sale, which

could also be considered on the question of reasonableness:

Autodesk contends that this (1) allows for tiered pricing for differ-

ent software markets, such as reduced pricing for students or educa-

tional institutions; (2) increases software companies’ sales; (3)

lowers prices for all consumers by spreading costs among a large

number of purchasers; and (4) reduces the incidence of piracy by

allowing copyright owners to bring infringement actions against un-

authorized resellers.

258

These are not the sort of justifications that courts have held would

make restraints on alienations reasonable. Indeed, the first is simply

an argument for permitting price discrimination (“tiered pricing for

different software markets”), whereas first sale is intended to hinder

price discrimination.

259

The next two are possible, indirect effects of

price discrimination (it allows the seller to make more sales by pricing

differently). Lowering costs for all consumers would actually not be a

goal of Autodesk, who would like to use price discrimination to

charge each buyer the most they would pay, and so would only be an

effect of imperfect price discrimination from lack of perfect informa-

tion about the entire range of consumers.

260

Reducing piracy is circu-

lar in this context. Parties reselling authorized copies under first sale

are pirates only from the point of view of the frustrated copyright

owner.

After the policy demarcation of Lexmark and Kirtsaeng, the trend

in case law may reverse, after reexamining under the lens of restraints

on alienation, rather than simply contract law. The sellers of software

(and works like movies and books, which also sometimes seek to pre-

vent resale) would not be able to unilaterally opt out of the first sale

doctrine. Rather, although restraints on resale may be effective be-

tween the parties as a matter of contract law, they would not make

non-parties that later purchase and resell those goods liable for

infringement.

V. C

ONCLUSION

The Supreme Court, in Lexmark and Kirtsaeng, rooted first sale in

the policy against restraints on alienation in rather absolute terms.

Those cases involved rather absolute restraints on alienation, so the

258. Vernor, 621 F.3d at 1114–15.

259. Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 552 (2013) (“To the con-

trary, Congress enacted a copyright law that (through the “first sale” doctrine) limits

260. Cf. id. at 539 (“With these last few words, Coke emphasizes the importance of

leaving buyers of goods free to compete with each other when reselling or otherwise

disposing of those goods. American law too has generally thought that competition,

including freedom to resell, can work to the advantage of the consumer.”).

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lack of subtlety was not out of place. But other restraints on alienation

in the context of intellectual property are less clearly drawn. A

nuanced application of the policy could change the prevailing law re-

garding (1) the extent of judicially created conflict preemption and (2)

the extent to which federal first sale preempts state laws that have the

effect of restraining alienation of property covered by patents or copy-

rights. Despite the visceral rejection that restraints on alienation seem

to trigger in judges, some can serve purposes to benefit both parties to

the original transaction and their successors, as opposed to simply ty-

ing the hands of future owners. After Lexmark and Kirtsaeng, the

courts should change positions on two first-sale-related issues. First,

first sale should not preempt statutes like California’s Resale Royalty

Act, which create only minor friction on alienation while serving a

purpose completely in accord with federal copyright law. Second,

courts should reverse the trend of treating software transactions as

mere licenses. Rather, courts should acknowledge that where the

seller delivers the software and the buyer is entitled to keep and use it

freely, a sale has occurred. That sale triggers the right under first sale

to resell the software, contractual restraints on alienation notwith-

standing. Patent and copyright can learn much from the varied case

law experience of common law property.

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