The facts are this: UMG (like other record labels) sends out promotional CDs to radio stations, music reviewers, and other industry insiders. The CDs contain labels that say the following (or something very close):
This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.Of course, some recipients don't follow these instructions, and sell these promo CDs. Troy Augusto made a business of buying them at record stores or online, and re-selling them. UMG sued Augusto for copyright infringement, alleging a violation of its exclusive right to distribute its works under 17 USC § 106(3). Augusto defended by claiming that under the first sale doctrine, he's perfectly free to re-sell the CDs he bought, the "promotional use only" labels notwithstanding.
The district court sided with Augusto, ruling that UMG transferred title in the physical CDs to the initial recipients, and did not, as it argued, merely license them for a limited purpose to a limited group. The court relied in part on an obscure postal statute, 39 USC § 3009, which characterizes unordered merchandise" as a "gift." (The purpose of the statute is evidently to protect consumers from scammers who mail goods to consumers even when they don't request it, and then demand payment.)
When I listened to UMG attorney Russ Frackman face the panel, I was skeptical of the label's chances. The court practically begged him to give them a way not to follow the postal statute; he had to fall back on arguments based on the purpose of the law, the legislative history, and an insistence that words such as "recipient" and "merchandise" had some special meaning in this context other than their dictionary definitions. But I thought the panel was even tougher on Augusto's attorney Joseph Gratz. The court seemed a bit surprised by Gratz's concession that Augusto has the burden of proof on the first sale issue (at least one panel member had previously stated that it may be an open question), and it expressed considerable sympathy for the argument that UMG's relationship with the recipients of the promo CDs was indeed that of licensor/licensee -- or at least that Augusto may not have met his burden of proving otherwise.
In sum, I thought UMG came out of the argument with a slight edge, but predicting the result of the opinion would be a bit of a fool's errand. Listen for yourself and give your prediction in the comments. EFF collects the relevant documents here.