Redigi Case Poses A Novel Copyright Question on the Resale of Digital Audio Files – Is “Digital First Sale” Legal?

by Lee Gesmer on March 16, 2012

You know all those used music stores you used to love to go to back in the day when you bought music on CDs?  You could browse through used CDs and buy them for less than retail.  Maybe you still do (kudos to Deja Vu Records in Natick, Mass.).  Of course, you can do the same thing online.

The founders of Massachsetts-based Redigi figured, why can’t we create a marketplace that will allow people to do the same thing with their digital music files?  Or, as Redigi puts it: ” Sell your old songs legally – The world’s first used digital music marketplace – Buy used music insanely cheap”.  However, in starting this business Redigi may have run smack into the disconnect between the U.S. copyright statute and digital media.  And, it has been forced to defend against a full-on assault by the RIAA  (in the form of its apparent designee, Capitol Records).

Redigi’s service launched in October 2011, and by reason of the sheer chutzpah of its business model the copyright industry (the usual ragtag collection of lawyers, industry types, bloggers, reporters and hangers-on) was soon debating the legality or illegality of its service. By early November Redigi was holding a “roll over and die” letter from the RIAA. By early January 2012 Capitol had filed suit against Redigi in the Southern District of New York.

Issue was joined quickly when Capitol filed a motion for preliminary injunction seeking, in effect, to shut Redigi down and end the case with a single, crushing legal blow.  The district court denied the motion, so Redigi remains alive for now.  However, the case is on a fast track – Capitol and Redigi have waived a jury trial, and the parties will be filing summary judgment motions this summer.  The case is likely to be resolved before the end of the year, at least in the trial court.

At the heart of the Redigi case is what seems to be a question of first impression under copyright law: does the the copyright “first sale” doctrine apply to the transmission of digital audio files?  The first sale doctrine says, in essence, if you have purchased and own a work protected by copyright law, you can resell it.*  If this were not the case it would be illegal for the owners of books, records, cassette tapes, CDs and DVDs to resell them.  Stephen King cannot complain, under copyright law, if a copy of  11/22/63 is legally purchased and then sold and resold 50 times, depriving King and his publisher of what might have been the revenue from 50 separate sales.

*But not if you’ve “licensed” it, and the license prohibits resale.  That is a whole other topic. And, it is likely the reason Redigi limits itself to music that originated with iTunes.  The same practice using music files from Amazon might not be permissible, since Amazon does purport to “license” its downloads, and the license prohibits transfers

However, its not clear that the first sale doctrine applies to digital recordings.  Capitol records argues it does not, at least in the form sold by Redigi, and the motivation behind its position, at least in part, is no secret – since you can replicate a digital audio file without limit, and every copy is identical to the original (no degradation in quality), what’s to stop someone from selling a copy and keeping the original?  If you are the prospective purchaser of the 30th resale of a Stephen King novel, you may hesitate – what shape is the book in? What’s that dark smudge on page 200?  Whose phone number is written in the margin of page 2?  If you’re buying a used CD you have to ask whether it’s scratched.

In the world of digital files, these concerns don’t exist – the distinction between an “original” and a “copy” is non-existent.  If you can purchase a legal “used” copy of Thunder Road for 79 cents through Redigi (yes, that tune is for sale (resale?) on Redigi), why pay $1.29 for it on iTunes?  And, of course, the RIAA executives are asking themselves, what’s to stop people from uploaded and selling tens of thousands of audio files on Redigi while keeping a “copy” that is the same, in all respects, on another device?  Looking beyond Redigi, who knows what Pandora’s box of illegal copying may be opened if first sale permits the resale of digital recordings?  Better to stop the leak before it becomes a flood.  Or so the RIAA may be thinking.

