SDNY: ReDigi's Digital Music Resale Service Not Protected by First Sale Doctrine

Practical Law Legal Update 2-525-5207 (Approx. 5 pages)

SDNY: ReDigi's Digital Music Resale Service Not Protected by First Sale Doctrine

by PLC Intellectual Property & Technology

Key Litigated Issue

The key litigated issue in Capitol Records, LLC v. ReDigi, Inc., was whether digital music files could be resold by its owner through ReDigi's service under the first sale doctrine. The Court held that it could not.

Background

In October 2011, ReDigi, Inc., launched a website inviting users to sell music they purchased through iTunes (Apple, Inc. was not a party in this litigation) to other members of ReDigi's service at a reduced price, similar to a used record store. To participate in ReDigi's resale program, users must download ReDigi's Media Manager tool which scans the user's computer and builds a list of digital music files eligible for sale through ReDigi's site. A file is eligible only if it was either purchased on iTunes or from another ReDigi user. Music ripped from a CD or downloaded from a file-sharing site is ineligible. After Media Manager identifies eligible songs, users may upload any eligible files to ReDigi's remote server. At the end of the process, the file is located on ReDigi's service and not on the user's computer. Media Manager also deletes any additional copies of the file on the user's computer and connected devices. Media Manager continues to run in the background of the user's computer to monitor whether the user retains a copy of the file, but it cannot automatically delete any copies of the eligible file that remain on the user's computer.

Once eligible files are uploaded, the user can then choose to either:

Stream them for personal use.
Offer them for sale in ReDigi's marketplace.

If the user sells the music file, his access to the file is terminated and transferred to the new owner, who can choose to stream, sell or download it. Users buy music with credits they either earn or purchase on the ReDigi site. Music files are sold on the site for prices ranging from 59 to 79 cents. The seller receives twenty percent of each sale, twenty percent is put into an escrow fund for the recording artist and ReDigi retains the remaining sixty percent.

On January 6, 2012, Capitol Records, LLC filed suit against ReDigi alleging multiple violations of the Copyright Act arising out of sales of its recordings on the site, including:

Direct copyright infringement.
Inducement of copyright infringement.
Contributory and vicarious copyright infringement.
Common law copyright infringement.

The court denied Capitol's motion for a preliminary injunction, finding that Capitol failed to establish irreparable harm.

On July 20, 2012, Capitol filed a motion for partial summary judgment on its claims that ReDigi directly and secondarily infringed Capitol's reproduction and distribution rights. ReDigi filed a cross-motion seeking summary judgment on all grounds of liability, including ReDigi's alleged infringement of Capitol's performance and display rights.

Outcome

In its March 30, 2013 opinion, the US District Court for the Southern District of New York granted Capitol's motion for partial summary judgment, finding that:

The sale of digital music files on ReDigi's site infringe Capitol's reproduction and distribution rights (see Infringement).
The first sale and fair use doctrines do not apply to allow sales of the files (see First Sale Doctrine and Other Affirmative Defenses).
ReDigi is liable for direct, contributory and vicarious infringement (see Direct and Secondary Infringement Liability).

The court denied ReDigi's motion for summary judgment on its alleged infringement of Capitol's performance and display rights, finding that there was not enough evidence on the record.

Infringement

Capitol's Reproduction Rights

The opinion notes that other courts have consistently held that unauthorized duplication of digital music files over the internet infringes the exclusive right to reproduce copyrighted works. However, the court determined that these decisions have not previously addressed the issue of whether the unauthorized transfer of a digital music file over the internet where only one file exists before and after the transfer is a reproduction under the Copyright Act based on the following reasoning:

When a user downloads a digital music file to his hard disk, the file is reproduced on a new phonorecord within the meaning of the Copyright Act.
It is impossible for the same material object to be transferred over the internet from one computer to another.
The internet transfer of a file results in a new material object being created at the finish point.
The embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act.
It is the creation of a new material object, not an additional material object, that defines the reproduction right.

