The first sale doctrine allows owners of copies of copyrighted works (e.g. used books, CDs, DVDs) to resell their copies without restriction, and it is this distinction between sales and licenses that has made the licensing model the preferred method for software transactions, and increasingly, the preferred method for the sale of digital music and ebooks. Recent federal court decisions have offered some clarity and highlighted the limitations of the doctrine as applied to hard copies of licensed software and promotional music cds, yet leaving open questions about how the doctrine would apply to downloaded software and other media content. With conflicting decisions from a New York court and the European Court of Justice, let the debate continue.

Usedsoft v. Oracle

A landmark decision of the European Court of Justice tackled the issue and set forth a robust, pro-consumer interpretation of the first sale or "exhaustion" doctrine under EU law that is contrary to the latest interpretations of U.S. law. In UsedSoft GmbH v. Oracle International Corp., Case C-128/11 (CJEU July 3, 2012), the issue was whether and under what conditions the downloading from the internet of an authorized copy of a computer program subject to the terms of a restrictive license can give rise to exhaustion of the right of distribution of that copy in the EU. Similar to U.S. law, under the EU Software Directive, the first sale in the EU of a copy of a program by the rightsholder or with his consent exhausts the distribution right of the rightsholder within the EU of that copy.

UsedSoft operated a business that sold "used" licenses on the secondary market for previously downloaded software. It argued that copyright exhaustion should not be restricted to copies of software housed in a physical medium. The software maker Oracle countered that its licensees were not entitled to transfer to third parties the right of reproduction of the downloaded software sold under a restrictive license. The European court held, in accordance with the principles of the EU Software Directive, that the transfer of a copy of a computer program under a license agreement for an unlimited period by the copyright holder to a customer, in return for payment of a fee designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy of the work, triggered the first sale doctrine.

For an extended discussion the Usedsoft case and its implications for licensors and licensee going forward, see my prior article, EU's 'UsedSoft' Ruling Tackles User Rights in Licensed Software(subscription required).

Capitol Records v. ReDigi

On the other side of the debate, a New York district court analyzed the legality of an online service that sold "used" digital music files previously purchased from iTunes and held that the first sale doctrine was inapplicable. In Capitol Records, LLC v. ReDigi Inc., 2013 WL 1286134 (S.D.N.Y. Mar. 30, 2013), the court found that digital music files, lawfully made and purchased, may not be resold by users through an online used digital music marketplace under the first sale doctrine. The court granted the plaintiff's motion for summary judgment, ruling that defendant, the operator of an online digital music marketplace, was liable for the direct and secondary infringement of the plaintiff's reproduction and distribution rights.

The district court found that the reproduction right was necessarily implicated when a digital music file was embodied in a new material object following its transfer over the internet onto a new hard drive. The court rejected the defendant's argument that its service “migrates” a file from a user’s computer to its Cloud Locker, so that the same file is transferred to its server and no copying occurs. Rather, the court ruled that even accepting defendant's description of the process, "the fact that a file has moved from one material object – the user’s computer – to another – the ReDigi server – means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created."

The court also held that the sale of "used" digital music files on the defendant's site violated the copyright owners' distribution right. The court rejected the defendant's affirmative defenses, concluding that ReDigi’s reproduction and distribution of the plaintiff's copyrighted works fell "well outside" the fair use defense. While the record company notably admitted that uploading to and downloading from a cloud-based cyberlocker for storage and personal use was a protected fair use, the court agreed with the plaintiff that the uploading to and downloading from the cloud locker incident to sale was not "transformative" and fell outside the ambit of fair use.

Regarding the first sale defense (applicable to the right of distribution, not reproduction), the court found that the defendant's service did not qualify because ReDigi users were not reselling the same music file that was originally created when users downloaded a song from iTunes: "[R]ather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users’ hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era."