Reposted from Sports, Media, and Entertainment Intelligence, May 2013 

By Scott W. Pink

In a setback for resellers of digital products, a New York federal court issued a decision on March 30, 2013 holding that ReDigi’s online platform for reselling digital used music violated the copyrights owned by record companies in that music. In the case of Capitol Records v. ReDiGi, the court held that the resale of the digital files facilitated by ReDigi’s technology was not protected by the first sale doctrine, which allows one to resell a lawfully acquired copyrighted work, because the sale of the digital used music involves making an unauthorized copy of the digital file. This decision calls into question whether there could be any viable means for legally reselling any form of digital content through the Internet.

It has long been an accepted practice for music lovers to clean out their music collections by selling their used LPs and CDs. Indeed, you will still find retail stores that have used LPs and CDs for sale. With the advent of digital music distribution through such online services as iTunes, these traditional means for reselling music collections are not viable because the music is typically stored on the consumer’s computer or mobile device, and not on a separate medium. 

One company that tried to solve this problem is ReDigi, which markets itself as “the world’s first and only online marketplace for digital used music.” A consumer wanting to sell used music must download ReDigi’s Media Manager which first searches the user’s computer to build a list of eligible titles to sell by verifying they were legally purchased from iTunes or another ReDigi user. Once the list is built, the user can then upload eligible files to ReDigi’s “Cloud Locker” which results in them being completely removed from the user’s personal computer or other device and stored on a server controlled by ReDigi. If a user decides to sell the music, it is downloaded to the purchaser’s computer or other device and the seller no longer has access to it.

ReDigi launched its site in 2011. It was not long before it was challenged by the recording industry. Capitol Records, the recording label for many classic songs, such as The Beatles’ Yellow Submarine, filed a lawsuit in the United Stated District Court for the Southern District of New York claiming multiple violations of the Copyright Act, including direct copyright infringement, inducement of copyright infringement, contributory and vicarious infringement, and common law copyright infringement. Shortly after the case was filed the parties filed cross-motions for summary judgment, Capitol arguing that ReDigi directly and contributorily infringed Capitol’s reproduction and distribution rights and ReDigi arguing that it had no liability based on, among other things, the first sale and fair use doctrines. 

One of the threshold issues for the court to determine was whether the ReDigi technology involves a violation of Capitol’s exclusive reproduction right in the sound recordings. ReDigi’s contention was that no reproduction occurred because it was simply transferring the same digital file that had been purchased by the seller to the buyer. However, the court disagreed, noting that the reproduction right under the Copyright Act is the right to reproduce the copyrighted work in a “phonorecord.” The court noted that the ReDigi’s process of transferring the digital music file necessarily involving making a new “phonorecord” or “material object” of that copyrighted work because the digital file has moved from one material object — the user’s computer – to another – the ReDigi server.

Once the court had found that ReDigi’s process involved a reproduction, it was able to readily conclude that ReDigi was engaging in copyright infringement and to dispose of ReDigi’s main defense, the first sale doctrine. Under U.S. law, the first sale doctrine provides that the owner of a particular copy of a copyright work lawfully made under the Copyright Act may, without the permission of the copyright owner, sell or dispose of that particular copy. 17 U.S.C. §109. ReDigi had argued that the purchaser of the digital music file had the right to resell that digital file under the first sale doctrine. The court noted, however, that this doctrine was not applicable because it only applies to the distribution of the copyright work, not to its reproduction, which was the right that was being infringed in this case. The court further noted that ReDigi was not distributing the original material object containing the sound recording but rather an unauthorized reproduction that was created on the ReDigi servers. As such the first sale doctrine did not apply to that reproduction because it was not “lawfully made.”

This ruling certainly makes it very difficult for owners of digital content to sell their content online because it will necessarily require the making of a separate and distinct copy of that digital content on the purchaser’s computer or device. Under the court’s ruling in the ReDigi case, the first sale doctrine will not apply to permit the sale of that digital content, even if the original copy of that content is removed from the seller’s computer. Even though content owners and resellers, like ReDigi, believe this is not good public policy, Congressional intervention may be required in order to modify the first sale doctrine to permit the sale of lawfully acquired used digital files.