The basic storyline to this headline is that Disney discovered Redbox was selling the codes for the digital copies of its movies separate from the DVDs. For those who have not bought a DVD in a while, movie companies often package a digital copy with a DVD so the buyer can have both the physical copy and a digital copy to use on whatever device they see fit. Access to the digital copy is in the form of a code, which is printed on an insert in the DVD.
Redbox apparently has been selling the codes that it gets in volume from Disney, and to add to the mess Redbox hasn’t had a deal to get physical discs from Disney since back in 2012. There seems to be a profit motive here for Redbox that leaves Disney completely out of the picture, so naturally they are upset.
The legal issue here is what is known as Patent Exhaustion. Basically, the law states that once you sell a product to another entity (company or person) the patent on that specific item ceases at the time of purchase. When it comes to licenses, as is the case here, the buyer is required to adhere to the agreed limitations of the contract, but as long as they adhere to the restrictions they can basically do whatever they want to with the licensed product. Naturally, the Supreme Court would have to get involved sooner o later to determine the scope of this law, and did so in 2008 – Quanta Computer, Inc. v. L.G. Electronics, Inc., 170 L. Ed. 2d 996 (2008). That ruling favored Quanta as the court stated,” The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law control postsale use of the article.”
So Redbox has a contract to buy and resell the digital codes provided to it by Disney. What we don’t know is the exact wording of the license agreement with Disney, which obviously has been left to the lawyers. If there is no specific provision in the agreement between the two, then it doesn’t seem Disney has a case.
It would seem relatively insane for Redbox to continue the code selling practice if they knew it was specifically forbidden in the contract. The practice only began back in October, so it might be that Redbox is testing the waters to see what Disney will do. That part they found out. In an odd public relations choice of words, a Redbox spokesperson said, “we feel very confident in our pro-consumer position.” This seems to be a subtle attack on Disney, portraying them as anti-consumer. But what will be the position of Redbox in court?
One observation is that Redbox is using the public forum to manipulate Disney to strike a new deal to sell their DVDs on their kiosks. But there may be a problem with the entire Redbox business model as DVDs are going the way of VHS tapes. Redbox may be closing its eyes to a statistical reality – about 60% of its renters are also Netflix subscribers. With the huge investment Netflix is making (an estimated $7 billion) in original programming, movie viewers are cutting the cable cord and streaming is clearly the wave of the future.
Redbox revenue has paralleled the drop in sales of DVD players over the last 3 years, albeit it has been a slow decline. Are Redbox’s actions the evidence of a last gasp for a company in decline?
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