By IT-Lex Intern Joey Chindamo (LinkedIn)
Are legally purchased digital music files eligible for resale? Or, more specifically, does copyright’s first sale doctrine reach digital music files? That is the novel question a New York federal district court recently answered, and the answer was no. The decision, while certainly not binding nationwide, could be pivotal. With news coming out that both Amazon and Apple have recently been granted patents for systems to resell digital media, ironing out this copyright wrinkle is likely at the top of many tech entities’ To-Do lists.
The case, Capitol Records, LLC v. ReDigi, Inc., came out of the Southern District of New York, a district known for its copyright law rulings. ReDigi markets itself as “the world’s first and only online marketplace for digital used music.” The decision carefully describes ReDigi’s business model (see pages 2-3), which mandates that only digital music files purchased from iTunes or another ReDigi user are available for sale on the ReDigi service. Users must first download ReDigi’s “Music Manager,” a scanning software program that monitors users’ computers and digital devices to ensure files that have been sold or uploaded for sale are not retained. Notably, however, the software cannot detect copies stored in other locations, like flash drives, external hard drives, or cloud storage. Problematic as well is that the Media Manager does not automatically delete retained copies of music files—instead, the program simply prompts users to delete the file themselves and ReDigi alleges that it suspends the accounts of users who fail to comply with this requirement.
But one important factual contention between Capitol Records and ReDigi was the website’s uploading process, and it is the focus of this post. ReDigi equated the process to a train, wherein the files are “migrat[ed]” to the central server, packet by packet, but Capitol asserted ReDigi’s process necessarily involves copying a file from the user’s computer to the central server. The court used a footnote to highlight the other analogies applied to ReDigi’s service:
“A train was only one of many analogies used to describe ReDigi’s service. At oral argument, the device was likened to the Star Trek transporter – ‘Beam me up, Scotty’ – and Willy Wonka’s teleportation device, Wonkavision.”
This technological distinction became the critical factor in the court’s copyright infringement analysis. Most of the analysis hinged on well-established principles of copyright law—duplicating digital music files over the Internet without authorization is an infringement of a copyright owner’s exclusive right to reproduce; file-sharing and electronic transmissions of copyrighted works without authorization are infringements of the exclusive right to distribute; and a digital audio stream is a performance, as defined in the Copyright Act. But the novel question was whether or not ReDigi’s technology was a reproduction of the digital music file. The answer to this question would control the rest of the copyright analysis.
The Court discussed the differences between phonorecords and sound records, two distinct entities. A phonorecord is the:
“[M]aterial object[] in which sounds . . . are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.”
A sound recording is the:
“[W]ork[] that result[s] from the fixation of a series of musical, spoken, or other sounds.”
What is the difference here? The phonorecord is the physical, tangible item the sound recording is fixed on—the CD, cassette tape, or vinyl record. The sound recording is the actual perceivable audio stream. These distinctions are important because the Court concluded that a reproduction occurs when a copyrighted work is fixed in a new material object, or, phonorecord.
The Court applied these distinctions to digital music files by determining that a digital music file itself is the sound recording. The segment of the hard disk, or other media on which the file is saved, represents the phonorecord. Relying on London-Sire Records, Inc. v. John Doe 1 from the District of Massachusetts, the Court concluded:
“[W]hen a user downloads a digital music file or ‘digital sequence’ to his ‘hard disk,’ the file is ‘reproduce[d]’ on a new phonorecord within the meaning of the Copyright Act. This understanding is, of course, confirmed by the laws of physics. It is simply impossible that the same ‘material object’ can be transferred over the Internet. Thus, logically, the court in London-Sire noted that the Internet transfer of a file results in a material object being ‘created elsewhere at its finish.’ Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act.” (internal citations omitted and emphasis added).
