The Court of Appeals for the Second Circuit recently issued a decision in Capitol Records, LLC v. ReDigi Inc. affirming a previous finding out of the Southern District of New York that ReDigi’s digital music file reselling platform infringed upon the plaintiffs’ copyright to the music files being resold. The Second Circuit panel upheld the lower court’s decision over ReDigi’s arguments that its platform enabled the lawful resale of digital music files under the first sale doctrine.
Capitol Records and the other plaintiffs in this case first brought suit against ReDigi in January 2012 alleging that ReDigi’s platform enabled the unauthorized reproduction and distribution of copyrighted works. The Southern New York court granted partial summary judgment in March 2013 in favor of the plaintiffs’ copyright infringement claims. A stipulated final judgment filed in June 2016 awarded $3.5 million in damages to the plaintiffs and enjoined ReDigi and its owners from operating the music resale platform.
On appeal to the Second Circuit, ReDigi argued that sales of music files on its platform are protected under the first sale doctrine as codified in 17 U.S.C. § 109(a), which gives a party who legally bought a phonorecord or copy from the copyright owner to resell that phonorecord or copy without the authority of the copyright owner. Under this doctrine, a person buying a copy of a book, for example, is free to resell or otherwise distribute that copy without violating the copyright holder’s exclusive right of distribution. The Second Circuit disagreed, believing that many of the arguments made by ReDigi were aimed at explaining why the law should be changed or not apply. “If ReDigi and its champions have persuasive arguments in support of the change of law they advocate, it is Congress they should persuade,” the Second Circuit’s decision by Judge Pierre Leval concluded. “We reject the invitation to substitute our judgment for that of Congress.”
While the district court found that ReDigi’s platform reproduced phonorecord files in a manner that violated that exclusive right of distribution, ReDigi argued on appeal that its platform effectuates the transfer of a particular digital file lawfully purchased from iTunes or another digital music sale platform. ReDigi contended that the digital files should be considered “material objects” and thus “phonorecords” eligible for protection under Section 109(a)’s first sale doctrine. Further, ReDigi argued that from a technical standpoint, the process employed by its digital file transfer system shouldn’t be seen as making a reproduction of transferred files.
Despite ReDigi’s arguments that its process transfers files and doesn’t create reproductions, the Second Circuit found that each transfer of a music file on the ReDigi platform creates new phonorecords. ReDigi’s platform utilizes a music manager which scans music files to ensure that they were lawfully purchased and a data migration system which reproduces the digital music file on ReDigi’s remote server. As a file is being migrated, ReDigi’s software sends a command to the user’s device to delete the file from that device. Once the file is on ReDigi’s remote server, it can be resold to a purchaser who is given exclusive access to that file. The Second Circuit found that this process involved the creation of new phonorecords when files are migrated to ReDigi’s server and then sent to a purchaser’s device. “We are not free to disregard the terms of the statute merely because the entity performing an unauthorized reproduction makes efforts to nullify its consequences by the counterbalancing destruction of the preexisting phonorecords,” Leval explained.
ReDigi cited to the Second Circuit’s 1996 decision in ABKCO Music, Inc. v. Stellar Records, Inc. to argue that a computer hard drive into which a digital file is embedded cannot qualify as a phonorecord because it contains more than a sound record. The Second Circuit found that this argument misconstrued ABKCO, a case regarding compulsory licensing in karaoke which doesn’t support the conclusion that a compact disc storing visual depictions of words along with sound recordings doesn’t contain a phonorecord. ReDigi also argued that the district court’s holding makes no sense as it would require a person lawfully purchasing a music file for $1 to sell their entire computer to lawfully sell that file under the first sale doctrine, but the appellate court found that it could “readily… imagine” a legal secondary market for first purchasers putting 50 to 100 lawfully purchased music files onto a thumb drive which is then sold.
ReDigi also attempted a fair use defense but this was also struck down by the Second Circuit. The appellate court found that multiple fair use factors as laid out in 17 U.S.C. § 107 weighed against a finding of fair use, especially the fourth factor, “the effect of the use upon the potential market for or value of the copyrighted work.” The file replicas resold by ReDigi were sold to consumers whose objective it was to acquire the music copyrighted by the plaintiffs at a lower price than they would have paid to otherwise acquire plaintiffs’ work.
“Even if ReDigi is credited with some faint showing of a transformative purpose, that purpose is overwhelmed by the substantial harm ReDigi inflicts on the value of Plaintiffs’ copyrights through its direct competition in the rights holders’ legitimate market, offering consumers a substitute for purchasing from the rights holders. We find no fair use justification,” Judge Pierre Leval wrote.