Second hand book stores, preloved clothing stores, and markets for old records – there are no laws preventing these shop owners from selling used items to consumers, so how about a second hand store for digital music and movie files? This question has been raised by a lawsuit in New York between Capitol Records LLC and ReDigi Inc. The hearing took place on 5 October 2012.

ReDigi brands itself as "The World’s First Pre-Owned Digital Marketplace" and the start-up was launched in October 2011. The concept is simple: users are asked to sign up and submit the digital music files they wish to sell. ReDigi’s system verifies the file to check that it is legitimate and then uploads it to ReDigi’s servers, where it is made available for another user to buy. While a music file on iTunes costs around US$0.99, a "pre-owned" digital music file will set consumers back about US$0.69. The premise, according to founders Larry Rudolph and John Ossenmacher, is that if a person buys digital media, they should have the right to sell it too – in the same way that physical goods like books or clothes can be resold.

The case raises some tricky legal issues. Capitol Records argues that the process of removing a file from one computer, "re-selling" it and moving it to another computer inherently involves reproduction – and unless there is a permission or licence from the copyright owner, this amounts to breach of copyright. There are also concerns that there is no guarantee that all the original owner’s copies have been deleted. Capitol Records is demanding ReDigi pay a penalty of US$150,000 for each song in its catalogue that was sold through ReDigi since its launch.

ReDigi responds by saying that there is no "reproduction" involved in the process, and "there is never an instance where the music file exists in more than one place or can be accessed by more than one user". It argues that its software is designed to prevent sellers from reinstalling a sold song to their computer. ReDigi’s key argument focuses on the US first sale doctrine, which allows owners of lawfully acquired copies of copyrighted material to re-sell that particular material without interference from the copyright owner. In Australia, the resale of physical items is largely unproblematic in terms of copyright law; however, the resale of digital material is a grey area.

The other issue to consider is whether there is a breach of the conditions of sale under which the digital material was originally bought. There are usually terms and conditions agreed to before customers can buy files from online marketplaces. At the time of writing, iTunes’ terms and conditions do not explicitly prohibit customers from reselling their purchases.

The decision will be keenly awaited by players in the online and digital industries. Indeed, when the case was first filed, Google Inc sought to appear as amicus curiae claiming it had a "specific and vital interest" in the case (the application was refused).  The decision is likely to be significant and could transform business models in the industry – keep an eye out for this one.