In this age of digitization, the world has become extremely well connected from one corner to the other. This has led to the increase in communication, transfer of information, services, goods and a lot more. Today over the internet we can seek medical treatment online, learn to fix a car or make our own nuclear reactor. However, there is no accountability due to the meteoric rise of the internet and lack of control over cyber space, and in turn no one being held responsible for the legal violations that are committed over the internet.

One such example is that the internet today allows the distribution of digital goods that were once available only in physical form. However, this development has led to difficult questions being raised about the origin of goods and their protection in cyberspace. The predominant function of ‘trademarks’ is defeated in cyber space. Due to this a number of disputes have arisen with respect to digital goods and their origins and many countries have taken extremely interesting views to accommodate the same in their respective IP regimes. The fundamental challenges range from data collection, data privacy, and taxation across inter-state jurisdictions to 3D printing wherein the goods are uploaded in one country but printed out in another.

The different interpretations and policies dealing with digital goods and the threat digital goods pose towards intellectual property rights make an extremely interesting study.

“Digital goods” is a term used to describe goods that are stored, delivered and used in electronic format.[1] These goods can be transferred or sold to the consumer via emails or may be downloaded through links provided on the Internet. Sharing media files like music are the obvious example. Other examples include: e-books, music, software, photos, graphics, etc.

Coming to the point of conflict; the traditional function of trademarks is to distinguish a particular source of goods and services from another, whereas, due to the rise in digital goods, the association of trademarks with physical/tangible goods has been frustrated. For example: software purchased on floppies earlier, is now available/downloaded online and stored on individual computers.[2] Moreover, these goods can then be printed on a 3D printer, hence leading to the infringement of the said good from cyber space to the real world.

One such example would be of BMW suing TurboSquid, an online virtual modelling company for hosting virtual 3D models of the BMW car models [3] In order to better understand the extent of infringement of BMW’s trademark, it is pertinent to understand how this company works. ‘TurboSquid’ is a website that allows artists to upload digital 3D models created by them, to its website which include toys, cars, animals, furniture and even characters which can further be sold[4] to buyers for a price, and these digital 3D models sold are suitable for 3D printing.[5]The cause of the real conflict was that the designs were entirely copied from the original design of the car and even possessed the trademark of that car. BMW claimed that TurboSquid’s marketing of its 3D models infringed BMW’s trademarks, trade dress and its design patents.[6]

BMW also claimed that by using its trademarks on the models it would confuse consumers on whether these were originally licensed by BMW. This case had a different flavor because the claim related not to the inclusion of digital BMWs in a digital work, but to the sales of the files themselves and further, the 3D printing of the same.

There are reasons to think these types of claims may be more common in the future, as a variety of goods that consumers once would have purchased in physical form are increasingly beamed to computers and phones as digital files for a fraction of the actual cost. However, the said infringement in cyber space is not going unnoticed and has led to a number of precedents on the said topic by the Courts of USA.

Another example of the same would be E.S.S. Entm’t 2000, Inc. v. Rock Star Videos, Inc.[7],  in the said suit it was claimed that the defendant’s game “The Grand Theft Auto: San Andreas” infringed the rights of the Plaintiff’s strip club “Play Pen” by the depiction of a strip club with the name of “Pig Pen”. The defendant had modeled the city of “Las Santos” on “Los Angeles” To generate their vision for Los Santos, some of the artists of Plaintiff who drew it visited Los Angeles to take reference photographs. The artists took pictures of businesses, streets, and other places in Los Angeles that they thought evoked the San Andreas theme. One neighbourhood in the fictional city is “East Los Santos,” the Game’s version of East Los Angeles. East Los Santos contains variations on the businesses and architecture of the real thing, including a virtual, cartoon-style strip club known as the “Pig Pen. It was held that the use of modified marks was protected and a company owning a not-so-popular strip club in Los Angeles would not possibly produce a sophisticated video game and hence, it would not amount to IP violation as the circuit Judge stated “Video games and strip clubs do not go together like a horse and carriage or, perish the thought, love and marriage”.

