In November of last year, a division of Walt Disney Company brought a lawsuit against Redbox. The Mouse now has kicked it up a notch by moving for a preliminary injunction.
One of the ways in which Disney markets its movies is in Combo Packs. These are bundles that include DVD and Blu-ray discs as well as digital download codes. The Combo Packs are packaged and priced to be sold as a unit. The outside packaging of the Combo Packs states that “codes are not for sale or transfer”; similar language appears on the package insert containing the code. A consumer redeeming the codes on the Disney portal is likewise required to represent that he or she is “the owner of the physical product that accompanied the digital code at the time of purchase.”
Redbox is best known for its automated cut-rate video rental kiosks outside drugstores and supermarkets. The lawsuit alleges that Redbox has purchased Disney Combo Packs, disassembled them and sold the digital download codes through its kiosks and directly on its website. The business issue this raises for Disney is that because Disney discounts the price of the code when sold in a Combo Pack, Redbox can resell the codes for less than the price of a digital download on iTunes or a similar site. In an effort to shut down Redbox’s practice, Disney has asserted claims for breach of contract and copyright infringement.
The breach of contract claim is predicated on the contention that Redbox accepted the prohibition on sale or transfer of the codes when it purchased and opened the Combo Packs. To this end, Disney cites numerous cases upholding the validity of “shrink-wrap licenses.”
The sale of the codes does not in itself infringe on the rights protected under copyright law; the actual infringement alleged by Disney occurs when the Redbox customer downloads and views the movie. But under the doctrine of contributory infringement, Redbox could be held liable if it knowingly induced or materially contributed to its customer’s infringing activities. To establish this point, Disney cites not only the sales themselves, but that they were promoted heavily by Redbox as “cheap” and a “smart buy.”
Interestingly, Disney’s preliminary injunction motion attempts to answer what it anticipates will be Redbox’s principal defense. Redbox carries on its main disc rental business under the “first sale” provisions of copyright law. The first sale defense provides that the lawful owner of a copy of a work may sell or otherwise dispose of its possession. This is why you can sell your secondhand books, CDs and DVDs without fear of liability, and why Redbox contends that it has unlimited rights to rent DVDs lawfully purchased from their copyright owners.
Disney’s motion will prevail if the judge agrees that sales of the codes are causing it irreparable harm, and that it is likely to succeed on the merits. If the preliminary injunction is granted, it will bring an immediate halt to Redbox’s sales of the unbundled codes and likely lead to a quick resolution to the lawsuit as a whole.
You can read Disney’s full motion here.