How Much Does Amazon Still Own What It Sells?

Attorney Mark D. Rasch is the former head of the U.S. Justice Department's computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

A grocery chain was not happy with the profitability of products purchased by certain customers, so it had someone slip into their homes overnight and steal their refrigerators with all of the low-profit food. Three houses away, a national sports chain suspected one of its high-school athlete customers of buying some items from a direct rival, so it activated heater-equipped active RFID tags that melted or set on fire all of the disloyal customer's athletic gear. Sound absurd? Well, it's apparently not, if you work for Amazon. That is, in essence, what the world's largest e-tailer has done with one European customer.

In this age of digital content, Amazon is acting as though it has the right to deal with one dispute on one piece of content as license to steal back all of that customer's paid-for content. With the newness of digital rights issues, it's frighteningly possible that Amazon may be right—for now.

When Amazon decided that one of its U.K. consumers was violating its terms of service, it did not go to court to enforce its rights. Rather, the Seattle-based company simply wiped out the customer's Kindle, banned her from the service and prevented her from ever reading an e-book with Amazon again. Ever. If she had purchased a book from a physical bookstore, Amazon's remedies would have been much more limited. But because the customer didn't "own" the thing she bought, merely had a license to use it (at the discretion of Amazon), the merchant moved from being a "seller" to a licenser of a service that it could terminate at will. This may give both merchants and consumers pause when they consider these new digital relationships. Merchants need to tread lightly when enforcing their "rights" and provide consumers with a means to demonstrate compliance with contracts. The "punishment" also must be commensurate with the alleged "offense."

Online, we are quickly moving from an "ownership" society to a "rental" one or, more accurately, a "licensed" one. We used to own books, records, magazines, maps and a host of other "products." We bought them, we paid for them, we owned them and we could resell them if we wanted to (more on this in a minute). In the online world, however, retailers no longer "sell" consumers a product. They license that product, or its embedded intellectual property, for which the consumer must not only pay (and sometimes continue to pay) but also agree to and then abide by an ever-changing series of licensing agreements.

Don't agree? "No soup for you." (A soup license.) Not only can the retailer refuse consumers access to future goods and services, it can wipe out all of the things those consumers have purchased in the past. It's one thing to say that your leased car can be repossessed if you violate the terms of the lease agreement. It's yet another to say that all of your leased cars and your house can be repossessed if you violate the terms of the agreement on even one.

Moreover, contract terms will allow the service provider to do this even if it simply "suspects" a violation of the terms of the contract. These contracts rarely provide the consumer with any remedy except to go somewhere else. "No soup for you."

The particulars of what that U.K. customer, Linn Jordet Nygaard, heard from Amazon is illustrative. When Nygaard logged into her account, she was unable to retrieve any of her Kindle books stored on the server. When she contacted customer service, she received the following reply: "We have found your account is directly related to another, which has been previously closed for abuse of our policies. As such, your account has been closed and any open orders have been cancelled. Per our Conditions of Use, which state in part: and its affiliates reserve the right to refuse service, terminate accounts, remove or edit content, or cancel orders at their sole discretion. Please know that any attempt to open a new account will meet with the same action."

Not only were Nygaard's orders cancelled, but her Kindle was wiped of all previously "purchased" content. In her case, Nygaard wrote to Amazon and told the company that she had no other account. Amazon didn't seem to care, noting: "Your account has been closed, as it has come to our attention that this account is related to a previously blocked account. While we are unable to provide detailed information on how we link related accounts, please know that we have reviewed your account on the basis of the information provided and regret to inform you that it will not be reopened. Please understand that the closure of an account is a permanent action. Any subsequent accounts that are opened will be closed as well. Thank you for your understanding of our decision."

Nygaard had asked what account hers was "related to," what the contact information was on that account and what the nature of the "violation" was. Amazon simply said her account was terminated and all future accounts would be terminated. What's worse, not only did Nygaard lose all of her content, but her expensive Kindle became useful only as a Christmas ornament. She could neither retrieve paid-for content, nor get any refund for those things "purchased."

Welcome to the wonderful world of intellectual property "licensing."Welcome to the wonderful world of intellectual property "licensing."

In the new digital economy, the retailer retains not only the ability to control content but, because it writes the contract giving the consumer access to that content, the retailer controls the terms and conditions of the use of the account and that content. These terms say things like, "If we suspect, in our sole and exclusive opinion, that you are doing x and such, we reserve the right to terminate your account and all associated content without notice and without liability." In other words, no soup for you.