In Marvel Enterprises, Inc. V. NC Soft Corp.[8], Marvel asserted that the Defendant’s videogame involved certain characters which a player could choose to pose as and these characters were very similar to that of the Plaintiff. The court held that since such characters were not used for commercial purposes, there was no infringement.

The aforementioned cases raise an important question as to whether “digital goods” constituted “goods” as per the Lanham Act. In 2001, the United States Copyright Office in its DMCA section 104 report acknowledged the fact that traditional physical good varied from digital goods wherein it stated that the “Doctrine of First sale” defense would not be available to the people making digital copies as every copy shared is a new copy of the work, as the original stays with the person sending it, and the person receiving it get a new copy.[9]

The said argument was re-affirmed by the District judge in Capitol Records, LLC v. ReDigi Inc. and the Future of Digital Resale, the Defendant was a website which allowed resale of digital music tracks originally purchased from iTunes Store, the main issue involved was whether consumers with digital works i.e. music files have the right “to sell or otherwise dispose of” the digital files they possess in the same way they do physical media i.e. CD’’s DVD’s. In this case, it was not limited to the right of distribution but included reproduction and preparation of derivative works which can only be granted if the Copyright owner consents to it.[10] Hence, since a copy of the good was to be made, it was infringing copyright owners’ right, therefore, it was held that the doctrine of first sale was limited to tangible goods only. The said judgement was appealed but reasoning given by the District judge upheld

The problems relating to Digital goods have not been limited to United States. The anticipation of future infringement in cyber space has led many countries to take precautionary steps in order to protect their IPR.

The European Union firmly believes that the completion of the Digital Single Market is one of its highest political priorities as it will be a major source of revenue.[11] The EU follows a process of segregating whether the goods are entirely digital or if the digital goods are further produced and supplied in a physical material form. The former constitutes as a service whereas the latter as a good.[12] In general, if a good is not related to a physical entity, rules on service will apply and if they do, rules on goods will apply.

A case in example of the would be Dynamic Medien Vertribes GMBH v.Avides media AG, the issue involved the sale of audio and video media over an Internet site and an electronic trading platform. It involved importation by a company of Japanese cartoons called ‘Animes’ in DVD or video cassette format from the United Kingdom to Germany. On examination they were classified ‘suitable only for 15 years and over’. Court examined the media concerned as “goods” despite them being sold online over an electronic trading platform. However, in general, if digital goods are not related to a tangible entity, rules on services will apply; if they do, rules concerning goods will apply. [13]

A much celebrated and important case is UsedSoft GmbH v Oracle International Corp[14]although this case falls under the purview of the European Union, it was initially discussed by the German Courts and then sent to the European Court of Justice as a question of interpretation was needed.  This case is similar to that of Capitol Records, LLC v. ReDigi Inc. and the Future of Digital Resale however in the present matter the computer software was bone of contention,, and is concerned with the principle of exhaustion, which for the longest time was purely used for physical goods but in this case was expanded to downloading and storing of software on customers’ computers.

In this regard, the Court addressed the case in the form of three questions, firstly, is the sale of software a “first sale”, secondly, under what conditions the downloading of a computer program can give rise to exhaustion of the right of distribution, thirdly, under what conditions, an acquirer of used licences for computer programs enjoy the right of reproduction of the program, essentially, if it only applies to tangible software or even otherwise.

Answering them in this order, firstly, with respect to the issue of sale, the Court held that “According to a commonly accepted definition, a ‘sale’ is an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.”  To understand whether this constitutes as sale, what was important was to understand the transfer of ownership. The transfer by the copyright holder to a customer accompanied with the conclusion between the same parties of a user licence agreement constitutes a ‘first sale … of a copy of a program’ within the meaning of Article 4(2) of Directive 2009/24.

With regard to the next question, the Court held that the right of distribution of a copy of a computer program is exhausted if the copyright holder who has authorized the downloading of that copy from the internet onto a data carrier in return for payment of a fee has also conferred a right to use that copy for an unlimited period.

