Along with the well-publicised free iTunes release of its new album Songs of Innocence late last year, U2 has also released the album as a double white-vinyl LP. Of course when U2 started out in the early 1980s, all music was on LP, followed by various other physical formats. Who could forget the 1980s tape, followed by the technical breakthrough of the 1990s CD! Today, while vinyl seems to have turned the corner into retro cool, we mostly expect to download music at the touch of a button, keeping music on our devices purely as electronic files. This is certainly convenient but what happens when your music tastes change? It’s easy enough to take those records that now make you cringe to the local second hand music shop, but can you sell unwanted second hand digital goods?

From a copyright perspective, the sale of second hand records, tapes or CDs has never posed a problem. It is readily accepted that a second hand sale of a “genuine” physical item does not infringe copyright in the material on it (homemade mix tapes are another story). However music sold in digital form presents more difficult copyright questions. A single digital file is never truly “sold” to another person but rather another copy must be made. Additionally, what iTunes or any other online music store really “sells” you is a licence to make and use a copy of an album on your device. So, a resale would really be an attempted assignment of a copyright licence.

What does the law have to say about all this?

The situation overseas

In the United States, the digital music re-sale model was taken up by ReDigi, which decided to chance its arm on the copyright position.

ReDigi provided a market to facilitate “resale” of unwanted digital music files between users. ReDigi did not buy or sell the files itself, however as the fate of creators of peer-to-peer file sharing software has shown, this in itself would not allow it to escape potential liability. ReDigi used various technical measures to replicate insofar as possible the nature of a sale of a physical product. First, ReDigi’s software scanned a user’s computer to identify music files which the user purchased from Apple iTunes or another ReDigi user. Once the music files were identified, the user could upload any of the files to ReDigi’s server, and the digital music file was deleted from the user’s computer. On “sale” of a file, the seller’s access to the file on ReDigi’s server was terminated and the file was transferred to the purchasing user.

In 2013, the US District Court upheld a claim brought by Capitol Records against ReDigi for copyright infringement in its sound recordings1. ReDigi had argued that it was effectively “migrating” files from one computer to another. Since the US doctrine of first sale allows the owner of a lawfully made copy to sell that copy, it argued there was no infringement.

The Court rejected these arguments. It was irrelevant that the user’s copy is deleted from the user’s computer, since a new copy was still created on ReDigi’s server, a copyright infringing act. ReDigi’s infringement was not excused by the first sale doctrine sale, among other reasons because the new copy on ReDigi’s server was not lawfully made. The Court noted that: “Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. … The first sale defence does not cover [ReDigi’s business] any more than it covered the sale of cassette recordings of vinyl records in a bygone era.”

Across the Atlantic, the Higher Regional Court of Hamm in Germany also held in 2014 that a contractual clause prohibiting resale of digital audio books was not inconsistent with the principle of exhaustion (the European equivalent to the doctrine of first sale) in the GermanCopyright Act. The Court distinguished the case from the CJEU’s earlier decision in UsedSoft v Oracle, which held that the resale of licences for enterprise software was permissible in appropriate conditions. It found that UsedSoft considered the specific interplay between the EU Software Directive and applicable copyright law and so was not generally applicable to other digital content. Under European law therefore, it appears that the resale of computer programs may be allowed, but resale of other copyright works in digital form is prohibited.

Australian position

Back in Australia, based on copyright law as it currently stands, we do not believe the resale of digital goods would be permitted.

As far as sound recordings are concerned, one of the exclusive rights of the copyright owner is the right to make a copy of the sound recording. In other words, making a copy of the sound recording without permission of the copyright owner infringes copyright. In any “resale” of a digital music file, a new copy of the sound recording must be made on the purchaser’s computer. Accordingly, unless permission to “resell” the file (ie, make a new copy of the file) has been given by the copyright owner or an exception in the Copyright Act applies, “resale” of a digital music file would appear to infringe copyright.

The Australian Copyright Act does not include a general doctrine of first sale or principle of exhaustion. We note that in the recent Australian Law Reform Commission report on Copyright and the Digital Economy, eBay raised the issue of exhaustion of rights, and the ALRC noted the effect that such a principle could have in facilitating the resale of second hand digital goods2. However, the ALRC did not further consider the issue as it considered it to be outside the scope of its terms of reference.

As to whether any permission is granted by the copyright owner for resale, we must firstly consider whether there is any express permission. This could vary from service to service. Under the Australian iTunes Store Terms and Conditions, use of purchased content is limited by Apple’s “Usage Rules”. Users are only authorised to use the content “for personal, non-commercial use” and the user agrees not to sell purchased content. Any “resale” of iTunes content is likely to fall outside of the express permission given in the iTunes Store Terms and Conditions.

Lack of express permission is not necessarily fatal if permission to “resell” the content can be implied. In the case of a specific prohibition of resale such as contained in the iTunes Store Terms and Conditions, it is clear that an implied permission could not be read into the agreement. Even in cases where there is no specific prohibition, relatively strict conditions must be satisfied before such a term could be implied, for example that it was necessary to give business efficacy to the contract, or that it was very well known custom or was a normal incident of sale of digital goods. It seems unlikely at least today, that an implied right of resale would meet such tests.

Possible future developments

While we think that any law reform to allow the general resale of digital goods is unlikely in Australia in the near future, this is not an issue which is going to go away.

Following the judgment against it in 2013, ReDigi announced in early 2014 that it has been granted a patent for technology which allows for resale of music files without the making of a copy. Its system apparently works by having any purchased music immediately stored in a ReDigi cloud facility. The user can play the music by downloading from the cloud. If they want to sell, ownership of the cloud-based file transfers to the purchaser without, according to ReDigi, any additional copies being created. While this may overcome the copyright issues, one wonders how this would stack up contractually under the iTunes terms and conditions, which specifically prohibit resale.

Meanwhile, hot on the heels of its success in its claim against the ReDigi company, Capitol Records has now successfully joined the founding co-owners of ReDigi, John Ossenmacher and Larry Rudolph in its proceedings personally, prompting some to speculate that the damages claim could force ReDigi out of business.

The Capitol – ReDigi battle is far from over, and as those of us still valiantly clutching our CDs are forced to accept that we are a dying breed, it seems that one day this copyright issue will need to be grappled with in Australia too.