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Federal Court Says No to “Used” Digital Music Marketplace

Posted in Copyright, Litigation

Digital music has come a long way since the era of widespread unauthorized sharing, with digital music sales estimated to be approaching $6 billion worldwide. As this market grows, a natural question is whether there can be a legitimate digital analog to the traditional “used music” market. One company, ReDigi, sought to create such a market and suggested that it would create “billions of dollars in wealth” by imparting resale value to lawfully obtained digital materials. In Capitol Records v. ReDigi, however, the Southern District of New York confronted the resulting “fundamental clash over culture, policy, and copyright law” and ruled that ReDigi’s service results in unlawful copying.

ReDigi’s web-based service enables users to sell legally acquired digital music to other users at a “fraction” of the music’s price on iTunes or other legal sources. ReDigi’s service also requires users to run its “Media Manager” program to ensure that their computers and attached devices do not retain their own copies of the music offered for sale, but Media Manager cannot detect copies maintained in other locations. For every transaction, ReDigi retains 60% of the purchase price, which users pay other users in the form of credits that can only be used to purchase other music on ReDigi.

As a defense to infringement of Capitol Records’ distribution rights, ReDigi relied on the “first sale” doctrine, codified at Section 109 of the Copyright Act, which expressly permits authorized buyers of copyrighted material to redistribute their particular copies (or “phonorecords”). The doctrine, however, applies only to distribution of copies that are “lawfully made,” so the threshold question was whether ReDigi’s service creates unauthorized copies of the music files in violation of Capitol’s exclusive reproduction rights. Given the context, this was a novel question, as previous cases have not addressed the issue of whether the transfer of digital files “where only one file exists before and after the transfer” constitutes reproduction under the Copyright Act.

ReDigi argued that its service “migrates” a file as if it were a train so that the same data never exists in two places at any one time, but Capitol countered that, semantics aside, uploading a file “necessarily involves copying.” The court agreed with Capitol and saw it as “beside the point that the original phonorecord no longer exists.” What mattered was that transferring files over the Internet “moves” a file on one material object (a user’s computer) by reproducing it on another (ReDigi’s server). The court concluded that “it is therefore impossible for the user to sell her ‘particular’ phonorecord on ReDigi.” Given that ReDigi sold whole copies of commercial recordings that would harm the primary market for those recordings, the court also made quick work of ReDigi’s argument that the reproductions were “fair use” under Section 107 of the Copyright Act. Because the reproductions themselves were not lawful, ReDigi could not avail itself of the first sale doctrine and, therefore, was liable for infringement.

While giving credit to ReDigi for taking steps to prevent users from retaining an extra copy of the music sold via its service, commentators generally note that the court’s decision was predictable and aligns with the intrinsic difference between non-digital and digital goods, which are extremely easy to duplicate and mass distribute. This case demonstrates that there is no “digital first sale doctrine,” which, as one commentator pointed out, means that “digital files are intrinsically worth less over their lifetimes” than are physical media like CDs and DVDs.

Other reactions to the ruling included that it will “profoundly affect the economics of any digital re-sale marketplace,” not just music, and confirmed the rights of online distributors to control whether customers can resell or transfer digital goods. This does not mean, however, that there can be no resale markets, and there has been much public speculation regarding plans by existing retailers to create digital resale models.