Lastly, with regard to the need of software being tangible, the Court held that the application was not limited to the tangibility of the software and such a safeguard would go beyond what was needed for the specific subject matter concerned under Article 4(2) of Directive 2009/24.

This case has laid down a very interesting perspective when it comes to second hand sales of software. It would definitely not constitute as a mandate that the copyright owners should not prohibit second hand sales, but in no case does it deny the opportunity to do so. Due to the said duplicity of the judgement it may pose to be a problem in order to control piracy.

Moving to Asia, China made certain amendments in the year 2016, in order to adapt itself more to digital trade for precautionary measures. These regulations attempt to prohibit foreign companies from circulating a wide range of content online and require a clearance from the Government prior to any material being posted on their websites.[15] These regulations tend to govern everything under the sun from text, news, games, animation, audio and video, digitized books, art, literature and science.[16] Due to China’s extreme censorship laws, they already have the required infrastructure to bring a halt to infringements in Digital space. 

Once such case is the Tomato Garden case[17], Chengdu Software and Network Technology Co., Ltd, encouraged certain co-defendants to collaborate and replicate the Microsoft’s Windows XP software. The defendants made certain changes to the software and added the other tools that could be used.[18] They made a “new” software under the name “Tomato Garden” and it was made available to the residents for free downloads. The Court convicted the defendants for copyright infringement along with a fine and confiscation of the illegal income.

In India, infringement claims relating to digital goods per se have not surfaced yet, however, under Section 2(1) J of the Trade Marks Act, 1999 “Goods” are defined as: anything which is the subject of trade or manufacture. Hence, the digital goods would be included, as they are subject of trade and can be tried as ‘normal goods’ in an Indian Court of Law. Additionally, on a comprehensive analysis of the Information Technology Act 2000, the liability of such intermediaries can be defined. This shall pave way to introduce and determine the ambit of terms like cyber-squatting, digital goods and infringement in cyber space.

The Delhi High Court, in the celebrated judgment of Christian Louboutin v. Nakul Bajaj[19] laid down certain acts performed by an intermediary which would make it liable for facilitating IP infringement. Earlier an intermediary were to be held liable for infringing content hosted on its platform only when it had specific or actual knowledge or a reason to believe that such information may be infringing. However, this judgement laid down 26 “tasks” performed by the intermediary while serving as a platform for commerce. It would cross the line from being an intermediary to an active participant in the infringement if a number of such tasks were also performed by the intermediary. This judgment has helped in interpreting liability of such hosting platforms for online infringement of tangible products, which shall eventually pave way to define the status of digital goods as well.

In UTV Software v. 1337X.TO[20], the Delhi High Court laid down the definition of “rogue websites” which were hosting copyrighted material on their online film/TV shows streaming platforms. In the present matter, the plaintiff sought injunctions from eight defendants on account of the defendants communicating the original content of the plaintiff to the public without authorization. The plaintiffs’ companies are engaged in various businesses of creating, producing and distributing cinematographic films globally including India. Finally, the Court directed the MeitY and the DoT, who are also defendants in this case, to come up with a policy where individuals who access ‘pirated content’ can be notified of the same by ISPs, and if they do not refrain from continuing such actions, they may be fined.

The trends in various countries analyzed, i.e., United States of America which is unclear on its position on how digital goods can be covered under the Lanham Act, the European Union which has accepted digitalization with open arms and China which has fortified its IP portfolio by introducing various policies to aid online trade, show how the countries are attempting to interpret their laws and regulations to cover within its ambit the advent of digitalization.

In light of the preceding observation, instances of claims relating to digital goods are widely prevalent because most transactions occur in the form of digital files.[21] Therefore, the applicability of “digital goods” requires close scrutiny globally as it is a problem that cannot be solved by one country alone. There needs to be a resolution on the same wherein certain definition can be agreed upon and a uniform system around the world like the UNDRP is formulated for prosecuting these infringers in Cyber space. The road ahead seems fraught with uncertainties but that’s what makes it challenging.