IP Law Daily Online marketplace for ‘pre-owned’ digital music files infringed exclusive reproduction right
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Friday, December 14, 2018

Online marketplace for ‘pre-owned’ digital music files infringed exclusive reproduction right

By Thomas Long, J.D.

The resale of copyrighted digital sound recordings through a web-based "virtual" marketplace for "pre-owned" digital music operated by ReDigi Inc. was not protected from copyright infringement claims by the first sale doctrine codified in Section 109 of the Copyright Act, the U.S. Court of Appeals in New York City has held. The Second Circuit affirmed a district court’s ruling on summary judgment that ReDigi infringed copyrights owned by Capitol Records, LLC, Capitol Christian Music Group, Inc., and Virgin Records IR Holdings, Inc., specifically their exclusive rights under Section 106(1) to reproduce their copyrighted works. ReDigi’s service created copies—"phonorecords"—that infringed the copyright owners’ exclusive reproduction rights. The service was not protected by a fair use defense because ReDigi did not transform the digital music files in any way, it copied the entire works, and it competed directly with the rights owners in the market for sale of the works (Capitol Records, LLC v. ReDigi Inc., December 12, 2018, Leval, P.).

ReDigi’s music resale service. ReDigi’s website functioned somewhat like a used record store, in that users were invited to sell their legally acquired digital music files and to buy used digital music from others. Unlike used record stores, ReDigi’s sales took place entirely in the digital world.

To sell music, users downloaded ReDigi’s "Media Manager" software, which analyzed the user’s computer and made a list of digital music files eligible for sale. A file was considered eligible only if it had been purchased on iTunes or from another ReDigi user. The Media Manager software also continuously monitored the user’s computer to ensure that the user did not retain music that had been sold or uploaded for sale, although it could not detect whether the file was stored on another device. If a copy was detected, Media Manager instructed the user to delete the file. The file was not deleted automatically, although ReDigi had a policy of suspending users who refused to comply.

Users then could upload eligible files to ReDigi’s "Cloud Locker," which was a remote server that stored uploaded files. Once a file was uploaded, it went through another verification process to determine that it had not been tampered with or offered for sale by another user. The user was given the option of simply storing the file and streaming it for personal use or offering it for sale in ReDigi’s marketplace. Upon sale, the original user’s access to the file was terminated.

Users bought files with credits they either purchased from ReDigi or acquired by selling music files. ReDigi credits could not be exchanged for money and could only be used to buy additional music. ReDigi priced digital music files at 59 to 79 cents each. When a user purchased a file with credits, 20% of the sale price was allocated to the seller, 20% went to an "escrow" fund for the artist, and 60% was retained by ReDigi.

Lower court decision. The plaintiffs, who owned a number of the recordings sold on ReDigi’s website, filed suit against ReDigi, alleging direct and secondary copyright infringement. The district court decided that Capitol was entitled to partial summary judgment, holding that the digital music files at issue could not be legally resold by their owners through ReDigi under the first sale doctrine. On June 6, 2016, the district court entered a stipulated final judgment awarding damages to the plaintiffs in the amount of $3.5 million permanently enjoining ReDigi Inc. and its principals from operating the service. ReDigi appealed.

First sale doctrine. The primary issue on appeal is whether ReDigi’s system lawfully enabled resales of its users’ digital files. The court noted that that the first sale defense codified in Section 109 was limited to assertions of the copyright owner’s distribution right of Section 106(3), not the reproduction right of Section 106(1). Section 109(a) provides:

Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

"Under this provision, it is well established that the lawful purchaser of a copy of a book is free to resell, lend, give, or otherwise transfer that copy without violating the copyright holder’s exclusive right of distribution," the court explained. "The copy so resold or re-transferred may be re-transferred again and again without violating the exclusive distribution right."

A person who owns a digital file purchased from iTunes that contains music that is fixed in a material object qualifies as "the owner of a particular … phonorecord lawfully made," and therefore can sell the phonorecord without violating Section 106(3). However, this conduct would not be protected by the first sale doctrine from reproduction claims arising under Section 106(1).

ReDigi argued on appeal that its system effectuated transfer of the particular digital file that the user lawfully purchased from iTunes, and therefore it should not be deemed to have reproduced that file. According to ReDigi, the digital files should be considered "material objects" that fit Section 101’s definition of "phonorecords" that would be eligible for the protection of Section 109(a). ReDigi also argued that from a technical standpoint, its process did not make a reproduction of the digital files but instead "transfers" the data comprising the files from one location to another. The system purportedly caused data packets to be removed from the seller’s computer as the packets were copied into the buffer and transferred to ReDigi’s server, so that the complete file never existed in full in two places at the same time.

The Second Circuit did not decide ReDigi’s first argument because it determined that even if the digital file transferred was a phonorecord, ReDigi effectuated an unlawful reproduction of the file, and not merely a distribution of it.

As for ReDigi’s second argument, the court rejected it because the Copyright Act defined phonorecords as "material objects in which sounds … are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device." When a purchaser of a digital music file from iTunes possesses that file, embodied "for a period of more than transitory duration" in a computer or other physical storage device, that device becomes a phonorecord. In the course of transferring a digital music file from an original purchaser’s computer, through ReDigi, to a new purchaser, the digital file is first received and stored on ReDigi’s server. Then, at the new purchaser’s option, the file may also be subsequently received and stored on the new purchaser’s device. At each of these steps, the digital file is fixed in a new material object "for a period of more than transitory duration." The fixing of the digital file in ReDigi’s server and in the new purchaser’s device, created a new phonorecord, which is a reproduction implicating Section 106(1), the court said. Even if ReDigi was correct in asserting that its system deleted packets of data on the original owner’s storage device, the system was still involved in the making of new phonorecords. The court rejected ReDigi’s contention that its system ensured that the original owner’s preexisting copies were destroyed; in the court’s view, the system did not ensure against retention of duplicate phonorecords created by the original owner. And even if these deletions were in fact made, the system still made unauthorized reproductions in violation of Section 106(1). These reproductions infringed copyright unless they were protected by fair use.

Fair use. Applying the four-factor test for fair use in Section 107 of the Copyright Act, the Second Circuit concluded that ReDigi did not engage in fair use. With respect to the purpose and character of the infringing use, the court noted that ReDigi made no change in the copyrighted work. In addition, ReDigi acted with a commercial motivation. ReDigi also copied the entire works at issue, which weighed against a fair use finding. Most important, the negative effect on the potential market for the copyrighted works weighed "powerfully" against ReDigi, the court said. ReDigi made reproductions of the plaintiffs’ works for the purpose of resale in competition with the Plaintiffs’ market for the sale of their sound recordings. "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," the court said. "We find no fair use justification."

Accordingly, the district court’s grant of summary judgment in favor of the plaintiffs was affirmed.

This case is No. 16-2321.

Attorneys: Jonathan Z. King (Cowan, Liebowitz & Latman, PC) for Capitol Records, LLC, Capitol Christian Music Group, Inc. and Virgin Records IR Holdings, Inc. C. Dennis Loomi (Baker & Hostetler LLP) for ReDigi Inc.

Companies: Capitol Records, LLC; Capitol Christian Music Group, Inc.; Virgin Records IR Holdings, Inc.; ReDigi Inc.

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