US – Distribution Right Not Exhausted After First Sale

ReDigi, a US company, allows its customers to resell their digital music through its online marketplace. Users of the service can buy used digital music at a fraction of the price currently available on iTunes and other recognised sources.

To avail of the service, users must download ReDigi’s proprietary software onto their computer. This software permits only legally purchased music (e.g. iTunes) to be uploaded and sold on ReDigi’s cloud-based marketplace. The software detects and prompts users to delete copy music files. Eligible music files undergo a second verification once uploaded to the marketplace and the original music file is deleted from the seller’scomputer. No royalties or fees are paid to the copyright holder.

In 2012 Capitol Records issued legal proceedings against ReDigi, claiming that it was infringing the copyright Capitol holds in the recordings of artists such as Katy Perry, Coldplay and Frank Sinatra. ReDigi argued that the ‘’first sale doctrine’’ under US copyright law applied, i.e. the distribution rights of the copyright holder were exhausted after the first sale of the music. On 30 March 2013, a US District Court rejected ReDigi’s defence,  stating that:

‘’the first sale defense is limited to material items, like records… Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects…’’

and

‘’It is simply impossible that the same ‘material object’ can be transferred over the Internet,’’.

The Court has not yet confirmed the amount of damages payable and it is possible that ReDigi may appeal the decision.

EU – First Sale Exhausts Rights

By contrast, in July 2012 the EU Court of Justice ruled that used software licences may be resold without the licensor’s permission.   It held that the distribution right of the copyright holder (in this case Oracle) is exhausted when the customer downloads the software and enters a licence agreement providing for the right to use the copy for an unlimited time in return for a fee.

It would be interesting to see ReDigi’s model tested before the European Court and indeed this may occur as ReDigi recently announced it is preparing to move into the European market.  Applying the principle in the Oracle case, it seems likely that the Court would find no infringement by ReDigi. The polar opposite position adopted by the EU and US courts gives rise to a fascinating conflict.  It is early days yet, but this promises to be a very interesting topic.