Capital Records v. ReDigi, Inc.: New York District Court Determines that First Sale Doctrine does NOT apply to Digital Media. Did They Get it Right?

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On March 30, 2013, only 11 days after the United States Supreme Court’s decision in Kirtsaeng v. Wiley to extend the first sale doctrine to foreign made goods, a United States District Court in the Southern District of New York decided in Capital Records, LLC v. ReDigi Inc., that the online re-sale of lawfully made and purchased digital media is excluded from the doctrine. A copy of the District Court’s opinion can be found here.

One of the integral issues in this case turned on whether or not the “first-sale doctrine” applied to pre-owned digital tracks. As we discussed in detail in previous blog entries on the Kirtsaeng case which can be found here and here, the first sale doctrine limits the copyright owner’s exclusive right of distribution after the original sale, allowing a secondary or re-sale market to effectively exist. It is well established that the first sale doctrine applies to tangible mediums such as books, dvds, and cds. However, ReDigi Inc.’s business model is the first that attempts to extend this doctrine to digital media.

ReDigi’s services, described in this video, allow users to upload and resell content purchased from online retailers like Apple’s iTunes. ReDigi’s system would verify its users’ purchased music, and allow users in turn to upload the tracks to ReDigi’s cloud.  The user’s access to the file would terminate and transfer to the new owner at the time of purchase. In essence, ReDigi was to function as the digital equivalent of a used record store. Capitol Records, however, was skeptical and believed that the product was directly infringing copyrights as well as enabling and inducing users to infringe copyright law. Back in January 2012, Capital Records filed a lawsuit against ReDigi, Inc. that raised these allegations.  The United States District Court for the Southern District of New York agreed with Capital Records, and as such, ReDigi, Inc. was unsuccessful in its effort to establish a “used” or “secondary” digital marketplace.

In its analysis, the Court found that ReDigi, Inc. violated copyright law by making unlawful reproductions of the content during the transfer process from a user’s hard drive to the cloud server.  The court stated:

[W]hen a user downloads a digital music file or “digital sequence” to his “hard disk,” the file is “reproduce[d]” on a new phonorecord within the meaning of the Copyright Act. Id.

This understanding is, of course, confirmed by the laws of physics. It is simply impossible that the same “material object” can be transferred over the Internet.  Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act. […]

Simply put, it is the creation of a new material object and not an additional material object that defines the reproduction right. The dictionary defines “reproduction” to mean, inter alia, “to produce again” or “to cause to exist again or anew.” See Merriam-Webster Collegiate Edition 994 (10th ed. 1998) (emphasis added). Significantly, it is not defined as “to produce again while the original exists.” Thus, the right “to reproduce the copyrighted work in . . . phonorecords” is implicated whenever a sound recording is fixed in a new material object, regardless of whether the sound recording remains fixed in the original material object.

Under this rationale and interpretation of the doctrine, the “transfer” of a digital file could never occur, only a “reproduction” under copyright law, thus wiping out the first sale doctrine for all digital goods.

In opposition, ReDigi, Inc. claimed that no unlawful copying occurred, but rather a permissible transfer of digital content. ReDigi, Inc. further argued that to the extent any copying did occur for the purposes of making the transfer, it constituted an allowable “fair use” and customary practice under the Copyright Act. ReDigi, Inc. argued that the transfer taking place represented space and format shifting that was no different than converting content to a different file type, moving content to a different location on a hard-drive, or syncing said content with another device – all of which are allowable actions under iTunes’ terms of use policy.

While the court’s premise is based in a valid and literal reading of the statute – which forbids the selling of a “copy” of an original work – it offers an limited analysis in its dismissal of very reasonable counterarguments that in the digital context the definition of what constitutes a “copy” is not the same as it has been traditionally. Arguably, a user that syncs content in the ReDigi, Inc. cloud and then subsequently forfeits access to that content is conceptually no different than selling a used CD to a record store. Rather than explore this analysis, to reconcile this tough decision, the Court noted that the first sale doctrine was enacted in a time where the ease, speed, and quality of data transfer could not have been imagined, and as such pushed for Congress to modify the provisions of the Copyright Act.

On the other hand, there are legitimate arguments that support the District Court’s decision. The first sale doctrine was established not only to open up the re-sale markets, but to also help preserve the tangible mediums on which content was stored. Presumably, without the first sale doctrine, the consumer who moved locations, ran out of storage room, or simply wanted to get rid of her copy, would discard it if she could not sell or give the used copy to another owner. Thus, with the assistance of this doctrine, a work that may otherwise disappear would remain accessible to the public. This historic rationale for imposition of the doctrine is much less applicable, however, to new age digital content. In a Digital Millennium Copyright Act (DMCA) Report dating back to 2001, the former Register of Copyrights, Marybeth Peters, explored this issue:

Physical copies degrade with time and use; digital information does not. Works in digital format can be reproduced flawlessly, and disseminated to nearly any point on the globe instantly and at negligible cost. Digital transmissions can adversely affect the market for the original to a much greater degree than transfers of physical copies […]

The underlying policy of the first sale doctrine as adopted by the courts was to give effect to the common law rule against restraints on the alienation of tangible property. The tangible nature of a copy is a defining element of the first sale doctrine and critical to its rationale. The digital transmission of a work does not implicate the alienability of a physical artifact. When a work is transmitted, the sender is exercising control over the intangible work through its reproduction rather than common law dominion over an item of tangible personal property.

In the commercial context, ReDigi, Inc. is a relatively small player in the world of digital media, but the case’s outcome will have potentially huge and direct effects on digital media giants Apple and Amazon, both of which have pending patent applications for software that like ReDigi, Inc., opens up the secondary digital marketplace. As media continues to shift to the digital space the interplay of the consumer’s rights in their purchased data must be weighed against the protection of the copyright holder whose content can more easily be reproduced to almost identical quality. There is no obvious answer here, and it will be up to Congress to try to rework the Copyright Act and first sale doctrine to reflect the demands of modern technology.

It is not yet known how, or whether, ReDigi, Inc. will challenge the District Court’s decision. However, we expect that it will and hope that the Second Circuit Court of Appeals will examine the ReDigi, Inc. decision in light of the Supreme Court’s recent Kirtsaeng decision and broader policy considerations regarding this issue. We will keep you posted.