In December 2018, the US Court of Appeal for the Second Circuit handed an early Christmas present to copyright owners, holding that the resale of lawfully purchased digital music files is not protected by the US first sale doctrine and amounts to copyright infringement. This affirmed the first instance decision of the Southern District for New York.
In 2001 under the command of Steve Jobs, Apple revolutionised the way we all listen to music through the release of iTunes. iTunes allows users to purchase and download digital music files for as little as £0.79 per song and to organise our digital music libraries without having to find somewhere to store rafts of physical CDs.
With the physical CD now turned into somewhat of a collector’s item, selling them is straightforward (and legal) thanks to the principle of copyright exhaustion in the EEA. This offers protection to those selling copies of copyrighted works which were previously and lawfully issued to the public in an EEA member state with the owner’s consent. Under the principle of exhaustion, the copyright owner cannot object to resale anywhere else in the EEA.
But what about reselling digital music?
Across the pond in 2011, a company named ReDigi attempted to pioneer a secondary market for the lawful resale of lawfully purchased digital music by creating a platform for users to re-sell their digital music acquired from online sellers such as iTunes.
The ReDigi platform worked by allowing users to transfer the music which they no longer wanted to the ReDigi cloud storage locker, which ReDigi then sold onto secondary buyers for a lower price than available on iTunes.
Soon after the platform’s inception however, various copyright owners of music being resold by ReDigi, including record label giant Capitol Records, alleged that ReDigi was reproducing and distributing copyrighted works without their authorisation. In 2012 Capitol Records and their fellow plaintiffs successfully filed a suit in the District Court for copyright infringement, being awarded $3,500,000 in damages; and ReDigi were prohibited from operating their platform.
ReDigi filed a notice of appeal in 2016; however, the US Court of Appeal for the Second Circuit found ReDigi’s appeal arguments to be without merit and affirmed judgment of the District Court.
Reproduction of digital music files
ReDigi’s transfer system allowed users to upload digital files to the ReDigi server and worked by breaking music files up into ‘blocks’ of data. These blocks would then, in sequence, be copied where the copy would be transferred to ReDigi’s server and the original block would then be deleted from the user’s server.
If the ReDigi system detected a full duplicate of a music file on the user’s system and the ReDigi server, users were prompted to delete the original file on their hard drive (with disobedience resulting in user account suspension).
ReDigi claimed that this method of “data migration” was not a reproduction of copyrighted work because the ‘originals’ were destroyed, therefore eliminating the circulation of any duplicates. This notion was rejected by the District Court.
Distribution of digital music files
ReDigi argued that their system of music resale was lawful under the protection of the first sale doctrine, which is the US equivalent of the principle of copyright exhaustion in the EEA. They argued that their system simply allowed users to resell their digital music files.
The US Court of Appeal affirmed the District Court’s decision, confirming that ReDigi’s method of ‘data migration’ still fundamentally produced an unlawful copy which infringed copyright, regardless of the deletion of the original file; and that such unlawful reproductions do not enjoy the protection of the first sale doctrine.
Interestingly, ReDigi argued that their method of transfer meant that “the complete file never exists in more than one place at the same time, and the “file on the user’s machine continually shrinks in size while the file on the server grows in size”. […] “the sum of the size of the data” stored in the original purchaser’s computer and in ReDigi’s server never exceeds the “size of the original file”, which, according to ReDigi, “confirms that no reproductions are made during the transfer process”.”
The US Court of Appeal rejected this argument however, stating that during the course of a transfer, a new digital file is fixed in a new material object (ReDigi’s server) which in accordance with the wording of the US Copyright Act constitutes a reproduction.
In relation to ReDigi’s argument that the transfer process is constant – that during the transfer the file from the user’s drive “shrinks” as the file on ReDigi’s server “grows” – the US Court of Appeal stated that the process still results in the eventual receipt and storage of a music file on ReDigi’s server and the making of a new phonorecord.
What this decision means
In the US, purchases of digital music from sellers such as iTunes cannot be resold under the protection of the first sale doctrine. This decision delivers a blow for the ‘second hand’ market for digital music in the US and is a victory for copyright owners and record labels. Considering the US Court of Appeal’s rationale, the only way to resell digital music would theoretically seem to be to physically sell your hard drive.
Although there has yet to be a case discussing copyright exhaustion in the EU in relation to music, the EU courts have and are currently exploring the principle in relation to other digital products.
The CJEU in the case of UsedSoft in 2012, which was further clarified in the case of Microsoft in 2016, confirmed that copyright exhaustion can, in particular circumstances, apply to downloaded computer software leaning in favour of a secondary market.
Since this decision, there has been plentiful commentary and discussion about whether the principle of exhaustion could apply to digital media such as music, film and e-books.
The case of Tom Kabinet which has recently progressed through the Dutch Courts, is doing just that in relation to e-books. This case was stayed early last year to allow for a preliminary reference to the CJEU for a ruling on some definitive questions on whether exhaustion under the InfoSoc Directive can apply to e-books. This case, which has been previously commented on by this newspaper, will be the first time that the CJEU has had to consider exhaustion arguments similar to those discussed in relation to the US first sale doctrine in the ReDigi case, and to provide some conclusive guidance on the legality of a secondary market for digital media in the EU.
The referral to the CJEU was lodged in April 2018 and it can take up to two years for a decision. We can therefore hopefully expect a definitive answer either later this year or by 2020, which publishers will no doubt be eagerly awaiting.
Until then, these are untested waters in Europe, and it will be interesting to see whether the CJEU will take the same stance as the US courts favouring copyright owners, or come to a decision closer to that in UsedSoft encouraging secondary markets.
Capitol Records and their co-plaintiffs first filed their suit against ReDigi back in 2012 before streaming became the predominant channel for accessing and listening to digital music. Although the ReDigi decision arguably has little impact on the future of the music industry, some digital products still operate in the pay and download sphere – such as e-books, video and film – and copyright owners of such works will no doubt look to draw parallels should a similar secondary market emerge.