Digital First Sale: Online Marketplace For "Used" Digital Music Strikes Discord With The Copyright Act

by Manatt, Phelps & Phillips, LLP

A recent decision out of New York illustrates the difficulty that courts in the digital era face in applying laws designed for a brick-and-mortar world. In Capitol Records, L.L.C. v. ReDigi Inc., the U.S. District Court for the Southern District of New York was asked to determine “whether a digital music file, lawfully made and purchased, may be resold by its owner through [an online marketplace] under the first sale doctrine.”1 According to U.S. District Judge Richard Sullivan, selling “used” digital files online constitutes reproduction and distribution of copyrighted works in violation of the Copyright Act of 1976.

Under the Copyright Act, owners have the exclusive rights to reproduce and distribute their copyrighted works, among other rights.2 The first sale doctrine provides a defense to a claim of unauthorized distribution (but not reproduction) when the owner of a lawfully made copy or phonorecord of a sound recording or other work decides to sell or otherwise dispose of that copy or phonorecord.3 For this reason, the first sale doctrine effectively fosters a resale market for copies of copyrighted works that a copyright owner has placed into the stream of commerce.

Against this backdrop, ReDigi Inc. exploited a perceived inconsistency in the secondary music market. If a consumer buys a CD and decides that she doesn’t like it, she can sell it on eBay or to her local music shop. But when a consumer impulsively downloads the latest one-hit wonder’s record from iTunes, she can either delete it or let it take up space on her hard drive forever. ReDigi offers a third solution, permitting users to store and sell their unwanted digital music through a cloud-based service.

The media reports surrounding ReDigi’s legal battles since its launch in 2011 provided that ReDigi was developed with an eye towards Copyright Act compliance. The technologies that defined ReDigi were designed to ensure that users’ uploaded music was eligible for resale and that, once resold, it could no longer be accessed by sellers. For instance, ReDigi’s verification engine determined which songs in a user’s music library were legally downloaded from iTunes, while ReDigi’s media manager continuously ran on users’ computers to ensure that no copies of resold songs were retained on their hard drives or synced devices. In other words, through its cloud service, ReDigi purported to ensure that only one copy of a digital music file existed both before and after resale.

The number of files in existence was important to ReDigi’s legal strategy in defending against Capitol Records’ lawsuit, because the first sale doctrine is a defense to an unlawful distribution claim but does not excuse an infringing reproduction. Specifically, ReDigi’s strategy against Capitol Records was first to prove that it never reproduced a copyrighted work, and second to show that its distributions of such works were excused under the first sale doctrine. As to the former point, ReDigi argued that it was a pure distributor because it never increased the number of copies available on the market. Courts previously have held that unauthorized downloading of digital music files over the Internet implicates and violates a copyright owner’s exclusive reproduction right. But before ReDigi, no court had considered “whether the unauthorized transfer of a digital music file over the Internet-where only one file exists before and after the transfer-constitutes reproduction within the meaning of the Copyright Act.”

In holding that such a transfer constitutes a reproduction, Judge Sullivan distinguished a copyrighted work (the digital music file) from the phonorecord or material object embodying it (the section of the hard drive to which the file is downloaded). He reasoned that “it is the creation of a new material object and not an additional material object that defines the reproduction right.” In other words, digital resale necessarily requires the creation of a new material object because the buyer downloads the purchased file to a new section of her hard disk. According to Judge Sullivan, “the laws of physics” confirm this understanding because “[i]t is simply impossible that the same ‘material object’ can be transferred over the Internet.” In other words, a user cannot send physical things through cyberspace without reproducing them.

ReDigi fared no better against Capital Record’s distribution argument. ReDigi did not dispute that it sold recordings. Indeed, Capitol Records actually purchased more than one hundred of its own recordings from ReDigi’s site. Instead, ReDigi asserted that the resale of digital music files lawfully purchased on iTunes is protected by the first sale doctrine. Under that defense, a copyright owner’s exclusive right to control an item’s distribution is exhausted once she places the item into the stream of commerce.

Piggybacking on its reproduction analysis, the district court reasoned that the first sale defense is available to the owner of a copy or phonorecord only when she decides to distribute that copy or phonorecord. “Put another way, the first sale defense is limited to material items, like records,” iPods, or computer hard drives. ReDigi’s music sellers did not distribute phonorecords that they lawfully acquired during a first sale. Instead, they created a new phonorecord whenever they stored music on the ReDigi server. Similarly, ReDigi’s music buyers created a new phonorecord for every download of “pre-owned” digital music to their hard disks. Thus, the court reasoned, the first sale doctrine was inapplicable.

ReDigi argued that the court’s refusal to apply the first sale doctrine to digital resale extends copyright holders’ rights beyond, and excludes digital works from the limitations of, the Copyright Act. Drawing on the legislative history of the Act, Judge Sullivan reasoned that there is a stark difference between applying the first sale doctrine in the off-line world and doing so in the digital one. In the former, copies degrade over time and lose market value-a fact of which the legislature was well aware when crafting Section 109’s first sale defense. In the latter, digital information never degrades and can be reproduced indefinitely. For that reason, the United States Copyright Office rejected extension of the first sale doctrine to digital works when Congress drafted the Digital Millennium Copyright Act.4 Accordingly, Judge Sullivan reasoned that the court lacked the authority to condone the doctrine’s application to the digital sphere, particularly when Congress had refused to do so.

The ReDigi case has potentially broad implications that may affect how consumers will be able to use digital goods in the future, as companies like ReDigi continue to innovate new technologies. Judge Sullivan’s decision came on the heels of media giant Amazon’s announcement that it is attempting to patent software similar to ReDigi’s. For that matter, ReDigi 2.0, which remains unaffected by Judge Sullivan’s decision, incorporates cloud technology for which ReDigi has a patent application pending. Media will continue its shift into digital space, and companies like Amazon and ReDigi will continue to push the envelope through their development of new technologies that are designed to facilitate that shift. Consequently, courts will have to strike a balance between consumers’ rights in their purchased media and copyright holders’ exclusive reproduction and distribution rights. It is anticipated that Congress will consider this issue when it soon tackles revisions to the Copyright Act, which Congress is undertaking to account for technological innovations that have outpaced the Copyright Act’s provisions.

1 Capitol Records, L.L.C. v. ReDigi Inc., No. 12 Civ. 95 (RJS), — F. Supp. 2d —, 2013 WL 1286134 (S.D.N.Y. Mar. 30, 2013).
2 17 U.S.C. §§ 106(1), (3).
3 See id. § 109(a).
4 Id. § 512.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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