Can Digital Goods Ever Lawfully Be Resold? A Legal Perspective...

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"...for now, the only thing that is clear is that in the Southern District of New York, the transfer of a digital file from one computer to another without a copyright owner's permission violates the reproduction right." - attorney Lynda Zadra-Symes, partner at Knobbe Martens Olson & Bear

A recent court case in New York highlights the ever-increasing clash between copyright law designed for real-world, physical goods and a modern world embracing all things digital.

The key question in the dispute  - between Capitol Records and ReDigi, an online service which allows members to sell "used" digital music to others - is whether someone who buys a song on iTunes can sell that song to someone else without violating copyright law. And the answer is guided by the “First Sale Doctrine” in copyright law - which states that after a creator sells a copy of his work, the purchaser is free to sell it or destroy it without punishment, but not copy it. The right to make copies still belongs to the creator.

Capitol Records argued that ReDigi does not just transfer the song to the new buyer but instead makes a copy before uploading a file to its servers. The court agreed. A win for Capitol Records; a loss for the used music digital marketplace.

All of this begs the question: Can digital goods ever lawfully be resold?

For a legal perspective, we asked attorneys writing on JD Supra:

- Is ReDigi a One-Off or a Sign of Things to Come?

Andrew Ittleman, partner at law firm Fuerst Itleman David & Joseph:

“It seems that the Redigi decision represents a trend, not so much in the interpretation of copyright law or the first sale doctrine itself, but rather in lower courts deferring difficult decisions to higher courts or Congress. It is our estimation that this is why the Redigi court, for example, used such a literal interpretation of the first sale doctrine rather than address the much tougher issue of finding a workable solution that allows the doctrine to exist for digital media. We often run into situations like this when judgment calls need to be made by courts on controversial issues — and this is probably a good thing. Courts in the United States are designed to interpret existing law as opposed to write new law.”

Tammi Hill, associate at law firm Knobbe Martens Olson & Bear:

“It would not be surprising to see a court apply the reasoning in the ReDigi opinion to other types of digital goods. The ReDigi opinion's reasoning relies on the nature of digital information transfer, rather than the type of digital file. However, other courts not bound by the ReDigi ruling may see the issue differently. ReDigi's combination of uploading and deleting the original file during the sale process made it an ideal factual pattern to argue for the extension of the first sale doctrine to the digital world.  Another district court, or a circuit court on appeal, may disagree with Judge Sullivan's interpretation of digital copying.”

- Implications for the Broader Digital Marketplace?

Attorney Tammi Hill:

“Early in the ReDigi case, Google requested the permission of the court to file amicus briefing highlighting the importance of the application of the first sale doctrine to the cloud computer industry, which Google estimated was worth approximately $41 billion. Judge Sullivan’s order in ReDigi, which described uploads to a cloud server located in Arizona as reproductions, appears to apply to the cloud computing industry. In addition, since the filing of Capitol’s complaint, several companies, including Amazon and Apple, have applied for or obtained patents on second-hand marketplaces for digital goods. The outcome of the ReDigi case in the Southern District of New York could have far-reaching effects across all kinds of industries that rely on copyrightable digital files. The ReDigi case is therefore unlikely to be the final word on the first sale doctrine as applied to digital goods.”

- What Can We Expect Going Forward?

Andrew Ittleman:

“We are seeing a big shift in content and media from tangible mediums such as hard drives, disks, etc. to digital storage. We believe that this will result in one of two things with regard to the first sale doctrine. First, the first sale doctrine will be done away with entirely – but this is unlikely. If we look at the Supreme Court’s most recent decision on the first Sale Doctrine, Kirtsaeng v. Wiley, we can see that that Court was reluctant to do away with a doctrine that is so integral to the free flow of economics and the secondary marketplace. What’s more likely to happen is that  Congress will redefine the Copyright Act so that the first sale doctrine will better reflect modern technology.”

Emily Sauter, associate at Knobbe Martens:

“We will likely see companies interested in creating a marketplace for used digital goods come up with creative ideas in an attempt to avoid violating the reproduction right. For example, ReDigi has already claimed its new product, ReDigi 2.0, does not violate the reproduction right because the copy purchased by the initial owner is not downloaded to the owner's computer but is instead directed to ReDigi's server. Thus, while access to the digital file may transfer from one user to another when the file is sold, the file is never moved from its initial location on ReDigi's server.

At the same time, we will likely see content owners come up with creative ideas to prevent the resale of digital goods. For example, many content owners already distribute copies of digital goods through purported license agreements, as opposed to distributing digital goods through sales, because 17 U.S.C. § 109 only extends the fair use defense to owners.”

- So... Can Digital Goods Ever Lawfully be Resold?

Two different perspectives on this. From Lynda Zadra-Symes, partner at Knobbe Martens:

“Yes. First, they can be resold with the copyright owner's permission. Second, the ReDIGI opinion held the sale of the particular copy of the music file that was purchased by the initial owner would be protected by the first sale doctrine. Thus, if the owner sold the file in the form it was purchased, for example, by selling the device, computer or hard drive the file was purchased on, this sale would be lawful under the first sale doctrine. Third, the new ReDigi 2.0 service may be permitted under copyright law if no copying is involved. The ReDigi 2.0 service apparently allows a user to purchase and download a digital file to a single location on a cloud computing network. The user may then sell access to the file, allowing a new user to exclusively access the file without making a copy.

Additionally, the ReDigi case is only one case from one district court. The decision may be reversed on appeal, and/or other courts may not follow Judge Sullivan's holding. Accordingly, for now, the only thing that is clear is that in the Southern District of New York, the transfer of a digital file from one computer to another without a copyright owner's permission violates the reproduction right.”

And Andrew Ittleman again:

"Based on the holding and rationale in the Redigi decision, we would have to say no. This holding effectively made all digital re-sales illegal because, in some capacity, any transfer of digital media will require a level of copying/reproduction of the original digital file. This is what’s most dangerous about this holding. It results in a limitation of users’ ownership rights in purchased media under copyright law. So, again, without an act of Congress to change law, the answer to this question is most likely no."

- How Does This Contrast to the EU Approach?

Attorney Lynda Zadra-Symes:

“The contrast with recent European law is interesting. In a recent case, Case C-128/11, UsedSoft GmbH v. Oracle Int'l Corp., 2012 E.C.R. I-00000, available at http://eur-lex.europa.eu/, UsedSoft sold a licensed digital copy of a computer program and a maintenance agreement for that program. The European Court of Justice held that the principle of exhaustion precluded a finding of infringement. The ECJ explained that, so long as the original purchaser made its copy unusable at the time of sale and the subsequent purchaser conformed to the terms of the original license, the sale was protected by the exhaustion principle. The ECJ compared the downloaded copy of the software to a CD or DVD which could be transferred, and thus it is likely that the ECJ would treat a digital music file similarly.”

Stay tuned; clearly not the last we have heard on this issue.