Redigi claims to have an answer to the music industry’s objections to its service, and it is quite clever.  Redigi advertises that it “has the technologies in place to ensure that once you sell a song, you no longer have access to it.  This is how ReDigi stays legit, and how you now have access to a new marketplace where rights long accepted in the physical world may now be applied to digital goods.”  More specifically, Redigi claims that its technology (1) verifies a potential seller owns a non-infringing copy, and  (2) ensures that any items sold will not remain on their computer or synced devices, such as an iPod or iPhone. Of course, this assumes a certain level of naiveté – if the seller is motivated and clever enough to move a “copy” of the file to an unsynced device, the owner of the file can have the file and sell it too.  Two computers will do the trick.  However, the fact that a user may go to this extreme to game the system seems irrelevant (legally) – Redigi is not encouraging it, and the fact that a legal product may be put to an illegal use is hardly the legal responsibility of the product’s manufacturer, as long as the illegal use is not encouraged.

Digging more deeply, it is clear that Redigi has put together an ingenious system.  As I understand it from the various court filings (mea culpa), Redigi operates as follows:

Step One: the user establishes a Redigi account and uploads a music file to the Redigi “music locker.”  The user, and only the user, can stream the track on her computer.  This act is legal under copyright law, since this kind of “space shifting,” as its called, is protected as “fair use.”  Thus far, Redigi asserts, it’s in the clear.  Moreover, in this process Redigi verifies that the file was purchased from iTunes and it is legal – that is, it was not ripped from a cd or is itself a copy.  Redigi digitally fingerprints the file, so that multiple copies of the file cannot be sold on Redigi.  And, importantly, Redigi deletes the copy on the user’s computer and synced devices, such as an iPod.  Thus, at this point the file exists only on the Redigi servers, the “Redigi cloud.”  If the user wants to listen to it, they must do so by streaming from the cloud.

Step Two: At some point the user tags the track as “for sale,” and potential buyers are able to see that the track is for sale.  If someone decides to purchase the track, it is re-designated in Redigi’s system as belonging to the new owner.   Redigi does not create a new copy of the file, it simply transfers “title” to the file on its system.

Step Three: The new owner can leave her new audio file on the Redigi server (the cloud locker) and stream it for her listening pleasure.  If the new owner decides to download it to her computer, it is deleted from Redigi.  A download by the new user is legal, since moving a file between the cloud and the owner’s computer is permissible.

This fiendishly clever invention has some serious brainpower behind it (Larry Rudolph, who has a PhD in computer science and has worked at MIT, Carnegie-Mellon and Hebrew University), and a patent pending.

How does Capitol respond?  Poppycock, claims Capitol Records in its lawsuit.  To quote a Capitol court filing, “rather than acknowledge what its service really does, Redigi recasts itself as a benign ‘cloud storage’ medium.  It dissects its service into isolated components, where users upload and download songs to ‘space shift’ for ‘personal, non-commercial’ use, and ‘pointers’ are ‘modified in the cloud’ so that no copying occurs during a resale transaction.”  In truth, Capitol argues, Redigi is an illegal “marketplace,” and Redigi is falsely trying to recast itself as a “cloud service.”

On another level, apart from name calling, hyperbole and accusations aimed at Redigi’s “true” purpose (all standard stuff when it comes to lawyering, I’m sorry to say), the case is being debated in highly technical terms – technical in both the “computer sense” and the “copyright sense.”  Capitol has raised a multitude of claims, and Redigi as many defenses, but after you filter out the arguments that appear to be weak or red herrings, the central issue appears to be whether the resales facilitated by Redigi are protected by the first sale doctrine.  The law does not, Capitol argues, permit the resale of a digital file unless a material object changes hands, and Capitol assumes that electrons are not material objects.

