Brilliance Audio, Inc. v. Haights Cross Communications, Inc.

Citations: 474 F.3d 365; 35 Media L. Rep. (BNA) 1257; 81 U.S.P.Q. 2d (BNA) 1568; 2007 U.S. App. LEXIS 1706; 2007 WL 188103Docket: 05-1209

Court: Court of Appeals for the Sixth Circuit; January 26, 2007; Federal Appellate Court

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Brilliance Audio, Inc. appeals the district court's dismissal of its copyright and trademark infringement claims against Haights Cross Communications, Inc. The case addresses whether the record rental exception to the first sale doctrine under 17 U.S.C. 109(b)(1)(A) applies to audiobooks, concluding that it does not, leading to the affirmation of the dismissal of the copyright claims. However, the court disagreed with the dismissal of the trademark claims, identifying two exceptions to the first sale doctrine under trademark law that Brilliance's complaint suggests may apply. Therefore, the court affirmed the dismissal of the copyright claims while reversing the dismissal of the trademark claims.

Brilliance, which produces and sells audiobooks under exclusive agreements and holds copyrights and a registered trademark for its products, alleges that Haights is unlawfully repackaging and marketing its retail editions as library editions without authorization. This practice is claimed to misrepresent Haights' affiliation with Brilliance and constitutes trademark infringement.

Brilliance filed a federal lawsuit claiming copyright infringement under 17 U.S.C. § 109, along with multiple trademark-related allegations under 15 U.S.C. §§ 1114, 1125(a), and 1125(c), as well as common law trademark infringement and unfair competition. Haights moved to dismiss the case under Fed. R. Civ. P. 12(b)(6), arguing that Brilliance failed to state a valid claim. The district court granted this motion, prompting Brilliance to appeal.

The appellate review of a 12(b)(6) dismissal is conducted de novo, focusing on whether any facts could support Brilliance's claims. The court must accept factual allegations as true but can disregard legal conclusions and unwarranted inferences. The district court determined that the first sale doctrine, which allows resale of a trademarked item without infringement, applied to Brilliance’s trademark claims as stated in the complaint.

Trademark law’s first sale exception generally protects resales by the original purchaser from being considered infringement or unfair competition. This exception rests on the premise that consumer confusion is unlikely when a genuine trademarked product is sold. However, there are exceptions where the first sale doctrine does not apply, notably if the repackaging of the product lacks adequate notice to consumers. Citing case law, the court emphasized that consumer awareness of repackaging minimizes confusion and protects the trademark holder's rights. If adequate notice is not provided, the trademark owner risks being associated with a product of inferior quality, necessitating limits on the first sale doctrine to safeguard trademark rights.

The first sale doctrine does not apply when a seller offers trademarked goods that differ materially from those sold by the trademark owner, as established in Davidoff, CIE, S.A. v. PLD Int'l Corp. and supported by multiple circuit rulings. A material difference is defined as one that consumers deem relevant to their purchase decision, and even subtle differences may qualify as material. The determination of materiality is a factual inquiry, requiring evaluation of the products and markets involved, and cannot be dismissed on a 12(b)(6) motion.

In this case, Brilliance alleges that Haights has infringed its trademark by repackaging and relabeling its retail editions as library editions, claiming inadequate notice leads to misrepresentation and consumer confusion. Brilliance asserts that the differences between the editions in packaging and marketing are likely to dilute its trademark's value. Despite ambiguity in the complaint regarding whether the differences are in the product itself or just in the packaging, the court found that sufficient facts were alleged to warrant relief, thus reversing the district court's dismissal of the trademark claims.

Additionally, the district court dismissed Brilliance's copyright infringement claim regarding Haights renting audiobooks without permission. While the first sale doctrine generally allows owners of copies to dispose of them freely, a 1984 amendment introduces a limited exception specific to rental activities.

