Copyhype

Is it possible to sell used mp3s?

That’s one of the questions raised by a legal dispute currently headed toward trial between Capitol Records and ReDigi.

ReDigi is an online service founded in October 2011 that claims to provide a marketplace for secondhand digital music files. The site has since raised over $1 million in venture financing and announced plans to expand its service to used e-books.

The biggest obstacle to re-selling digital works online is that they are independent of any material object. Unlike with physical objects, any transfer of a digital work would seem to necessarily require that the work is copied, since transmission doesn’t result in actual physical transfer of bits over a network. And the exclusive right to copy a work is, after all, one of the core rights of copyright.

ReDigi believes it has found a way to overcome this obstacle. The company has built a “forward-and-delete” mechanism into its service that is designed to ensure that any file uploaded for resale is deleted from the user’s computer. Whether or not this is enough remains in the hands of the Southern District Court of New York.

The First Sale Doctrine and Digital Works

The first sale doctrine was first recognized in 1908 by the Supreme Court in Bobbs-Merrill v Straus. ¹210 US 339. There, a book publisher had printed the following notice in its books: “The price of this book at retail is one dollar net. No dealer is licensed to sell it at a less price, and a sale at a less price will be treated as an infringement of the copyright.” The publisher brought suit against a wholesale dealer who was selling copies of the book for 89 cents. The Court rejected the publisher’s copyright claim, stating:

In our view the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract.

The US Copyright Act of 1909 incorporated this first sale doctrine into statute, and it has remained a permanent fixture of copyright law since. ²Currently codified in 17 USC § 109(a). It has, however, become subject to several limitations. The Record Rental Amendment of 1984 prohibits for-profit rental, lease, or lending of phonorecords, ³Pub. L. No. 98-450, 98 Stat. 1727 (Oct. 4, 1984), amending 17 U.S.C. §§109, 115. while the Computer Software Rental Amendments Act of 1990 did the same for computer software (though the limitation doesn’t apply to console games). ⁴Tit. VIII of the Judicial Improvements Act of 1990, Pub. L. No. 101-650, 104 Stat. 5089, 5134 (Dec. 1, 1990), codified at 17 U.S.C. §109. A 1983 bill to create a similar exception for videotapes failed to pass after opposition from the video rental industry and consumer groups. ⁵Consumer Video Sales-Rental Amendment, H.R. 1029, 98th Cong. (1983). These limitations were added because of concerns over the ease of making near-perfect duplicates. ⁶Report of the Working Group on Intellectual Property Rights, National Information Infrastructure (1995).

Digital goods raise particular challenges to the scope of the first sale doctrine, as explained by the National Information Infrastructure’s Working Group on Intellectual Property Rights:

If the owner of a particular copy transmits a copy to another person without authorization (either from the copyright owner or the law), such a transmission would involve an unlawful reproduction of a work, and the first sale doctrine would not shield the transmitter from liability for the reproduction nor for the distribution. Under the first sale doctrine, the owner of a particular copy of a copyrighted work may distribute it, but may not reproduce it. Therefore, the transmission would constitute infringement of the copyright owner’s reproduction right. If the reproduction is unlawful, further distribution of the unlawful reproduction would not be allowed under the first sale doctrine because the copy distributed would not be one “lawfully made” under the Copyright Act, as required by the statute.

Congress has at times considered the application of the first sale doctrine to digital goods. In 2001, the US Copyright Office recommended against expanding the doctrine to explicitly include works in digital form:

Proponents of expansion of the scope of section 109 to include the transmission and deletion of a digital file argue that this activity is essentially identical to the transfer of a physical copy and that the similarities outweigh the differences. While it is true that there are similarities, we find the analogy to the physical world to be flawed and unconvincing.

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 effect the market for the original to a much greater degree than transfers of physical copies. 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.

The underlying policy of the first sale doctrine as adopted by the courts was to give effect to the common law rule against restraints on the alienation of tangible property. The tangible nature of a copy is a defining element of the first sale doctrine and critical to its rationale. The digital transmission of a work does not implicate the alienability of a physical artifact. When a work is transmitted, the sender is exercising control over the intangible work through its reproduction rather than common law dominion over an item of tangible personal property. Unlike the physical distribution of digital works on a tangible medium, such as a floppy disk, the transmission of works interferes with the copyright owner’s control over the intangible work and the exclusive right of reproduction. The benefits to further expansion simply do not outweigh the likelihood of increased harm.

