Second Circuit: Sales of Pre-Owned Digital Music Infringe Copyright

A copyright owner’s exclusive rights, codified at Section 106 of the Copyright Act, include the right to control both the reproduction and the distribution of a work. The exclusive distribution right is tempered by the “first sale doctrine,” codified at Section 109 which provides that, once you lawfully obtain a copy of something, you usually can resell the physical object (e.g., a used book) containing that copy.

So how does the first sale doctrine affect your Huey Lewis and the News LP? Good question. Let’s say you purchased the album at Sam Goody in 1984, made a cassette tape copy for a friend in 1986, and then sold the LP to a used record store in 1991 (the year you became cool). The cassette tape copy was NOT permitted by the first sale doctrine, because you created a new copy, thus violating the exclusive right to reproduction, which is not affected by the first sale doctrine. On the other hand, when you resold the LP in 1991, the first sale doctrine permitted it, because at that point you were simply redistributing the physical object containing the particular copy that you had lawfully acquired back in 1984.

Bringing things forward a few years, what if you had acquired your Huey Lewis album only recently by digital download, and you wanted to resell it online? Would such a resale be more like the infringing creation of an unauthorized cassette tape copy, or more like the redistribution of a physical object (and thus protected by the first sale doctrine)? Last week, in Capitol Records v. ReDigi Inc., the Second Circuit held that the transfer of pre-owned digital music, as least as engineered by ReDigi, Inc., was more akin to an unauthorized copy, and thus a violation of the reproduction right.

The ReDigi Packet Train

ReDigi’s online platform was an attempt to create a legitimate market for the resale of pre-owned digital music. It works something like this: First, you get sick of the music you purchased online and decide you want to resell it. Second, you install ReDigi’s Music Manager software on your computer. ReDigi “migrates” the digital files you want to sell to the ReDigi server. This is done by breaking down the file into “packets.” A transitory copy of each packet is made for transfer to the ReDigi server, and each packet is deleted from your computer immediately after the transitory copy is transferred. At the end of the process, you no longer have the file on your hard drive, but it does exist in the ReDigi Cloud Locker.

In an attempt to describe this process as a physical transfer protected by the first sale doctrine, ReDigi analogized its system to a “train (the digital file) leaving from one station (the original purchaser’s device) and arriving at its destination (in the first instance, ReDigi’s server).” In this metaphor, each packet is just a car on the train. Once all the cars arrive at the destination station, the ReDigi server, they are reassembled into a usable file. From there, a second user can purchase the file; the file will once again be broken down into packets, and those packets will disappear from the ReDigi server as the train pulls into the second user’s computer and the file is reassembled at its final destination.

The Second Circuit’s Reasoning

The District Court had held that the ReDigi system infringed copyright in two ways. First, because unauthorized reproductions were made in the course of the transfer, it was a violation of the reproduction right. Second, because the files being transferred were unlawful copies, the first sale doctrine did not apply and the transfers also violated the distribution right.

The Second Circuit affirmed only on the first rationale. The Court rejected ReDigi’s argument that its system did no more than move a file from one location to another. Even putting aside the temporary transitory copies, the final outcome of the process was the fixation of a non-transitory unauthorized copy in a new material object: the ReDigi server (and then eventually on the second user’s computer). This was a violation of the reproduction right.

The Second Circuit also rejected ReDigi’s fair use argument (which ReDigi apparently made only half-heartedly, as its opening brief did not address the statutory factors). As to the first factor, the purpose and character of the use, the Court noted that ReDigi’s transfer of files was in no way transformative, as it made no change in the copyrighted work and did not deliver the work in a more convenient or usable form. Moreover, the Court held that the fourth factor, the effect on the market, weighed “powerfully” against fair use, as it was evident that ReDigi was offering a market substitute for the original.

Wiggle Room?

Does this ruling spell the death knell for efforts to create a market for pre-owned digital music? Probably in the short term. As for ReDigi, the immediate impact is the affirmance of a $3.5 million judgment and a permanent injunction against its operation of the platform.

But maybe there is still some wiggle room. After the start of the case, ReDigi created a new version of its software — ReDigi 2.0 — which no longer transfers the music file from one user to another, but rather transfers access to the music file as stored in the cloud server of the original seller (e.g., iTunes). In other words, ReDigi 2.0 arguably doesn’t make a copy so it may not infringe. The Second Circuit held that the terms of the injunction nevertheless prevent ReDigi from trying out its new platform. But because the technology has not been litigated and has not yet been found to infringe, the Court hinted that some third party could give it a try.