In a decision sure to be significant to the cloud computing and digital content industries, the U.S. District Court for the Southern District of New York held on March 30, 2013 that the resale of digital music tracks constitutes both direct and indirect infringement that is not protected by the first sale doctrine, even when the original data file is deleted after transfer. (Capitol Records L.L.C. v. ReDigi Inc., S.D.N.Y., No. 12-civ-95, March 30, 2013). The Court strongly rejected the expansion of the first sale doctrine to cover digital files stating: “The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine . . . The Court determines that it cannot.” According to the Court, the first sale doctrine only applies to the copyright holder’s distribution rights and the transfer in this case involved the copyright owner’s reproduction rights. Recognizing the limits of the Copyright Act, the Court repeatedly stated that any expansion of (or amendment to) the clear language of the Copyright Act and legislative history to cover digital transfers like those made by ReDigi needs to be “a legislative prerogative that courts are unauthorized and ill suited [sic] to attempt.” This decision should be closely reviewed by any business that stores or attempts to distribute digital content by making a copy without the express permission of the content owner.

ReDigi Inc. describes itself as a “virtual” marketplace that allows users to buy and sell “pre-owned” digital music. To sell music on ReDigi’s website, a user must download ReDigi’s “Media Manager.” The Media Manager analyzes the user’s computer and builds a list of digital titles that are eligible for sale. A song is eligible for resale if it has been legally purchased on iTunes or from another ReDigi user, is uploaded to ReDigi’s servers (known as a “Cloud Locker”), and the original copy of the song is deleted from the users computers and devices once the upload to ReDigi has occurred. If the copy of the song is purchased by another user, the initial user loses access to that song within the Cloud Locker. A seller earns credits at ReDigi for each sale, which can be used for purchases of other eligible titles within the Cloud Locker. Capitol Records sued ReDigi for both direct and indirect copyright infringement.

The Court held that the unauthorized transfer of a digital music file over the Internet constitutes a “reproduction” within the meaning of the Copyright Act because the Act makes it clear that a reproduction occurs when a copyrighted work is fixed in a new material object. Since the nature of the transfer of a digital file from a computer to another server requires making a copy, the Court held that the reproduction rights of the content owners are infringed by ReDigi. The Court also found that ReDigi infringed Capitol’s distribution right, stating “ReDigi is not distributing [the original] material items; rather, 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.” Thus, the Court held that since ReDigi makes and distributes a copy of the original digital file, the first sale doctrine does not apply and ReDigi directly and indirectly infringes Capitol’s copyrights.

The decision certainly is a setback to companies looking to enter potential markets for used songs, e-books and downloaded movies or television shows. In addition, the Court’s discussion regarding ReDigi’s violation of Capitol’s reproduction right by making copies of the digital files (even when the original file is destroyed) can have a significant impact on companies providing cloud computing services if the copies of works are made without the consent of the owners of such works.