With this determination, the Court necessarily concluded that ReDigi’s service infringed Capitol Records’ reproduction rights. Despite ReDigi’s attempts to stress that its technology “migrates” digital music files without any copying occurring, the Court was unconvinced. In the Court’s point-of-view, any time a digital file arrives on a new device, a new phonorecord has been created, and thus, a reproduction has occurred. The Court also pointed out that ReDigi itself made numerous admissions to the contrary during the preliminary injunction stage of the litigation, making statements like, “The only copying which takes place in the ReDigi service occurs when a user uploads music files to the ReDigi Cloud.”
The Court quickly disposed of ReDigi’s fair use affirmative defense, finding that all four of the fair use factors—(1) purpose and character of the use; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used; and (4) the effect of the use upon the potential market—cut against a finding of fair use. That left ReDigi with its final affirmative defense, the first sale doctrine.
The first sale doctrine, codified at 17 U.S.C. § 109(a), states:
Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.
The Court ultimately held that the fair use doctrine failed to apply to ReDigi’s digital music files for multiple reasons. First, because each ReDigi file would be an unlawful reproduction, a digital music file sold on the service would not have been “lawfully made.” Second, ReDigi would not allow users to distribute “particular” copies of digital music files because users would have to create new phonorecords on the ReDigi server each time they uploaded a song.
Because it is therefore impossible for the user to sell her ‘particular’ phonorecord on ReDigi, the first sale statute cannot provide a defense. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users’ hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era. (emphasis added)
Despite ReDigi’s arguments to the contrary about the first sale doctrine, the Court looked to the U.S. Copyright Office’s report on the Digital Millennium Copyright Act, which addressed the first sale doctrine as applied to the distribution of digital works. In that 2001 report, the Court said, the Copyright Office specifically rejected the extension of the first sale doctrine to the digital realm because the “justifications for the first sale doctrine in the physical world could not be imported into the digital domain.” Of note:
“[P]hysical copies of works degrade with time and use, making used copies less desirable than new ones. Digital information does not degrade, and can be reproduced perfectly on a recipient’s computer. The ‘used’ copy is just as desirable as (in fact, is indistinguishable from) a new copy of the same work.” (emphasis added).
Despite the Court’s confident ruling, it did intimate that its legal conclusions may not fairly represent the equities of a modern, digital world. But, as always, the Court directed the parties’ attention to who can fix that problem:
While this limitation clearly presents obstacles to resale that are different from, and perhaps even more onerous than, those involved in the resale of CDs and cassettes, the limitation is hardly absurd – the first sale doctrine was enacted in a world where the ease and speed of data transfer could not have been imagined. There are many reasons, some discussed herein, for why such physical limitations may be desirable. It is left to Congress, and not this Court, to deem them outmoded. (emphasis added).
The Court’s legal conclusions in this case represent a limitation of an almost limitless medium. As the Court described, the first sale doctrine is not so much a right of equity for the buyers of copyrighted material to recoup some of their expenses on unwanted purchases, but it really serves as a brake on unstoppable resale of copyrighted material. Typical first sale involves some element of transportation costs to move physical copies of works, not to mention the loss of value that copyrighted works experience due to degradation. Like the used textbook market, those who are willing to use a book with margin notes and highlights will buy the used book at reduced cost. But those who want a fresh copy will shell out full price for the new copy.
But “used” digital music files do not compare. There is no cost in transporting the files, and there is no degradation with their use. So, aside from artificial price differences, what is the functional difference between a “used” MP3 and a “new” MP3? As the Southern District made clear, there is not one.
ReDigi has announced plans to appeal the Southern District’s ruling, so the Second Circuit may weigh in. It is possible this dispute could make its way to the Supreme Court eventually, too. The High Court recently ruled on the first sale doctrine as it related to “gray market goods” in Kirtsaeng v. John Wiley & Sons, Inc., and Rep. Bob Goodlatte, (R-Va.), the Chairman of the House Judiciary Committee, recently announced an upcoming comprehensive review of federal copyright law. Technology continually pushes the judiciary to keep up, especially when it comes to intellectual property, so stay tuned to see how this case resolves.
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