Digital Used Music Sales Infringing, Not Protected by First Sale Doctrine

ReDigi Inc. claims that it is “the world’s first and only online marketplace for digital used music.”  (Opinion pdf page 1).  Capitol Records is the copyright owner for numerous songs sold on ReDigi’s website and did not authorize the sales.  Capitol Records sued ReDigi for copyright infringement, alleging direct copyright infringement, inducement of copyright infringement, contributory copyright infringement, vicarious copyright infringement and common law copyright infringement. 

The copyright owner’s exclusive rights under the Copyright Act include the right to make copies, distribute the work and publicly perform the work.  These rights are limited by the first sale doctrine, which allows the lawful owner of a particular copy of the work to sell the work without the permission of the copyright owner.  Last week’s blog post, First Sale Doctrine Not Limited by Geography, Rules U.S. Supreme Court, describes the first sale doctrine in detail.  “The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine.”  (Opinion pdf page 4.)  The district court ruled that it cannot.

Right to Reproduce

The right to reproduce is the right to make copies.  It is an exclusive right belonging to the copyright owner under 17 U.S.C. §106.  If the music file is uploaded to ReDigi’s website by the seller and, at the same time, is deleted from the seller’s computer and connected devices, is a copy made under the Copyright Act?  One file existed before the upload and only one file existed after the upload.  The district court ruled that this sequence of events is a reproduction under the Copyright Act.

Sound recordings are included in the definition of copyrighted works.  Sound recordings are distinguished from their material embodiments, i.e., the material objects in which they are fixed, such as CDs. 

The plain text of the Copyright Act makes clear that reproduction occurs when a copyrighted work is fixed in a new material object.

(Opinion pdf page 5).

Put differently, the reproduction right is the exclusive right to embody, and to prevent others from embodying, the copyrighted work (or sound recording) in a new material object (or phonorecord).

(Opinion pdf page 5).

The district court ruled that the music file is embodied in a new material object when it is uploaded from the seller’s computer to ReDigi’s server.  Therefore, the copyright owner’s exclusive right to reproduce (copy) is infringed.  It was immaterial that the song was deleted from the seller’s computer at the same time it was uploaded to ReDigi’s server.  The creation of a new copy is what matters, not whether the old copy still exists.

Right to Distribute

The right to distribute is another exclusive right of the copyright owner.  The district court ruled that distribution occurs on ReDigi’s website.  ReDigi did not deny it, but argued that the distribution was protected by the fair use and first sale defenses.

Fair Use

Fair use permits the reproduction of a copyrighted work without the copyright owner’s consent “for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research.”  17 U.S.C. §107.  The district court ruled that “ReDigi’s reproduction and distribution of Capitol’s copyrighted works falls well outside the fair use defense.”  (Opinion pdf page 10).  ReDigi argued that uploading to and downloading from its servers for storage and personal use were protected by fair use.  Capitol did not dispute ReDigi’s claim regarding storage and personal use, but argued that such uploading and downloading from ReDigi’s servers incident to a sale are not activities that are protected by fair use.  The district court agreed with Capitol.  In addition, the district court ruled in Capitol’s favor on each of the four fair use statutory factors.

The district court had this to say about the fourth fair use factor, market for or value of the copyrighted work:

The product sold in ReDigi’s secondary market is indistinguishable from that sold in the legitimate primary market save for its lower price. The clear inference is that ReDigi will divert buyers away from that primary market. ReDigi incredibly argues that Capitol is preempted from making a market-based argument because Capitol itself condones downloading of its works on iTunes. Of course, Capitol, as copyright owner, does not forfeit its right to claim copyright infringement merely because it permits certain uses of its works. This argument, too, is therefore unavailing.

(Opinion pdf page 11).

First Sale

The first sale defense is codified in §109(a):

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.

The district court ruled that ReDigi’s service is not protected by the first sale doctrine.  The first sale doctrine is limited to the right of distribution.  Specifically, it is not a defense to unlawful copying.  The first sale doctrine cannot protect ReDigi’s infringing copying.

The first sale doctrine also does not protect ReDigi’s distribution activities.  The first sale doctrine protects only distribution of copies “lawfully made under this title.”  Since the copies made by ReDigi were not lawfully made, distribution of those copies is not protected by the first sale doctrine.  The first sale doctrine also protects only distribution by the owner of that particular copy.  ReDigi users produced new copies by uploading and therefore did not sell the particular copies that they owned.  The first sale defense is limited to material objects.  Material objects degrade with time and use, but digital files do not. 

Liability

The district court ruled that ReDigi was both directly and secondarily liable for infringing Capitol’s copyrights. 

To be liable for direct infringement, a defendant must have engaged in some volitional conduct sufficient to show that it actively violated one of the plaintiff’s exclusive rights.

(Opinion pdf page 13).

Something more than ownership of the machine used to make infringing copies is required.  The district court ruled that ReDigi was liable for direct infringement because it created a service in which only copyrighted works could be sold.  ReDigi’s service is available only to users who purchased the songs from iTunes or from another ReDigi user. 

The fact that ReDigi’s founders programmed their software to choose copyrighted content satisfies the volitional conduct requirement and renders ReDigi’s case indistinguishable from those where human review of content gave rise to direct liability.

(Opinion pdf page 14).

ReDigi is more than a passive service provider.  It provides the infrastructure for infringing sales and affirmatively acts to connect users with potential sellers.  The district court found that ReDigi played a fundamental and deliberate role that transformed its conduct into active participation in the infringement process. 

The district court ruled that ReDigi was liable for contributory infringement and vicarious infringement, both of which are forms of secondary liability. 

Contributory infringement occurs where one with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.

(Opinion pdf page 15).

The district court ruled that ReDigi knew or should have known that its service would encourage infringement.  Among other things, ReDigi warned its investors that it might not prevail on copyright claims against it, received cease and desist letters that its website violated other’s copyrights, built its business model on offering a website on which copyrighted content could be sold and researched copyright law before launching its service.  It could not have objectively been unaware of its users’ infringing activities.  ReDigi’s service was also not capable of any substantial non-infringing use.

Vicarious liability for copyright infringement exists where the defendant has the right and ability to supervise the infringing activity and also has a direct financial interest in such activities.

(Opinion pdf page 16).

Knowledge is not an element in proving vicarious liability. 

Clearly, ReDigi vicariously infringed Capitol’s copyrights. As discussed, ReDigi exercised complete control over its website’s content, user access, and sales. Indeed, ReDigi admits that it is intimately involved in supervising the steps involved in making the music available for sale and selling it on the website.

(Opinion pdf page 17). 

In its conclusion, the district court declared that

the Court cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step.

(Opinion pdf page 17).

This case is Capitol Records, LLC v. ReDigi Inc., No. 12 Civ. 95 (RJS), United States District Court, Southern District of New York.

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