Accordingly, when ReDigi's Media Manager uploads a copy of a user's music file to ReDigi's remote server, Capitol's reproduction rights are infringed.

Capitol's Distribution Rights

ReDigi did not contest that distribution took place on its site but argued that it was protected by fair use and the first sale doctrine (see First Sale Doctrine). The Court concluded that without an affirmative defense, the resale of digital music files on ReDigi's website infringes Capitol's distribution rights.

First Sale Doctrine and Other Affirmative Defenses

ReDigi's primary argument was the first sale doctrine protects the digital music resales on its site. The first sale doctrine allows the owner of a particular copy or phonorecord lawfully made under the Copyright Act to sell or otherwise dispose of that copy or phonorecord without the authority of the copyright owner despite the copyright owner's exclusive right of distribution under Section 106(3) of the Copyright Act.

The court rejected this argument for the following reasons:

The first sale doctrine is an exception limited to the exclusive right of distribution under Section 106(3). It therefore does not apply to the infringement of Capitol's reproduction rights under Section 106(1).
The first sale doctrine only applies to copies lawfully made under the Copyright Act. The first sale doctrine therefore does not protect the unauthorized distributions through ReDigi's site because those music files are unlawful reproductions.

The court also rejected ReDigi's argument that the fair use defense applied, finding that ReDigi facilitates and profits from the sale of copyrighted commercial recordings transferred in their entirety, with a likely detrimental impact on the primary market for these goods.

Direct and Secondary Infringement Liability

Direct Infringement

The court found that ReDigi's contribution to the unauthorized copying was so great that it warranted holding ReDigi liable for direct infringement even though users made the actual copies. Key to the court's decision was that:

ReDigi built a service where only copyrighted work could be sold.
Its founders programmed their software to identify copyrighted content to be uploaded to its remote server.
ReDigi provided the infrastructure to facilitate its users' infringing sales and affirmatively brokered sales by connecting sellers with potential buyers.

Contributory and Vicarious Infringement

The court found ReDigi liable for contributory infringement, concluding that:

ReDigi knew or should have known that its service would encourage infringement.
ReDigi's service was not capable of substantial non-infringing uses.

Factors the Court considered in determining that ReDigi knew or should have known that its service would encourage infringement include:

ReDigi's warnings to investors that the law was not well settled, and advised that it could not guarantee it would prevail on its copyright defenses.
ReDigi's receipt of a cease-and-desist letter from the Recording Industry Association of America advising ReDigi that its website violated Capitol's copyrights and those of others.
The existence of a licensing dispute between ReDigi and a third party over song clips and cover art, which should have indicated to ReDigi shortly after launch that the service might be infringing.
ReDigi's knowledge that copyrighted content was being sold on its website.
Claims by ReDigi's officers that they had researched copyright law and consulted with attorneys, noting that as a result they presumably would have understood the likelihood that the use of the service would result in infringement.

The court concluded that ReDigi's service by design is not capable of substantial noninfringing uses, noting that it was built on the erroneous assumption that the first sale defense allows the electronic resale of digital music.

The court also found it clear that ReDigi vicariously infringed Capitol's copyrights because it:

Exercised complete control over its site's content, user access and sales.
Financially benefitted from every infringing sale by collecting sixty percent of each transaction fee.

Practical Implications

The SDNY's decision in this case, including the unavailability of the first sale doctrine, turned on its finding that ReDigi's service creates unauthorized reproductions of copyrighted works. The court found that the reproduction right is implicated because digital music files must be embodied in a new material object such as a hard drive following their transfer over the internet. That new embodiment is a reproduction of the copyrighted work regardless of whether the copyrighted work remains fixed in the original material object.

Unless overturned on appeal, the SDNY's decision serves a blow to companies seeking to capitalize on the resale of digital works protected by copyright, like music and e-books.

SDNY: ReDigi's Digital Music Resale Service Not Protected by First Sale Doctrine | Practical Law