As anticipated, the Second Circuit ruled in Capitol Records v. Redigi Inc. (Dec. 12, 2018) that Redigi’s digital music resale system made unauthorized copies of copyrighted works when it transferred digital music files from customers’ computers to Redigi’s servers, even with its technology that simultaneously deleted the originals. Redigi had argued that its system used a process that effectively only moved the file from one place to another without making a duplication, but the appeals court didn’t buy it, just as the District Court was unpersuaded. The Second Circuit also agreed with the District Court that the reproductions did not constitute a fair use primarily because they were not transformative and might serve as competing substitutes in the marketplace for the copyrighted works.
Interestingly, the Second Circuit was not moved by the argument that digital purchasers might consequently have to sell their computers to effectuate first sale rights. To this end, it ambiguously stated, “A secondary market can readily be imagined for first purchasers who cost-effectively place 50 or 100 (or more) songs on an inexpensive device such as a thumb drive and sell it.” One can only hope that the court does not mean that a digital purchaser could transfer songs from the computer to a thumb drive for sale, while presumably deleting the original copyrighted content. This, of course, would require fundamentally the same steps as the court was condemning when performed over Redigi’s system. The statement, however, is confusing because the court references a source indicating that the first sale doctrine “permits the sale of an iPod that contains lawfully made digital music files.” Although I don’t believe it has ever been directly litigated, it is arguable that transferring songs to an iPod or other digital media player is lawful as a fair use when undertaken for personal use, such as facilitating listening in different locations. But I am quite confident that fair use would not extend to the sale of the iPod if the music were still on it.
Presumably, therefore, the court must have meant by its statement that an individual could originally download recordings onto a thumb drive when it anticipates it someday may want to sell them. This, of course, probably would pass legal muster under the first sale doctrine, but practically speaking, is it reasonable to expect digital music purchasers to know prior to download what playlists of songs they should store to thumb drives for the purpose of future sales? Also, can we really expect individuals in today’s Internet-connected world to use thumb drives to transact their music exchanges? Thus, unless I am wrong about this, it sounds as if the court dismissed a serious policy concern with a somewhat specious and superficial argument.
Having said this, the court did reach the correct solution in my opinion. In doing so, it determined that Congress clearly intended with its statutory language to restrict the application of the first sale doctrine only to distributions. According to the court, the concept of first sale does not extend to unpermitted reproductions, even if they provide economically efficient ways for owners of digital files to transfer their property to others, or are needed to put purchasers of digital files on the same footing as buyers of physical works. The Second Circuit thus concluded, as I previously surmised, that those who seek greater opportunities to facilitate digital resales must convince Congress to make the changes that they desire.
Unless Congress responds by amending the Copyright Act, Internet-based systems that rely on reproductions to effectuate sales of digital works will likely remain illegal. This does not mean that all is lost for those seeking change. Rather, as the court suggests, they will have to find different technological methods to accomplish their goals. For instance, just after Capitol Records filed its complaint in this litigation, ReDigi launched a new service, called ReDigi 2.0. With ReDigi 2.0, customers would originally download iTunes music files directly from Apple onto a specific physical location on ReDigi’s server, from which they could then stream their music or download it for personal use on their own media devices. When a customer chose to sell a digital file, ReDigi would retain the file in the same server space and simply assign “title” to the new owner. Thus, there would be no duplication of files, and the content would be transferred along with the original physical media.
For now, we don’t know the legal status of such a system because it was introduced too late for it to be reviewed in this litigation, and ReDigi is now enjoined from reestablishing it. However, others could do so and in theory, it does appear that the framework might satisfy the contours of the first sale doctrine. Nonetheless, such a service could run afoul of other copyright privileges, such as public performance rights – for instance, by streaming content from the same file to several unrelated individuals. Thus, despite the Second Circuit’s ruling and the demise of Redigi, the legal debates regarding digital resale are sure to continue.