Digital communications technology enables authors and publishers to develop new business models, with a more flexible array of products that can be tailored and priced to meet the needs of different consumers. We are concerned that these proposals for a digital first sale doctrine endeavor to fit the exploitation of works online into a distribution model – the sale of copies – that was developed within the confines of pre-digital technology. If the sale model is to continue as the dominant method of distribution, it should be the choice of the market, not due to legislative fiat. ⁷Statement of Marybeth Peters, The Register of Copyrights, before the Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary, United States House of Representatives, 107th Congress, 1st Session, December 12-13, 2001.

Preliminary Injunction Denied

Capitol Records filed suit against ReDigi on January 6, 2012. It alleged copyright infringement, inducement of infringement, contributory copyright infringement, vicarious infringement, and common law copyright infringement of Capitol’s reproduction and distribution rights. ⁸Capitol also alleges violation of its public performance rights since ReDigi allows a user to stream tracks from her Cloud Locker and violation of its public display rights for presenting associated artwork of songs through its service. Capitol sought a preliminary injunction shortly afterward. ⁹Google sought to intervene as amicus, but was denied by the court.

The district court denied the motion on February 6th. It noted that the balance of equities was “kind of a push”; both parties had a near-equal interest in the outcome of the motion. The public interest was similarly a tie, as there is both a legitimate interest in seeing copyright enforced and in secondary markets. Notably, the court did find that Capitol had shown a likelihood of success on the merits. What doomed the motion was, in the court’s opinion, a lack of irreparable harm — it concluded that money damages would be adequate for Capitol if it ultimately wins.

Both parties have moved for summary judgment.

The Arguments

In its opening legal brief, ReDigi primarily makes two arguments: first, that, although its system makes a copy, this is not a “reproduction” within the meaning of the US Copyright Act; and second, the first sale doctrine protects its service to the extent that there is any distribution of copyrighted works.

As far as the first argument goes, ReDigi claims that “to the extent any discrete acts by users on the ReDigi system even implicate any of Capitol’s exclusive rights, those acts are not infringements by virtue of statutory and/or equitable, policy based limitations on Capitol’s exclusive rights.” It argues that its process does not result in a reproduction by definition, saying “the mere fact that a copyrighted ‘copy’ or ‘phonorecord’ existed in one place and later existed in another does not constitute proof of a ‘reproduction’ or duplication.”

As to the second argument, ReDigi looks to the language of the Copyright Act and points out that both §106, which codifies the distribution right, and §109, where the first sale doctrine is located, refer to “phonorecords”. ReDigi argues that this requires both sections to be read consistently: either a digital song file is not a “phonorecord,” so ReDigi is not violating Capitol’s exclusive distribution right through its service, or it is a “phonorecord”, in which case, reading the Copyright Act consistently, the first sale doctrine applies.

In response, Capitol argues that ReDigi’s view of “reproduction” is novel and unsupported by any case or precedent. It specifically notes that ReDigi’s process involves deletion of music files from a user’s computer after they are uploaded to its servers. Capitol states that “this act of deletion presupposes the creation of a different copy on the ReDigi server; otherwise, there would be nothing to delete in the first place.”

Capitol also disputes ReDigi’s reading of the first sale doctrine. It agrees that both the distribution right and the first sale doctrine, as codified in the Copyright Act, refer to “phonorecords”, but it points to a critical distinction in the language. “While section 106(3) reserves to the copyright owner the exclusive right to ‘distribute … phonorecords of the copyrighted work,’ section 109(a) only provides a defense when the owner of a ‘particular … phonorecord lawfully made … dispose[s] of the possession of that … phonorecord.'”

In its reply, ReDigi adds that, relying on the Second Circuit’s Cartoon Network opinion, if there is any copying that occurs through its system, it is a result of the user’s volitional conduct, not ReDigi’s.

Oral arguments for the summary judgment motions are scheduled for October 5th. Although the issue of the first sale doctrine is a novel one, the court has ample opportunity to resolve this case without broaching that issue.