A US court has ruled that ReDigi’s sale of “second-hand” digital music online infringes Capitol Records’ copyright. Court grants summary judgment ruling that digital music cannot be resold. Is the distinction between the right to resell physical and digital products justified? Is this the end of Saturday Morning Swap Shop’s online comeback? 

What’s It All About?

ReDigi, Inc. (ReDigi) sought to resell “used” digital music via a marketplace on the internet at a reduced cost. Users who signed up to ReDigi’s marketplace allowed ReDigi’s to search their computer and upload all “eligible” digital music files stored on it onto ReDigi’s cloud. Eligible files were obtained from recognised sources (such as iTunes) and excluded music ripped from a CD or music obtained from an illegal music sharing site. Once in ReDigi’s cloud, the music files were removed from their respective user’s computers and ReDigi gave its users the option to stream the tracks for personal use or sell them via its marketplace.

Those digital music files sold were done so in exchange for credits. Users could use credits to buy new music. Most tracks sold were priced between 59 to 79 cents, however, unlike an original sale of music, no proceeds were paid to the rights owners directly but split between the seller (20%), an escrow account for the recording artist (20%) and ReDigi (60%).

So a good business model? A US court doesn’t think so.

The Claim

Capitol Records, LLC (Capitol), a former EMI subsidiary (now within Universal’s label portfolio), owns catalogues for artists including Katy Perry, Coldplay and Norah Jones. Capitol brought action against ReDigi in January 2012 for copyright infringement and inducement for copyright infringement under the US Copyright Act as a result of its activities.

ReDigi argued that the “first sale doctrine” under US copyright law applied. The “first sale doctrine” entitles you to “sell, display or otherwise dispose of that particular copy, notwithstanding the interests of the copyright owner” and therefore ReDigi argued that consumers had the right to resell digital copies of music without infringement.

In July 2012 Capitol requested summary judgment on the issue.

The Court’s Decision

The Court upheld Capitol’s motion for summary judgment on 30 March 2013.

It found that where a copy of a music file is transferred over the internet it infringes Capitol’s reproduction and distribution rights in that copyright. It concluded that the “first sale doctrine” did not apply to digital media.

Dismissing ReDigi’s defence, the Court said “the first sale defen[s]e is limited to material items, like records, that the copyright owner put into the stream of commerce… Here ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects… The first sale defen[s]e does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era”.

As a result, ReDigi were liable for direct, contributory and vicarious copyright infringement.

Capitol sought US$150,000 for each infringement but at the time of writing, the Court has not yet confirmed an amount of damages.

Implications

While the decision may still be appealed by ReDigi, it brings into question not only the resale of digital music, but the resale of other digital works protected by copyright including e-books.

The scope of its application will become clearer in time but, interestingly, online giants such as Apple and Amazon have recently been granted patents for the transfer of digital goods. Neither has launched their platform and are no doubt keenly watching this case.

It would be interesting to see how a similar claim would swing if presented to the European Court. UsedSoft (see here), a “used” software online marketplace, faced similar allegations of copyright infringement brought by Oracle. The judgment of the European Court, however, found that the ‘right of first sale’ did in fact apply in these instances. In other words, the copyright holder’s exclusive right to distribute a copy of their work is ‘exhausted’ once it is first distributed in the EU, whether distribution is by selling licences of electronic files, or selling physical units.

The ECJ judgment pitches it in direct opposition to the current position under US law after the District Court’s ReDigi decision. With the number of “used” online marketplaces set to increase, it will be fascinating to follow the legal developments on both sides of the pond.