These contracts limit consumers' rights to export, copy, use, discuss, transfer, test, benchmark or otherwise use and enjoy products or services. And they don't apply only to what we would think of as "digital" products. Many things we use every day have embedded or attached copyrighted or digital works that make them subject to a copyright license rather than a simple sale. For example, if you buy a printer, the printer and the cartridges have embedded software that comes with a licensing agreement. The agreement provides that you will only use the manufacturer's ink cartridges; no third-party cartridges, and no refilling your cartridges. Online retailer's terms of service provide that consumers must not infringe the copyrights of its merchants or manufacturers or other third parties. If you refill that ink cartridge, not only do you void the warranty on the printer but Amazon can repossess all of your books and movies and prevent you from reading your mail. Take that, ink refiller!

These online contracts also allow the retailer to be the judge, jury and executioner. They permit retailers to exercise self-help and unilaterally repossess digital content at their sole discretion. Such contracts also permit punitive repossession, because a term of service can say things like, "Don't say anything bad about our company or products, or we can repossess you entire library." This applies to any content that can be "controlled" in a service environment—your Web site; your e-mail; your documents; your storage; your software, music, videos, photographs and home movies; and even your infrastructure can be held hostage to the terms of the license agreement. Providers need not go to court or to an arbitrator or, in fact, to any third party to cut you off. It is the ultimate remedy for them.

Under public pressure, Amazon eventually reinstated Nygaard's account but still hasn't explained why it put Nygaard into Kindle jail. Some people have speculated that it was because she is Norwegian and was buying e-books from Apparently, that's a no-no. You see, publishers want to charge different prices in different countries. So do watch manufacturers, shampoo manufacturers and makers of DVDs. They also go to great lengths to keep people from buying things in a low-price market and using (or reselling) them in a higher priced market. Note that this is not a case where Nygaard bought pirated or black-market books or otherwise violated export laws. No. She did the electronic equivalent of picking up a few books at Blackwells (and paying for them) and then taking them back to Grimstad.

If this had been a physical book that Nygaard "owned," she could have bought it in London and taken it to Norway with no problems. Ownership of physical property has an impact. Because Nygaard only had a "license" to download and use the content, and this license could be withdrawn by Amazon whenever Amazon thought she violated a term of service, Nygaard could lose all of her content at will. Not just the books she "bought" in England. No trial, no hearing, nothing. No soup.

The online marketplace allows the retailer to retain the rights to products it has "sold" long after the "sale" and to enforce those rights on its own.

Even in the physical world, we are debating whether sellers (or the holders of the copyright to works that are sold) retain rights after they make the sale. The Supreme Court is poised shortly to take away consumers' rights with respect to products they have bought and think they have a right to use or sell.

Supap Kirtsaeng, a U.S. graduate student found that the textbooks he was using were much cheaper if he bought them legitimately from the publisher overseas, so he did. He then purchased additional textbooks (again paying the publisher for them) and resold them for a profit in the U.S.

A doctrine in copyright law called "first sale" has long permitted a lawful owner of a lawful copy of a copyrighted item to generally do whatever he or she wants with that copy—resell, lend, donate and even destroy it—without permission from the copyright holder. You bought it; you can break it. That's what it means to "own" a work. And that is what's different between what Kirtsaeng did and what Nygaard tried to do. Kirtsaeng owned the books he bought overseas; Nygaard only licensed hers. So the graduate student wins, but the Norwegian loses? Not so fast.

The publisher of the textbooks wants to make even more money on the difference between the price it charged for the books overseas and the price it would have charged for the books in the United States. Imagine buying a DVD for $12, selling it for $18 and then having the movie studio tell you that you owe the studio $6. Or, worse, buying it for $12, selling it for $6 and then having the studio tell you that you owe it $6 more for the "resale." Moreover, the retailer or the copyright holder can, as a condition of the "license" to the copyrighted work, get you to agree that you won't resell the product—even though the first sale doctrine lets you do so. It's all a byproduct of "selling" something but not really "selling" it.

This is not to say that licensing products instead of selling them is good, bad or otherwise. There are great advantages to both merchants and consumers to getting things as a service. Pandora beats the pants off buying every song ever written on CD, and it takes up less space. Software as a service enables users to get the latest and greatest software, with updates and patches; it also enables substantial mobility and flexibility. Indeed, "as a service" enables, and is enabled by, cloud technologies and implementations and will represent the next generation of "ownership." And let's not forget that companies—like Amazon—have a vested interest in not enforcing the contract terms that essentially terminate the relationship between the parties. They don't make money off those customers who they kick off. But these agreements need to be fair and reasonable to all parties, providing a mechanism not only for the merchant to demonstrate breach but also for consumers to challenge that unilateral finding and get "their" stuff back.

Until then, consumers are at the mercy of publishers, content providers, e-retailers, Web sites, e-mail providers and others, and at the mercy of their terms of use. They don't own anything and have no right to complain. Because, if they complain, you guessed it: "No soup for you!"

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.