Redbox’s copyright fight with Disney over digital movie sales escalates a long-running feud

Movie rental company Redbox has struggled for years to remain relevant as the DVD market plunges and consumers switch to streaming services such as Netflix. The company, known for its bright red kiosks at 7-Elevens, supermarkets and drug stores, only recently started selling and renting digital versions of movies online.

But Redbox’s late entry into the digital download business has been complicated by a longstanding feud with the world’s leading movie studio — the Walt Disney Co.

In a David versus Goliath legal brawl, Disney has accused Redbox of selling digital versions of its films without permission. Late last year, the Burbank-based entertainment giant sued Redbox for facilitating copyright infringement by selling digital movie codes from its kiosks, in “blatant disregard of clear prohibitions against doing so.”

The case has attracted widespread interest among legal experts because it raises questions about how much control studios such as Disney can exert over their copyrighted works at a time when home video revenue has been falling.

“What’s at the heart of this case is another emerging technology,” said business litigator Devin McRae of the Los Angeles firm Early Sullivan Wright Gizer & McRae. “The case does really come down to, what is this code? Should it be considered a copy of the work, or should it be considered a means to reproduce a copy?”

The legal battle escalates years of disagreement between Disney and privately held Redbox, which has 1,400 employees and operates 41,000 kiosks, according to legal filings. When Redbox launched in 2002, studios feared the cheap rentals would undercut an an already shrinking home video market. The company, based in Oakbrook Terrace, Ill., charges $1.50 a day for physical DVDs, much cheaper than most competitors.

Tensions again flared in 2012 when Disney said it would not provide rental partners, including Redbox, with discs of its movie “John Carter” until 28 days after the DVDs went on sale. Redbox responded by stocking its kiosks with discs purchased from big-box retailers.

“There’s no love lost between Redbox and Disney,” said Aaron Moss, a partner at law firm Greenberg Glusker and intellectual property expert who is not involved in the dispute. “There’s already this feeling that Redbox is eating their lunch.”

Redbox’s legal issues come at a critical time for the brick-and-mortar company as it transitions to digital technology. The once popular market for cheap discs rented from kiosks has shrunk by 33% in the last five years, according to data from Digital Entertainment Group. Last year, kiosk rentals accounted for $1.27 billion in U.S. consumer spending, DEG said.

Redbox in 2013 launched a Netflix-like subscription service through a deal with Verizon, which was not successful. After struggling to adapt to shifting consumer habits, Redbox and its then-parent company, Outerwall, were acquired by New York private equity firm Apollo Global Management in 2016 for $1.6 billion. Redbox does not disclose its finances, but physical kiosk rentals still account for the vast majority of its revenue. The company says its customers rent about 1 million discs a day.

In a filing last week, Redbox said that a preliminary injunction would irreparably harm its business, and that Disney is trying to muscle out competition for its much-anticipated streaming service, set to debut next year. The company says it has spent $700,000 and the better part of a year on its program for selling digital download codes, which launched in October.

“The popularity of digital downloads is growing and it is expected that Redbox’s absence from this market during this phase of growth, particularly when Disney is launching its own streaming service, will cause permanent and unquantifiable harm to Rebox’s ability to participate in the digital download market,” Redbox Chief Executive Galen Smith said in a declaration filed last week.

Representatives for Redbox and Disney declined to comment.

Unlike retailers that sell movies online — iTunes, Amazon, Walmart and its online retailer Vudu — Redbox doesn’t have a licensing agreement to sell Disney movies such as “Beauty and the Beast” and “Rogue One: A Star Wars Story,” which have been huge sellers on the home video market. Redbox says in court filings that it tried to secure a vendor agreement for Disney DVDs in 2012 and 2013, but Disney would not do a deal unless Redbox agreed to hold back new releases for 28 days after their home video debut.

So, in a workaround, Redbox buys combo packs of movies at physical retailers. Each pack contains a DVD, a Blu-ray disc and a piece of paper with a code that lets customers download a digital copy of the movie. After Redbox buys the packs, it takes them apart and sells the codes to customers, who can then redeem the codes at dedicated websites such as Disney’s Movies Anywhere service.

In its court filings, Disney says Redbox’s tactics clearly violate copyright law and constitute a breach of contract. According to Disney’s complaint, filed Nov. 30 in U.S. District Court in Los Angeles, Disney’s combo packs are marked with the phrase “codes are not for sale or transfer.” Disney also says Redbox is undercutting its pricing offered by authorized download services. Redbox sells the codes for $7.99 to $14.99 at its kiosks, whereas Disney movies retail for $19.99 on iTunes.

Disney is asking the court to block Redbox from reselling the codes and is demanding damages in the form of Redbox profits from the sales, or up to $150,000 per infringed work.

“Redbox sells the codes… with full knowledge that doing so violates the terms and conditions of plaintiffs’ copyright licenses,” Disney’s lawyers wrote.

Firing back at Disney, Redbox says its service is protected by the “first sale doctrine,” a key part of copyright law that says someone who buys a copyrighted work is allowed to resell it or give it away, as long as they don’t make their own copies to sell. That’s the principle that protects people selling used DVDs and records on eBay and to used video stores. Redbox argues that selling a slip of paper with a code printed on it is, in effect, no different from reselling a Blu-ray disc.

Disney says digital codes are different because a new copy of the work is created when a person uses the code to download the movie. Redbox would be facilitating the illegal duplication of a film, according to Disney.

“It ends up being an existential question, which is, ‘what is Disney selling?’” said Greenberg Glusker’s Moss. “Is there some affirmative right to download the film attached to the code? To my knowledge, no court has ever determined that.”

Though download codes have existed for years, courts have never determined how the first sale doctrine applies to them, legal experts said. Lawyers interviewed by The Times said Disney may have a difficult time overcoming Redbox’s argument.

“Redbox makes a much more compelling argument on the point that there is no creation of a copy by purchasing a code,” said McRae, who is not involved in the litigation. “I see this code and this digital copy as being a single copy that would be subject to the first sale doctrine.”

Further, Redbox argues that Disney’s prohibition against selling or transferring the codes isn’t enforceable, partly because the restrictions are ambiguous, inconsistent and difficult for the consumer to read. There’s also legal precedent that allows people to “unbundle” products that are sold together and then sell them separately.

“It’s really going to come down to the enforceability of the language of the contract,” said Caroline Mankey, an intellectual property lawyer at Akerman LLP. “The language of the contract is somewhat ambiguous, so Disney is going to have some hurdles to overcome.”

Redbox’s digital push has continued despite the lawsuit. Less than a month after Disney filed its complaint, Redbox launched a new video on-demand website to let customers buy or rent digital downloads of new films from Warner Bros., Universal Pictures, 20th Century Fox and Sony Pictures. Unlike Disney, those studios have vendor agreements in place with Redbox. Customers can buy new movies for about $15.99 or rent them for $4.99.

Not available on the site: Disney films.

ryan.faughnder@latimes.com

Twitter: @rfaughnder