Capital argues that the first sale doctrine permits owners of a “particular copy” (a “material object”)  in which a copyrighted work is “fixed,” to “dispose of the possession of that copy.” However, the first sale doctrine does not apply to digital transmissions, which by their very nature do not involve the physical transfer of a material object, or so Capitol claims. If a digital resale can only be accomplished by reproduction of the original file and creation of a new copy, first sale does not apply.  Simply put, you don’t have the right to copy a copyrighted work in order to distribute or sell it to someone else, even if you destroy the original.  When a Redigi buyer purchases an audio file from Redigi, she is purchasing a “copy” of the purchasers file.  The only way this would not be true is if the purchase involved the physical object holding the file.  That, after all, is what a CD is – a disk holding digital files.  The first sale doctrine protects this kind of sale, whether the object being sold is on a vinyl disk, cassette tape, CD or DVD.  It would even allow someone to sell their iPod, loaded with iTunes songs.  But it doesn’t allow a digital transmission of a file, even if the original is simultaneously destroyed.

Many of these issues came to a head for the first time (but hopefully not the last) in early February, when U.S. District Court Judge Richard J. Sullivan heard Capitol’s motion for a preliminary injunction in federal court in New York.  Before the hearing Google requested leave to intervene in the case, noting the “complex and profound legal issues” raised by the case.  Judge Sullivan denied that motion.  However, Google made many of its point in its request letter, and Judge Sullivan undoubtedly got the message that in the small world of digital copyright law, this case is a big deal.

The outcome of the hearing was both good and bad for Redigi: the judge denied the injunction (which would have shut Redigi down while the case proceeded, and likely have ended Redigi’s existence altogether).  However, he did this on the relatively narrow, non-copyright-specific, ground that Capitol would not suffer “irreparable harm” without an injunction – that is, that Capitol could recover money damages if it ultimately won the case, and therefore any injunction should await final judgment in the case.  For Redigi, this was good.  However, according to the transcript of the hearing the judge also made comments suggesting he thought Capitol had the better case: ” I think likelihood of success on the merits is something that plaintiffs have demonstrated.”  This was bad.

The transcript (link below) makes interesting reading.  The judge appeared to be prepared, and he peppered the lawyers on both sides with hypothetical questions that the lawyers sometimes had difficulty addressing. For example, Capitol’s lawyer conceded that Capitol was not challenging the right to store a legally purchased digital recording in the cloud, if the purpose is not resale of the recording.  In a humorous exchange Capitol also allowed that it would have no objection to the Judge selling his iPod, loaded with recordings, to his law clerk.  “That’s fine, because you transferred the material object.”*

* Tough question since it’s hard to disagree with a hypothetical that restricts the  judge and his clerk’s freedom of action.  The Capitol lawyer didn’t point out that if the original copies of these songs remained on the Judge’s computer (as is typically the case with iTunes music files), this would be an illegal transfer.  

However, based on a reading of the briefs and the transcript, it’s not clear that the judge really had a nuanced understanding of how Redigi works, or how copyright law might apply to Redigi’s system. Nothing in the transcript suggests that the judge understood that each “step” in the Redigi process was permitted, and therefore the system as a whole may be permissible.  Most judges and lawyers are not strong on computer technologies, and the hearing seemed to suffer from this shortcoming all around.  The judge even seemed to think it was relevant that Redigi could be misused (by the “second computer” trick, mentioned above). However, if Redigi doesn’t encourage misuse of the system, it can’t be blamed for the hypothetical misuse of it, so this should be irrelevant.

The case is now scheduled for summary judgment motions to be filed in mid-July, with oral argument to follow on August 17th.  A decision on these motions is likely to arrive sometime this Fall, and almost certainly by year end.  Hopefully, the outcome won’t turn on whether an electron is a “material object.”  And, one hopes that should the outcome be adverse to Redigi, it will have the resources to pursue an appeal to the Second Circuit Court of Appeals, which might be more receptive to the the “complex and profound” issues that lie at the heart of this case.*

Redigi Oral Argument Transcript (scribd)

Redigi Bench Ruling on Preliminary Injunction (scribd)

*Rick Sanders, at Aaron Sanders in Nashville, has written about this case at length (and in real time, as information on Redigi has been disclosed and the lawsuit has evolved) in a series of blog posts that are required reading for those seeking deeper understanding.  Click on “Redigi” under “Popular Tags” on Aaron Sanders site.

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