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S.D.N.Y Holds that the First Sale Doctrine Does not Permit the Resale of a Digital Music File

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Capitol Records, LLC v. ReDigi Inc. By Charlie Stiernberg – Edited by Andrew Crocker Capitol Records, LLC v. ReDigi Inc., No. 12 Civ. 95 (RJS) (S.D.N.Y. Mar. 30, 2013) Slip Opinion Internet startup ReDigi—“the world’s first and only online marketplace for digital used music”—recently suffered a setback in the rollout of its digital music resale platform. Capitol Records, LLC v. ReDigi Inc., No. 12 Civ. 95 (RJS), slip op. at 1 (S.D.N.Y. Mar. 30, 2013). Judge Sullivan for the District Court for the Southern District of New York granted plaintiff Capitol Records’ motion for partial summary judgment on its claims for defendant ReDigi’s direct, contributory, and vicarious infringement of its exclusive distribution and reproduction rights under the 1976 Copyright Act. The court held, in a case of first impression, that the first sale doctrine,17 U.S.C. § 109(a), does not permit the resale of a digital music file, and that uploading to and downloading from the cloud “incident to a sale” falls outside the scope of the fair use defense, 17 U.S.C. § 107. The New York Times provides a summary of the case and places it in the context of a broader debate over digital secondary markets, including books and movies. The Electronic Frontier Foundation expresses frustration over the court’s decision not to “bring the first sale doctrine into the 21st century.” Billboard notes that unlike iTunes sales, record labels do not get any proceeds from ReDigi sales of “perfect digital copies of ‘pre-owned’ music.” To sell music on ReDigi’s online platform, a user must download the “Media Manager” application to her computer. The user can upload any eligible file—purchased on iTunes or from another ReDigi user—to ReDigi’s “Cloud Locker.” Media Manager then deletes any additional copies of the file on the user’s computer and continually monitors the computer to ensure no local copies remain. The user has the option of storing and streaming the file for person use or offering it for sale in ReDigi’s marketplace. If a user sells her digital music file, her access to the file is terminated and transferred to the new owner, who can continue to store it in the Cloud Locker, stream it, sell it, or download it to her computer. ReDigi’s website prices digital music files at 59 to 79 cents each, retaining 60% of the proceeds itself and allocating the remainder to the seller (20%) and an escrow fund for the artist (20%). Capitol Records owns copyrights in a number of the recordings sold on ReDigi’s website and brought suit alleging direct copyright infringement, inducement of copyright infringement, contributory and vicarious copyright infringement, and common law copyright infringement. Both parties moved for summary judgment. Judge Sullivan held first that the digital music files on ReDigi’s website are reproduced and distributed in violation of Capitol’s exclusive rights under 17 U.S.C. §§ 106(1), 106(3). ReDigi did not contest that distribution occurs on its websites, only that such distribution is protected by the fair use and first sale doctrines. Examining the statutory text and the legislative history, the court distinguished between “sound recordings” (the music) and “phonorecords” (the physical objects in which sounds are fixed). The court reasoned that when a user downloads a music file to her hard disk the copyrighted work is reproduced on a new phonorecord (the user’s hard disk) within the meaning of § 106(1). Judge Sullivan acknowledged the parties analogies during oral argument (transcript) to “the Star Trek transporter—‘Beam me up, Scotty’—and Willy Wonka’s teleportation device, Wonkavision.” Id. at 2 n.2.However, the court held that it is beside the point that the original phonorecord no longer exists. The court next addressed ReDigi’s fair use defense, holding that each of the four statutory factors in § 107 weighed against it. Capitol did not allege and the court did not decide whether uploading to and downloading from the Cloud Locker for storage and personal use only are protected fair use. However, the court held that such activity “incident to a sale fall[s] outside the ambit of fair use.” Id. at 10 (emphasis in original). Addressing the first of the factors, Judge Sullivan reasoned that the upload, sale, and download of digital music files does nothing to “transform” the copyrighted work and that ReDigi’s use is undoubtedly commercial. The second factor also weighed against fair use, because sound recordings are “close to the core of the intended copyright protection.” Id. at 10. The third factor likewise hurt ReDigi, because it transmits the works in their entirety. Finally, under the fourth factor, the court held that the products sold through ReDigi not only harm the potential market for the copyrighted works but also those sold on the legitimate primary market. Judge Sullivan then addressed the “novel question presented in this action . . . whether a digital music file, lawfully made and purchased, may be resold by its owner . . . under the first sale doctrine.” Id. at 4. He held that “[t]he first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era.” Id. at 12. As a preliminary matter, the court noted that for the first sale doctrine—as codified at 17 U.S.C. § 109(a)—to apply, the copy of the work must be “lawfully made under this title.” Because the court had already held ReDigi’s copies to be in violation of § 106(1), the first sale doctrine was inapplicable. In addition, the court noted that the statute protects distribution “of a particular copy or phonorecord … of that copy or phonorecord.” Id. at 12 (quoting 17 U.S.C. § 109(a)) (emphasis in original). Because it is impossible for the user to sell her “particular” phonorecord on ReDigi, the first sale doctrine cannot apply. However, the court noted that § 109(a) does not prohibit an owner of a particular phonorecord—for example, a computer hard disk, iPod, or other memory device onto which the file was originally downloaded—from reselling it. Finally, the court held ReDigi both directly and secondarily liable for copyright infringement. As to direct infringement, the court reasoned that while the sales process itself is automated, absolving ReDigi of direct liability on that ground alone “would be a distinction without a difference.” Id. at 14. The court distinguished a similar situation in Cartoon Network, LP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008) (“Cablevision” previously covered by the Digest), by noting that the Second Circuit left room for liability where a party’s “contribution to the creation of an infringing copy [is] so great that it warrants holding that party directly liable for the infringement, even though another party has actually made the copy.” Id. at 14 (quoting Cablevision, 536 F.3d at 133). The court further found ReDigi contributorily liable, holding that its service is not “capable of substantial noninfringing uses” under the Supreme Court decision in Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 442 (1984). As a result, ReDigi’s entire business model—trading only in copyright-protected iTunes files—is built on the erroneous notion that the first sale defense permits the resale of digital music. Because the first sale defense does not apply, ReDigi’s resale platform is capable of no noninfringing uses by definition. Finally, the court held that ReDigi vicariously infringed Captiol’s copyrights by virtue of its transaction fee and control over the website’s content and user access. The court did not address Capitol’s performance and display rights, or common law copyrights on summary judgment. This case is another example from a line of similar disputes in the Second Circuit—for example, WNET v. Aereo and YouTube v. Viacomtesting the legal boundaries between a copyright system developed in an analog era and new digital business models. Several policy issues lay at the forefront of these disputes, but as Judge Sullivan admonished, “this is a court of law and not a congressional subcommittee or technology blog.” Id. at 1. Whether future legislative action is pursued by rightsholders remains to be seen. ReDigi, perhaps mindful of an adverse decision, has already developed a potential workaround in the interim: ReDigi 2.0, which directs users’ new iTunes purchases to upload from iTunes directly to the Cloud Locker. Thus, the digital files are never moved from their initial locations. The new system was launched at the close of discovery in the instant case but may become a target for future litigation. Charlie Stiernberg is a 3L at Harvard Law School.