First Sale Doctrine Provides No Defense to Copyright Infringement Claim Based on Selling "Used" Digital Music Recordings

Authored by D. Brian Kacedon, Daniel F. Klodowski, and John C. Paul

In Capitol Records, LLC v. ReDigi, Inc.,¹ a New York district court assessed whether "used" digital music recordings could be sold in an online marketplace without infringing the copyrights for those files and determined that the first sale doctrine, a defense to copyright infringement that has allowed brick-and-mortar stores to sell preowned music recordings, is not a defense to copyright infringement that occurs during the online resale of music.

Background

ReDigi runs an online marketplace for preowned digital music. Through its cloud-based service, ReDigi lets users buy, sell, and store digital music. To sell music on ReDigi's website, a user must first download ReDigi's Media Manager software, which handles the process of uploading the user's music to its server. That uploaded music can then be accessed by other users. In an attempt to confirm that the files its users upload were lawfully acquired and paid for, ReDigi permits users to upload only iTunes-purchased files.

Capitol Records holds copyrights for an extensive library of digitally recorded music, including music sold on ReDigi's website, and, as a result, sued ReDigi for copyright infringement. Relevant here, Capitol claimed that ReDigi's Media Manager software infringed Capitol's reproduction and distribution rights in music uploaded to ReDigi's server. A copyright owner has the exclusive rights to reproduce the copyrighted work and to distribute copies of it. Unauthorized duplication infringes the reproduction right, whereas unauthorized distribution infringes the distribution right. Capitol argued that a copy of the music is necessarily made when transferring the file from the user's computer to the server, thereby infringing its reproduction right. ReDigi, on the other hand, claimed that the Media Manager deleted the file from the user's computer after the file was uploaded to ReDigi's server. Thus, according to ReDigi, the uploading process transferred the music files, rather than duplicated them.

Online File Transfers Infringe Reproduction and Distribution Rights

The court first discussed whether ReDigi's service infringed Capitol's reproduction right and concluded that the unauthorized transfer of a file over the Internet—even where, as here, only one file exists before the transfer and only one file exists after the transfer—constitutes reproduction within the meaning of the Copyright Act. Because a music file is deleted at the source of the transmission and re-created at the destination, the court reasoned, a physical transfer of the work never takes place. And the court interpreted "reproduction" to cover the creation of a new material object, such as the file recording on a hard drive at the transfer destination, rather than requiring outright duplication. As a result, the court found Capitol's reproduction right infringed.

On the question of infringement of Capitol's distribution right, the court found that without a valid affirmative defense, ReDigi clearly infringed because its service necessarily involved the distribution of copyrighted works. ReDigi offered two affirmative defenses: fair use under section 107 of the Copyright Act and first sale under section 109.

The court rejected the fair use argument, concluding that all four fair use factors weighed in favor of Capitol. These factors include the purpose and character of the allegedly infringing use, the nature of the allegedly infringed work, the amount and substantiality of the portion of the allegedly infringing work used, and the effect of the use on the market for the allegedly infringed work. Here, the court found all four factors favored Capitol, highlighting the commercial and competitive nature of ReDigi's use of the copyrighted works. 

First Sale Doctrine Does Not Protect File Transfers

The court then discussed whether the first sale doctrine could absolve ReDigi of liability for infringing Capitol's distribution right. The first sale doctrine, codified at 17 U.S.C. § 109(a), permits the owner of a lawfully made "copy or phonorecord" to sell or dispose of that copy without the copyright holder's permission. According to the district court, the first sale doctrine permits further distribution only of a particular physical good after a first authorized sale. As it explained in its analysis of the reproduction right, the court found that a digital music file uploaded through ReDigi is re-created at its destination and deleted at its source—making a new item rather than transferring the original item. Thus, the court reasoned, it is impossible for a user to sell a particular phonorecord through ReDigi because that particular phonorecord exists only on the user's hard drive; it is a new phonorecord that is created on ReDigi's server. The court therefore found the first sale defense inapplicable.

The district court also cited to a report by the United States Copyright Office on the Digital Millennium Copyright Act in which the Copyright Office expressly rejected extending the first sale doctrine to cover the distribution of digital works. The Copyright Office recognized that physical items (such as used books and CDs) degrade over time, becoming less desirable than a new copy. Digital files, on the other hand, are indistinguishable from the original even in a "used" form. Because used digital files would directly compete with new items for sale, the Copyright Office recommended the first sale doctrine should not extend to digital files. The district court agreed.

Strategy and Conclusion

This decision bears on what can legally be done to extract value from used digital music recordings because it found that digitally transmitting copyrighted music necessarily involves copying and infringes the rights of distribution and reproduction even after an authorized initial sale.

Consumers recognize that there is value in digital music recordings that have been legally purchased, and businesses are interested in creating a model to extract that value by transferring the recordings from the original owner to a new owner. However, this decision may prevent that value from being extracted by transferring the recording by simply digitally transmitting the recording. As a result, businesses who want to extract value from digital music recordings may need to find a different way to transfer the recordings or make them accessible to a new owner.

Endnotes
¹The ReDigi opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/Capitol_Records_v_ReDigi.pdf.

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