"In the recent declaratory judgment suit (a suit filed to determine one’s rights when one is faced with an impending lawsuit) by Josho to confirm that barring resale of software is not supported by Copyright Law, the doctrine of “first sale” will take center stage.  “First sale” limits the rights of the holder of a Copyright from attempting to control the actions of the customer or third party following the initial sale of licensed goods.  In effect, the doctrine prevents the Copyright holder from getting a second bite at the apple once they have exacted a royalty or fee under license as a part of or prior to the first sale of software to the party dealing directly with the manufacturer.  In other words hypothetical Company A has filed a Copyright in their game software (“Game”), Buyer 1 buys “Game” which has written terms and conditions forbidding resale on its packaging.  Buyer 1 opens the packaging and plays “Game”.  Some time later Buyer 1 is now bored with “Game” and wants to sell it.  Buyer 1 sells “Game” to Buyer 2.  Company A now wants to sue Buyer 1 for infringement of Copyright, specifically Company A’s right to distribute (sell, lease, etc) under Copyright Law.  Buyer 1 defends by saying that Company A could have charged any price that they wished when they sold “Game” to Buyer 1 (first sale), therefor, why are they asking for more money now?

The key facts in such cases usually are the licensing details and relationship between the licensor (the party granting another rights to do something under their Copyright such as “Company A” or Enix) and the licensee (the party receiving rights to do something, such as “Buyer 1” or Josho).  Though patent cases are covered under a separate statute from Copyright Law, the “Aluminum Wheel Case” shows by analogy that the licensor has to hold onto their rights in controlling the resale of licensed goods by the licensee or third party (Buyer 2).  BBS Kraftverzeug Technik AG v. K.K. Racimex & K.K.Jap-Auto Products, Supreme Court of Japan (Case No. Heisei 7 (wo)1988).  The “Aluminum Wheel Case” dealt with a Japanese company receiving a license for selling patented goods in Germany but such license did not mention Japan.  Though the licensor had a separate patent in Japan under which to sue the licensee for infringement when importing to Japan, the Supreme Court found that the “doctrine of exhaustion” applied and that sale in Japan was non-infringing because the licensor failed to reserve such rights.

Though Japan is a civil law jurisdiction in which precedent is not binding (court decisions of past cases don’t have to be followed by other judges) and only mildly persuasive, the Court has shown that they recognize a balance between the rights of the Copyright or Patent holder (Enix or Company A) and the rights of distributors (Josho or Buyer 1) and their customers (end users or Buyer 2).

Copyright Law covers many categories of goods or “works”.  Different categories receive different kinds and levels of protection.  In this case, “motion pictures” or “cinematic works” receive special protection throughout their distribution chain.  This protection would not be present beyond the first sale of the good if the good is not a “cinematic work”.  Therefore a fight over definitions will ensue to produce a desired outcome.

Josho and the Association of Retailers of TV-game Software (ARTS) of Japan may have difficulty prevailing in their claim that software is not a cinematic work of authorship under Japan’s Copyright Law.  Even if software games fall into other categories of protected works, there is no limitation of Copyright Law that a work can only fall into one category.  The key to distinguishing software from cinematic works and removing the added protection in distribution rights afforded cinematic works is found in the fact that video games allow the player to make their own story while a cinematic work is typically a preset viewing experience.  Therefor one argues that “cinematic works” was not intended by the Diet to cover software games.  The actual statute however, Copyright Law Article 2, Paragraph 3 only requires that the cinematic works be fixed (recorded or permanently present) in an object (like a diskette) which can express its visual or audiovisual effects resembling cinematic effects by some means (such as a microprocessor).  “Fixed” has been found to include the condition found in programs of circuit boards, disks and other storage means (methods or devices).  On the off chance that the Court changes its mind and decides that software games are not “cinematic works” because of the flexibility in creating the end of the game by the actions of the player, DVD may still be at risk of protection against resale because DVD walks this line closer than software games considering the limited number of possible endings to an interactive movie.  Granted, DVD in the case of recorded movies is hard to dispute as not being a “cinematic work”.