A copyright owner of a phonorecord cannot sell, rent, lease, or lend that phonorecord for commercial advantage without authorization from the copyright owners of the sound recording and the musical works within it. Brilliance asserts that this exception applies to audiobooks, while Haights contends it only pertains to musical works, thereby subjecting audiobooks to the first-sale doctrine. To resolve this dispute, the court must interpret subsections (a) and (b) of 17 U.S.C. § 109. The statute's language is the primary focus; if clear, no further interpretation is needed. Both parties present valid interpretations, leading the court to conclude that the language of § 109(b)(1)(A) is ambiguous. It may require consent from the copyright owner of sound recordings containing musical works, or it may necessitate consent from all sound recording copyright owners regardless of the nature of the work. Consequently, the court will look to legislative history and policy rationales to clarify the intended scope of this exception, with evidence suggesting that Congress aimed to exclude only musical works from the first sale doctrine.

Congress established the exception in 1984 primarily to protect the music industry from the threats posed by commercial record rentals, as detailed in the Senate Report which highlighted concerns over the impact of record rentals on musical creativity and the willingness of record companies to invest in new artists. The Report advocated for modifying the first sale doctrine due to these concerns. The House Report echoed similar worries, indicating that record rentals and home taping could negatively affect copyright owners. While "sound recording" was defined to include both musical and non-musical works, it was clarified that the exception did not extend to motion pictures or computer programs. Notably, there was no indication that Congress considered audio recordings of literary works during the drafting of the 109(b) exemption. When the exception was extended in 1988, reports reaffirmed that literary works were excluded. Legislative history indicates that the primary focus was on musical works, which were seen as susceptible to extensive home taping, leading to potential sales displacement. In contrast, literary works were not believed to generate the same consumer enjoyment that would threaten sales. Consequently, the statute should be interpreted narrowly, as it disrupts the established balance between copyright owners' rights and individual property rights, a principle rooted in common law and embodied in the first sale doctrine.

Copyright law establishes a limited monopoly to incentivize the creation of new works and ensure fair compensation for creators. Once a copyright holder allows distribution of a work, the necessity for this monopoly diminishes, as the creator has already been compensated. The distribution right and first sale doctrine assert that the copyright owner is entitled to the full value of each copy sold. This doctrine is rooted in a common law principle against restricting personal property rights and is designed to prevent undue interference with the ownership of physical copies.

Congress made specific policy decisions regarding the first sale doctrine, particularly through the record rental exception, which altered the traditional copyright framework to protect sound recordings of musical works from piracy. However, it did not extend this exemption to literary works, including audiobooks, as there is no explicit Congressional mandate to do so. The language in the relevant statute, particularly regarding "musical works," indicates that the first sale doctrine's limitations apply solely to sound recordings of music, and not to other forms like audiobooks. Consequently, the court concluded that the first sale doctrine does not cover sound recordings of literary works, affirming the dismissal of copyright claims but reversing the dismissal of trademark claims and remanding for further proceedings. The legislative history supports this interpretation, confirming that ownership transfer allows for the disposition of the work without copyright restrictions.

Kennedy, Circuit Judge, concurs in part and dissents in part regarding the handling of trademark and copyright claims. He agrees with the majority that the alleged activities constitute trademark infringement, thus supporting the denial of the 12(b)(6) motion for those claims. However, he asserts that the same activities also amount to actionable copyright violations, warranting the survival of the copyright claim against the motion to dismiss.

Judge Kennedy interprets the statute, specifically 17 U.S.C. § 109(a) and § 109(b), to indicate that while § 109(a) allows for the legal sale of specific phonorecord copies, § 109(b) prohibits unauthorized rental, lease, or lending of such materials. He clarifies that the clause concerning sound recordings and musical works does not apply in this case since there is no musical work involved in the sound recording at issue. He believes the plaintiffs have adequately raised a copyright violation claim due to the alleged unauthorized commercial rental, lease, or lending of the sound recording.

Judge Kennedy emphasizes that the language of the statute is clear and does not require examination of legislative history, citing the Supreme Court's stance that the text of the statute is the authoritative guide. He critiques the potential pitfalls of relying on legislative history, which can be ambiguous and subject to manipulative interpretations by unrepresentative parties. Therefore, he advocates for denying the 12(b)(6) motion concerning the copyright claim based on a straightforward reading of § 109(b).