Capitol Records LLC v. ReDigi Inc, U.S. District Court, Southern District of New York, No. 12-00095

On 30 March 2013, a New York federal court ruled that the resale of digital music files on a web-based service owned and operated by ReDigi Inc (ReDigi), which created a secondary market for digital music, constituted an infringement by ReDigi of the copyright of Capitol Records, LLC (Capitol).

ReDigi created a website to facilitate the sale and purchase of legally acquired digital music files.  This included software designed to ensure that users would not retain copies of songs they had sold.  Capitol filed legal proceedings alleging that ReDigi reproduced and distributed sound recordings owned by Capitol and others, without consent, which constituted an infringement of copyright.

The infringement

In the U.S., owners of copyrighted work have certain exclusive rights, including the right to reproduce and distribute copies of the work.

On the issue of unauthorised reproduction, ReDigi submitted to the court that it “migrates” digital files from the user’s computer to the ReDigi server and no reproduction of files occurs.  However, the court held that the movement of a file from one material object to another (that is, from the user’s computer to the ReDigi server) results in a reproduction, regardless of whether the original file still exists.

ReDigi did not contest that the distribution of digital files occurred on its website, however it asserted that the distribution was protected by the “fair use” and “first sale” defences under U.S. law.

The defences

The U.S. “fair use” defence permits unauthorised reproduction of copyrighted work for purposes such as criticism, comment, news reporting, teaching, scholarship or research.  The Court ruled out the fair use defence on the basis that ReDigi facilitates and profits from the resale of copyrighted commercial recordings, with a likely detrimental impact to the primary market for those goods. 

ReDigi asserted that the “first sale” doctrine protected its service.  The first sale doctrine provides that an individual who knowingly purchases a copy of a copyrighted work from the copyright holder receives the right to sell, display or otherwise dispose of that particular copy.  So when you purchase a lawfully produced music CD, you are entitled to sell it without seeking permission from the copyright holder.  The doctrine has statutory recognition under U.S. copyright law.  There is no equivalent legislation in Australia.

The first sale doctrine does not, however, protect an individual who makes unlawful reproductions of a copyrighted work.  As the court found that ReDigi had reproduced the digital files, rather than there being a resale of the same “particular” digital file, the court held that the first use doctrine could not provide a defence to ReDigi.

The decision

The court held that ReDigi’s service infringed Capitol’s exclusive right of reproduction as well as its exclusive right of distribution.  The court noted that while ReDigi made a number of policy arguments about why its service should be considered lawful, these were not straightforward or un-contested and “the Court cannot of its own accord condone the wholesale application of the first sale defence to the digital sphere, particularly when Congress itself has declined to take that step.”

Implications for Australia

Although this is a U.S. case, given the novelty of the questions considered by the court, the global structure of the music industry and the similarities between U.S. and Australian copyright law, the case is likely to have a significant influence on the legal interpretation of digital resales in Australia.

However, the case is not likely to be fatal to the creation of a digital resale market.  ReDigi has announced its intention to appeal the decision, and to continue to operate an updated version of its service which incorporates new technology which was not considered by the court.

Apple and Amazon will be watching with interest.  Both have taken steps to secure digital resale patents and we can expect that they will find solutions to enable the emergence of lawful digital resale markets.  This may include ensuring that a single digital sale doesn’t turn into multiple digital copies in the secondary market, creating mechanisms for content creators to consent to digital resales and share in the proceeds, and creating “loans” of digital file copies.