LGJ: First Sale and Digital Distribution

Each week Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:


Ever since the Glider opinion was handed down late last year, there's been a resurgence of calls for courts to uphold the first sale doctrine with regard to all software. One such suit, featured in the latest Jurimetrics, concerned ligation over consumers as "owners" versus "licensees," since different copyright rights are granted based on the particular status. The court determined that players were licensees, thus negating certain rights of owners. We've talked about first sale before in LGJ, but generally in the context of retail products. In the context of retail games, no matter where you stand on the "owner" versus "licensee" position, nothing is stopping you from reselling the copy of the game you purchased.

Digital distribution changes this dynamic dramatically, however. As digital distribution mechanisms become more and more popular, it seems inevitable that the courts will have to eventually weigh in further on the owner versus licensee question. In fact, if those who run digital distribution systems wish to steer well clear of potential government involvement in their businesses, inclusion of certain features may mitigate the first sale question so that consumers have more rights and aren't in need of protection in that regard. There are many different digital distribution models, and so nothing I could write would truly accurately apply to all of them. Thus, this discussion is for models by which a user purchases individual games for a set price. Therefore, models like Shockwave.com's annual subscription (where you play a flat fee to play as much as you want for the year) won't be addressed, since that's really a subscription to a service, not a purchase of a product. Today's column focuses more on the system that exists on consoles and through services like Steam. Why these models? The simple answer is that they most closely mirror traditional retail sales, which is what the first sale rule is based on.

If you want to buy into the license model, then these services have no real flaw as they exist now. Consumers are purchasing a non-transferable license and have no real first sale rights. Everything is governed by the license agreement, and thus the contract governs. Most, if not all, game developers and publishers (not to mention many other software publishers) subscribe to this theory. With a physical product, if there has been a prohibition on transfer of simple retail titles, I haven't seen it thoroughly enforced, thus in practice the consumer is exercising a first sale–like behavior regardless of the agreement.

Digital distribution, however, changes that. If you want to transfer ownership of the title to someone else, you're bound by the constraints of the system. Take Steam, for example. If you buy a title on Steam, you cannot give that title to anyone else or sell that title to anyone else. It's yours forever. Even if you end up with extra gift copies per some of Steam's promotions, you can't sell those copies without violating your agreement. This has, in short, eliminated the concept of first sale. The content creator is executing control over the product after it's sold. Those who support first sale would say this is no different than buying a book and allowing the author to dictate that you can't ever put it in a garage sale; you have to destroy the book if you don't want to keep it.

But, is purchasing a digital download truly the same? In theory, you can re-download the game as often as you want. If your hard drive fails, then you can re-download the game. If your book is lost or destroyed, you have to buy a new one. So, does that make marketplaces like Steam more analogous to a long term service with flat fee pricing? Or does the fact that items could eventually be pulled from the system mean that consumers will have a grievance in the distant future, despite disclaimers in the user agreements?

As you can probably see, this is fairly uncharted legal territory, or at least territory where there's some significant possible discussion to be had. I won't go too deeply into my own thoughts on how the copyright issue should be resolved from a policy standpoint. However, if I had to predict what might bring this to a head, it would likely be some result of consumer protection. If there were significant consumer complaints about the system, then a group like the FTC would "come to the rescue" and impose certain kinds of regulations in the US.

This potential can be mitigated, though, through some relatively minor system features in digital distribution platforms. In fact, the majority of issues could be remedied by allowing users to transfer licenses. Ironically, you could build the entire transfer system into the platform, allow people to charge for it, and make money off a small transaction fee (à la eBay). Does Steam have any real loss, for example, if I buy Half-Life 2, then re-sell the copy I bought to another Steam user through the platform? No, especially if the company charges a small fee for processing the transaction. There's still only a finite number of playable copies of the game, since by selling my copy, I've lost the ability to play the game by virtue of the system. Yes, there is some risk of being able to crack the previously downloaded files, but the risk is not substantially greater than traditional piracy in my view.

The only other feature that might be argued is some sort of return system. Yes, it is currently difficult (if not impossible) to return software at retail. However, allowing for returns or exchanges in certain cases, such as someone buying a gift (if that were implemented) would probably do a lot for consumer confidence. The more touchy subject would be a return in the event of a game being released with a major glitch. With patching, the issue can be fixed, but giving the consumer an option to give up their copy of the game for, at a minimum, "store credit" within the system would be another boost to consumer confidence.

Clearly digital distribution is going to continue to expand, though I'm not as certain as some that it will eventually replace retail. I would imagine it will be more of a coexistence, with digital distribution still having a lot of room to grow. But as that growth occurs, issues like those discussed here will arise and will need to be dealt with in greater detail. While ultimately the license model seems to be holding up regardless of the first sale arguments, it's still possible that courts may alter that analysis in light of the expansion of digital distribution and the different position it puts the consumer into from traditional sale. After all, the point of intellectual property law, as I've long stated, is balancing the rights of producers and consumers.


Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc., where he is a board member of the Dallas chapter. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.

The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or The Vernon Law Group, PLLC. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.

This article was originally published on Joystiq.