New Laws Threaten Used CD Market

From Billboard

May 01, 2007

New legislation aimed at curbing the sale of stolen goods could threaten the growing used CD marketplace in a number of states.

The National Assn. of Recording Merchandisers outside counsel, John Mitchell, an attorney with Washington, D.C.-based Interaction Law, reports that Florida and Utah have passed second-hand goods legislation, sometimes referred to as pawn-shop laws, that could make the buying and selling of used CDs much more onerous to stores and less attractive to customers looking to sell music they are no longer interested in owning.

In Florida, the new legislation requires all stores buying second-hand merchandise for resale to apply for a permit, would be required to thumb-print CD sellers and get a copy of their state-issued identity documents, such as a driver's license. Furthermore, stores could only issue store credit -- not pay cash -- in exchange for traded CDs, and then would be required to hold them for a 30-day period, before re-selling them.

In addition to the two previously noted states, Rhode Island also has pending legislation, says Mitchell. "State lawmakers in different states tend to talk to one another...and there seems to be some sort of a new trend among states to support second-hand-goods legislation," says Mitchell.

While most states have pawn shop laws, they are not typically enforced against all sellers of second hand merchandise. But as a precaution, most merchants, including record stores owners, already collect ID from individuals selling previously owned goods.

In the states where pawn shop laws are getting more restrictive, it practically makes it prohibitive to sell used CDs, says one merchant. In fact, one music retailer -- who operates stores in Florida but is not headquartered there -- reports that one of the chain's stores has already had a visit from the local police enforcing the law. As a result, the chain stopped dealing in used goods in that store.

Meanwhile, video and video game retailers are less hit. Stores selling previously owned video and video games do not need a permit, and only have to wait for 15 days before reselling the merchandise.

Laws that result in the curtailment of used CD sales likely would be considered good news to record labels and music distributor executives who have long abhorred the growing strength of the used CD market. In fact, until the mid-1990's labels used to put pressure on merchants who bought directly from them not to carry such merchants. At the time, some majors attempted to kill the strategy by initiating new policies to withhold cooperative advertising from retailers buying directly from them but selling used CDs, a move endorsed by some artists including Garth Brooks.

But that effort triggered a revolt from independent stores and consumers, highlighted by barbeques of Garth Brook CDs, in some places called a "garth-eque." It also served as a catalyst for a Federal Trade Commission investigation of the music industry practices, forcing those majors to back down from its anti-used CD stance.

Since then, merchants who buy direct from majors who participate in the category say that used CD sales have grown from about 5% to sometimes 10%-20% of overall CD revenues. Also, those sales are more profitable.

Traditionally, used CD sales are protected by first-sale doctrine in copyright laws allow owners to resell CDs, according to Mitchell. Also, a CD resale is also protected by the U.S. Constitution's First Amendment, argues Mitchell. Since selling a CD could be seen as an indication that the owner does not like or agree with the content, the collection of identification information could be seen as a violation of first amendment rights.