Josho has asserted the a Japanese law covering dealing in antiquities shows that dealing in used goods is a specifically protected right.  Therefor, unless Copyright Law is shown to specifically cover the issue presented in this case, Josho may show that the Diet saw this issue coming and already dealt with it.  This argument can be used as either a fall back position if the first sale doctrine proves not to be helpful to Josho or as a direct attack on the Copyright law to limit the kinds of goods it covers and rights created in Copyright holders..

Enix claims to have sent a contract to all of its distributors forbidding resale of their software.  Resale of software would be a breach of this contract (an action in violation of the contract).  Of course a contract must be shown to exist before it can be breached.  Arguably the order of goods from Enix by Josho following such a notice shows that a contract was formed between Enix and Josho because Josho knew the conditions of purchase created by Enix prior to purchase and still purchased.  Josho could counter that there is no contract with Enix other than for the purchase of goods as Josho has signed no written contract with Josho as well as that Enix is trying to protect a non-existent distribution right under Copyright Law.   The claim actually asserted by Josho is that they were cut off from their supply by Enix following refusal to submit to the term that they not deal in used software.  This type of activity is more the realm of Antitrust Law which in increasingly enforced in Japan.

In the larger scale view of the affect of this case and CESA’s (Computer Entertainment Software Association) campaigning for recognition of the bar on rights to resell software, “shrink wrap” licenses are a concern.  The issue of “shrink wrap” licenses and whether the software buyer is under contract with the software manufacturer for use of software only and not resale is not very promising for the buyer.  “Shrink wrap” licenses have been gaining recognition in the U.S. and arguably Japan.  A “shrink wrap” license is the notice on packaged software which states that the buyer’s opening of the package is equivalent to acceptance that they cannot use the software contained for purposes expressly prohibited under the notice.  The buyer would face difficulty in saying that they have no duty to the manufacturer not to pirate or deal with the software in some way specifically barred by the terms of the “shrink wrap” license.  On the other hand the manufacturer is not exactly a party to a licensing agreement with the buyer in a classical sense.  The buyer is hardly in the position to negotiate different terms to the agreement.  Though law moves slower than technology, there are a few cases of “shrink wrap” licenses being found valid, at least in the U.S.  Regardless of the outcome of the issue of “shrink wrap” licenses, the “first sale” doctrine limits the prohibitions that a manufacturer can make as to certain products.

Depending on the comparative speed of the rulings in the Antitrust case filed against Enix and CESA which raises the abuse of the “distribution right” in software by Enix and CESA as an Antitrust violation, the resolution of the declaratory judgment case by Josho may not need to reach conclusion.  Such abuse includes warning letters, tying activities, forbidding resale and marking goods “not for resale”, all of which abuse the distribution right based power of Enix and CESA.  Protecting a monopoly by various means which capitalize on one’s strong market position is one type of activity barred under Antitrust Law.  Enix’s activities in enforcement would come to an end should Josho succeed, therefore there would be no need for the Court to provide Josho a ruling as they would be facing no threat of enforcement from Enix anymore.  As a result of such a dismissal (of the case) due to other judgment or voluntary dismissal due to settlement, this case may just be the harbinger of waves of litigation to come.  This dismissal depends on complaint to the Fair Trade Commission reaching the Tokyo District Court which has jurisdiction in the declaratory judgment suit.  Objectively speaking, an Antitrust case should require far longer than a declaratory judgment suit.  Therefor, the dismissal is unlikely.

Due to the effect which a ruling on this case could have on video related hardware makers, as well as, hardware and software makers in the fields of software games and DVD, one can expect not only a highly contested and repeatedly appealed case but also possible settlement in the event of an unfavorable judgment being eminent for either party or interest group.  Likewise, the Diet may weigh in on the matter due to the competitive campaigning of ARTS and CESA if other economic legislation can be put aside for a brief while.  In any event this will be a long bumpy ride so buckle up for safety.

Copyright © 1998 Sidney Hunt Weeks. All Rights Reserved.
This article is not intended to be used as legal advise.  It is merely observations on the developments in the suit between Josho and Enix.  Please consult a Japanese Attorney for advice on any Copyright, Patent or other Intellectual Property related legal issues.

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