Capitol Records v. ReDigi and Selling “Used” Digital Goods

I recently wrote about the potential impact on differential pricing caused by the Supreme Court decision in Kirtsaeng v. John Wiley and Sons which found that the first sale doctrine applies to copyrighted works lawfully made abroad. I noted in that article that since most digital goods are licensed, not sold, differential pricing is still possible for digital goods, but that licensing has had side effects, such as limiting the ability of consumers to resell their digital goods in the used goods market.

Generally, consumers are allowed to legally buy and sell used goods. For example, if you buy a music CD, you can listen to it as many times as you want and then, if you don’t plan to listen to it again and you haven’t made any copies, legally sell the CD. But the same isn’t true of digital goods that the consumer does not own but instead has only received a licensed to use.

For example, Amazon’s MP3 store license agreement includes the following restrictions:

“You must comply with all applicable copyright and other laws in your use of the Music Content. Except as set forth in Section 2.1 above, you may not redistribute, transmit, assign, sell, broadcast, rent, share, lend, modify, adapt, edit, license or otherwise transfer or use the Music Content. We do not grant you any synchronization, public performance, promotional use, commercial sale, resale, reproduction or distribution rights for the Music Content. As required by our Music Content providers, Music Content is available only to customers located in the United States.”

Recently, one company has attempted to change this. ReDigi has tried to create a virtual marketplace for “pre-owned” digital music so that individuals can legally buy and sell songs. Their basic idea is to have a three step process:

1. Users install ReDigi’s software which identifies if certain digital music files are legally owned.
2. Users upload music they legally own to ReDigi’s cloud storage service.
3. Users offer this music for sale. If someone buys a particular song, the seller loses access to that file and the buyer gains access. No new copies of the file are made—changes are only made to cloud-based access control system.

ReDigi argues that step two is legal because users are allowed to backup copies of their files under fair use and step three is legal because they are not creating any copies of the files (again, only changing the access control permissions). Not surprisingly, some rights holders are skeptical of the ReDigi system and have challenged its legality.

This past week a U.S. District Court issued a ruling in Capitol Records , LLC. v. ReDigi Inc. that rejected ReDigi’s arguments. The court found that while copying music files to a cloud service does not necessarily violate fair use, copying these files to a cloud service for the purpose of selling the music does fall outside of fair use. In addition, since the court does not believe the copy falls under fair use, it is not a lawful copy and therefore not subject to the first sale doctrine.

The court is quite explicit in its ruling:

“Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. 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 in original)

The ruling goes on to argue that U.S. copyright law quite clearly does not allow for secondary markets of “pre-owned” digital goods. Indeed, Reps. Boucher and Campbell had proposed legislation in 1997 to update Section 109 of the Copyright Act so that the first sale doctrine would apply to digital works, but their legislation was never enacted.

Of course, there are many reasons why not allowing users to sell “used” digital goods makes sense. As explained back in 2001 by Marybeth Peters, former Register of Copyrights:

“Physical copies degrade with time and use; digital information does not. Works in digital format can be reproduced flawlessly, and disseminated to nearly any point on the globe instantly and at negligible cost. Digital transmissions can adversely affect the market for the original to a much greater degree than transfers of physical copies.”

But while digital goods may be intrinsically different than non-digital goods, should that necessarily exclude them from being re-sold? Back in 2001, Ms. Peters argued that the status of the technology necessary to allow the sale of used digital goods is uncertain. She wrote:

“Additionally, unless a ‘forward-and-delete’ technology is employed to automatically delete the sender’s copy, the deletion of a work requires an additional affirmative act on the part of the sender subsequent to the transmission. This act is difficult to prove or disprove, as is a person’s claim to have transmitted only a single copy, thereby raising complex evidentiary concerns. There were conflicting views on whether effective forward and delete technologies exist today. Even if they do, it is not clear that the market will bear the cost of an expensive technological measure.”

Whether a system like ReDigi actually prevents music piracy is an open question. There is certainly a degree of consumer trust involved—and I’m sure it is possible to circumvent the system, at least on a limited basis. But the same is true when buying and selling CDs since it is impossible to be sure that the seller has not made an illegal copy. To its credit, ReDigi has implemented various controls to try to prevent users from cheating and keeping copies of the music that they upload. (For the full details, check out their FAQ “Is ReDigi Legal?”)

There are no obvious answers here, but if Congress does consider additional reforms to the Copyright Act, it is worth revisiting whether the technology has changed enough to warrant rethinking the First Sale doctrine for digital goods or if we are willing to accept that the First Sale doctrine is no longer feasible in a digital world.

Image credit: Photo by Flickr user fensterbme