Redigi – World’s First Used Digital Marketplace – Fails “First Sale” at Second Circuit

I first posted on Capitol Records v. Redigi in March 2012 (Redigi Case Poses A Novel Copyright Question on the Resale of Digital Audio Files – Is “Digital First Sale Legal? Link), and posted a number of follow-up articles on this interesting case.¹ Absent an appeal to the Supreme Court this long-running copyright case has finally come to an end with the Second Circuit’s December 12, 2018 decision holding that Redigi infringed the exclusive copyright right of reproduction with respect to the “second-hand” digital music files it sold via the Redigi system.

To understand this case it’s important to appreciate how Redigi’s system works. I explained this in detail in the post linked above, and the Second Circuit opinion describes it quite thoroughly as well. In short, Redigi acts as a broker for music files purchased and downloaded from iTunes. Redigi uploads a seller’s  music file to its own server and offers it for sale, deleting it from the seller’s computer, although the seller can continue to stream the file until it is sold. When a buyer selects it for purchase, it is retitled in the name of the buyer, and the seller loses access to it. The buyer may then stream or download the file to her computer or device.²

Redigi’s service irritated the record companies no end, and they sued for copyright infringement, asserting that Redigi was engaging in copyright infringement. Redigi, relying on the “first sale” doctrine, argued it did not.

The copyright first sale doctrine is an important exception to the copyright exclusive right of “distribution.” It allows the owner of a copyrighted work to sell the copy or phonorecord in which the work is fixed. This explains the existence of markets for second-hand books, records and CDs.³

Redigi argued that its service fell within the protection of first sale. The record companies argued that this analogy was inapt, since Redigi was not distributing the original file, but reproducing it on its server and on the buyer’s computer.⁴

The federal district court ruled in favor of the record companies (decision here⁵ and the Second Circuit (in an opinion written by Judge Pierre Leval, the Second Circuit’s prolific and influential copyright judge) agreed, reasoning as follows:

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 and then, at the new purchaser’s option, 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 . . . The fixing of the digital file in ReDigi’s server, as well as in the new purchaser’s device, creates a new phonorecord, which is a reproduction . . . ReDigi’s server and the resale purchaser’s device on which the digital music files are fixed constitute or contain new phonorecords under the statute. (Emphasis added)

Redigi also argued (half-heartedly, it seems) that its system was protected by fair use, but this was an obvious loser. First, Redigi cannot show that it’s system is transformative. Second, Redigi makes identical copies of the whole copyrighted sound recording, which cuts against fair use. Third, the reproductions created by Redigi are sold in competition with the market for the original sound recordings, another negative factor.⁶ Each of these factors weighed against fair use, and Redigi lost on its fair use defense as well.

The bottom line: Redigi is enjoined from operating its service, and the company and its founders⁷ are on the hook for $3.5 million.

In an interesting postscript to this case, Redigi has developed a new methodology (“Redigi 2.0”) which allows a user to place a music file in the Redigi cloud server in the first place (it’s never downloaded to the user’s computer) and then simply transfer ownership to that file. Under this system Redigi never makes a copy (or enables users to make a copy), so it may not infringe the reproduction right. However, as part of a stipulated injunction in the district court Redigi agreed not to implement Redigi 2.0, and therefore its unclear whether the legality of this system will ever be tested in the courts.

Here’s my non-exhaustive take on how digital music files are treated under copyright law post-Redigi:

• You purchase a CD that contains a digital music file authorized for sale by the copyright owner. You may sell it under first sale.⁸
• You legally download a copyrighted music file to your computer and you transfer it to your smart phone for your personal use. This form of “space-shifting” is permitted based on fair use. Capital Record’s lawyer conceded this during oral argument before the district court in Redigi, and the Second Circuit commented on it favorably (in dicta) in its decision.⁹ It’s worth noting that the record companies have never sued a consumer for space-shifting legally acquired music files for personal use.
• You legally download a music file to your computer and then upload it to a cloud service so you can stream it on your smart phone or speaker (e.g., an Amazon Echo). This is permitted based on fair use.
• You purchase a device preloaded with music files authorized by the copyright owner. You can sell the device based on first sale, since this is a distribution, not a reproduction.
• You download music files to your computer and sell your computer with your files on it. This is protected by first sale.
• You download copyright-protected music files to your computer, transfer them to a thumb drive and delete them from your computer (i.e. “copy and delete”). You then sell the thumb drive. This is not protected by either first sale or fair use – based on Redigi this is an illegal reproduction.¹⁰
• You legally download a music file to your computer, upload it to a cloud service, and then give your password to 25 of your closest friends or college dorm-mates so they can stream it. This is a violation of the copyright rights of reproduction, distribution and public performance. You lose.

Capitol Records LLC v. Redigi, Inc. (2nd Cir. Dec. 12, 2018)

Update: the Supreme Court denied review of this case, leaving the Second Circuit’s decision as the final word.

Footnotes:

1. For example: Federal Judge Tells Redigi to Shut It Down. Search the blog for others.
2. While this case was pending Redigi was granted a patent on this system. 8,627,500
3. The first sale doctrine is codified in 17 U.S. Code § 109(a)(“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”).
4. The case involved an extraordinary amount of technical mumbo jumbo and attempts at analogies to make the technology comprehensible to the judges. Some of this is summarized in the Second Circuit’s opinion and in my 2013 post – Copyright, Redigi and the Star Trek Transporter.
5. See my discussion here – Federal Judge Tells Redigi to Shut It Down.
6. On this factor the court stated that “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 direct competition in the rights holders’ legitimate market, offering consumers a substitute for purchasing from the rights holders.”
7. See my post on founder liability in this case – Capitol Records Bares Knuckles in Redigi Suit, Goes After Founders.
8. These examples assume there is no license agreement that precludes resale
9. “To the extent a reproduction was made solely for cloud storage of the user’s music on ReDigi’s server, and not to facilitate resale, the reproduction would likely be fair use just as the copying at issue in Sony was fair use.”
10. In Redigi the court stated that “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.” I think the Second Circuit was a bit sloppy here, and I take this to mean that one could download music files directly to a thumb drive and then sell the thumb drive, not that a person could download to a computer, transfer to a thumb drive and then sell it. Confusing stuff, no?