December 21, 2018
On December 12, in Capitol Records, LLC et al. v. ReDigi Inc., the U.S. Court of Appeals for the Second Circuit held that the first sale doctrine in copyright law did not permit resale of lawfully purchased digital music files.
Sections 106(1) and (3) of the Copyright Act, respectively, grant the owner of a copyright the exclusive right to control the reproduction and the distribution of the copyrighted works. Additionally, the first sale doctrine, which is codified in section 109(a) of the Act, provides that the rights holder’s control over the distribution of any particular copy or phonorecord that was lawfully made is terminated when that work is distributed to its first recipient. Put another way, a copyright holder who sells a copyrighted work embodied in physical form, such as a book or music recording, generally cannot use copyright law to prohibit the purchaser from reselling the particular physical copy of the work.
ReDigi styles itself as a company that provides a marketplace for the lawful resale of legally purchased digital music files. A number of music publishers sued ReDigi, alleging that ReDigi infringed their copyrights by allowing unauthorized reproduction and distribution of their copyrighted works and by inducing infringement by its customers. The district court granted partial summary judgment in favor of the publishers, holding that the defendants had, in fact, created duplicate files that were distinct from the original digital copies of the works and therefore had committed copyright infringement. The court held that ReDigi’s method of transferring the digital files violated the publishers’ exclusive control of reproduction under section 106(1) and that as unlawful reproductions, the digital files were not subject to the resale right established by section 109(a). The court awarded substantial damages and an injunction, and ReDigi appealed.
On appeal, ReDigi argued that its system only transfers a particular digital file that had been lawfully purchased. As such, ReDigi argued, each digital file processed by its system is transferred in the same way as would be a physical item such as a compact disc or record. Accordingly, ReDigi asserted, the transfer should not be categorized as reproduction but instead should be treated as a permitted resale. ReDigi specifically argued that the digital files should be considered “material objects” that qualify as “phonorecords,” according to the definition outlined in 17 U.S.C. § 101, which are thus afforded the protection of section 109(a). ReDigi also argued that its particular technological transfer mechanism did not, in fact, result in a reproduction.
The Second Circuit dismissed ReDigi’s first argument, finding that copying the digital files involved an unlawful reproduction, regardless of whether they did or did not qualify as phonorecords. The court then evaluated ReDigi’s second assertion against section 101, which provides that when a purchaser of a digital music file possesses that work embodied “for a period of more than transitory duration” in a computer or other physical storage device, that device becomes a phonorecord. Analyzing ReDigi’s process of transferring a digital music file, the court concluded that at each step in ReDigi’s process the digital file is fixed in ReDigi’s server “for a period of more than transitory duration.” Therefore, the court held, ReDigi’s process created a new phonorecord, which is a reproduction.
ReDigi advanced several additional arguments in support of its theory that it was merely transferring a particular copy of the digital files as opposed to making reproductions. ReDigi first argued that in its process, equivalent “packets” of data are deleted from the old phonorecord as each one is copied into the new phonorecord, such that no new phonorecord was created. The court rejected this argument, concluding that the receipt and storage of the file in ReDigi’s server and in the new purchaser’s device still involve the making of new phonorecords irrespective of when or how individual packets were created or deleted.
Next ReDigi claimed that the transferred file is not embodied “for a period of more than transitory duration” because it resides in a buffer “for less than a second” before it is overwritten. However, the Second Circuit rebutted that each file inevitably becomes fixed in ReDigi’s server and the purchaser’s device, where they exist for the statutory time period “of more than transitory duration.”
ReDigi also argued that its process ensures that the original purchaser’s preexisting duplicates are deleted during the transfer process. The court noted that such an assurance does not guarantee that duplicate phonorecords are not created and retained by the original owner by other means. It further emphasized that the terms of the statute could not be disregarded for such an assertion.
ReDigi then asserted that the original purchaser’s copies of the digital files did not qualify as “phonorecords” under the Copyright Act. When the original purchaser downloaded the file, ReDigi argued, the digital file became embedded into her computer hard drive, which necessarily contained other content such as software for operating the computer. ReDigi asserted that because the computer hard drive contains such additional content, it included more than a sound recording and so did not qualify as a phonorecord. ReDigi premised this argument on an earlier Second Circuit case, ABKCO Music, Inc. v. Stellar Records, Inc., which had distinguished rights in audio discs from rights in discs that contained both audio and visual content. The court rejected the defendants’ interpretation of ABKCO, holding that “it does not follow [from ABKCO] that a device or other ‘material object in which sounds . . . are fixed . . . and from which the sounds can be perceived, reproduced, or otherwise communicated,’ 17 U.S.C. § 101, is not a phonorecord, merely because it contains other matter as well.”
Lastly, ReDigi advanced certain policy-based arguments. ReDigi argued that the district court’s reasoning essentially required a customer to sell her computer in order to effectuate the sale of a digital music file because there would be no other feasible way to own a particular copy of a work or phonorecord as required by the first sale doctrine. The Second Circuit found this argument unpersuasive, stating that there are other cost-effective options for consumers who seek to resell their music. The court noted that it did not need to delve into the question of whether all digital file transfers might constitute copyright infringement, but that it was deciding that the particular method employed by ReDigi was infringing. The court further concluded that any policy-based change to existing copyright law must come from Congress.
Turning to ReDigi’s fair-use defense, the court determined ReDigi’s work was not transformative of the copyrighted works in any way. Rather, ReDigi was, in fact, making identical copies of the publishers’ copyrighted sound recordings. One of the fair-use factors “focuses on whether the copy brings to the marketplace a competing substitute for the original, or its derivative, so as to deprive the rights holder of significant revenues.” In Harper & Row Publishers, Inc. v. Nation Enterprises, the Supreme Court described the fourth factor as “undoubtedly the single most important element of fair use." Because ReDigi reproduced the plaintiffs’ works, resold them to the same customers in the competitive marketplace, and deprived the companies of the opportunity to sell the works themselves to ReDigi’s customers, the court determined that this factor was strongly in favor of the publishers.
This decision favors copyright owners and provides clarification for issues that may arise concerning the reproduction of digital copyrighted work. It also confirms the Second Circuit’s view that any policy-based arguments for modification of existing law will have to come from Congress.
For more information, please contact Fitch Even attorney Kerianne A. Strachan, author of this alert.
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