In Capitol Records, LLC v.ReDigi Inc., a case that has been closely watched in digital music and cloud computing circles, a district court in the Southern District of New York granted partial summary judgment in Capitol Records’ favor, finding that ReDigi’s operation of its self-described “first and only online marketplace for digital used music” infringes Capitol Records’ copyrights, and more specifically the reproduction and distribution rights, in its sound recordings. The district court’s decision explicitly rejected ReDigi’s “first sale” defense, thereby calling into question the viability of any business model that seeks to create a second-hand market for digital media. Also notable was the court’s finding that ReDigi is a direct infringer of Capitol’s copyrights, despite the completely automated nature of the ReDigi system.

ReDigi operates a service billed as an online “used record store” for pre-owned digital music downloads. Subscribers to ReDigi’s service begin by “migrating” digital music files stored on their local hard drives to ReDigi’s “Cloud Locker.” The Cloud Locker is nothing more than a server that stores copies of the subscribers’ music files. Only files that have been verifiably purchased by the subscribers — which at this point comprise only files purchased on Apple’s iTunes store — may be migrated by subscribers to the Cloud Locker. During the migration process, the local file is deleted from the user’s computer and thus, in effect, moved to ReDigi’s remote server. Subscribers are then able to use ReDigi as both a cloud storage and streaming service for their music files, and are also able to sell (or purchase) stored files to (or from) other ReDigi subscribers.

Capitol Records filed suit against ReDigi in January 2012 and promptly sought a preliminary injunction. The district court denied that request on the ground that Capitol Records had failed to demonstrate irreparable harm, and after a short discovery period plaintiff moved for partial summary judgment on its claims of direct and secondary liability for ReDigi’s alleged infringement of the reproduction and public distribution rights.

ReDigi first argued that that no reproduction occurs on its system within the meaning of the Copyright Act because all music files that subscribers migrated to its servers were (i) original files that were verifiably purchased and thus owned by the subscribers, and (ii) moved in such a way that there was no local copy stored on the subscribers’ computers at the end of the migration process. The Court rejected this argument, holding that the migration process indeed created a copy of the digital music file on ReDigi’s servers and thus infringed on Capitol’s reproduction right. According to the Court, the fact that only one copy of the file existed at the end of the migration process was irrelevant because when music files are fixed in computer memory a material object is created, and “it is the creation of a new material object and not an additional material object that defines the reproduction right.”

With respect to the distribution right, ReDigi did not deny that distribution occurred on its system. Rather, it argued that any such distribution was protected by both the fair use and first sale defenses. For its fair use defense, ReDigi argued that the uploading and downloading of digital music files to and from the Cloud Locker for storage and personal use was protected activity because it was “incident to sale” of the digital music files. The Court rejected ReDigi’s fair use argument out of hand because of the commercial purpose (i.e., to facilitate the purchase and sale of pre-owned music) behind the file transfers within ReDigi’s system.

As for the first sale defense, ReDigi argued that the music files on its system were all verifiably purchased from the copyright owners and owned by ReDigi’s subscribers. Therefore, the copyright owners, including Capitol Records, had exhausted their statutory right to control further distribution pursuant to Section 109 of the Copyright Act. The Court rejected this argument as well. The first sale defense, according to the district court, is limited to physical items that the copyright owner put into the stream of commerce. In the case of digital music, this means that the first sale doctrine applies only to the phonorecord on which the digital sound recording is fixed, (e.g., the subscriber’s hard drive, iPod, or other memory device) and not the music file itself. As the ReDigi system resells only music files, and not the hard drives or other physical media on which those files are stored, the Court reasoned that the first sale doctrine does not apply to ReDigi “any more than [the first sale doctrine] covered the sale of cassette recordings of vinyl records in a bygone era.”

Finally, the Court held that in addition to contributorily and vicariously infringing, ReDigi’s operation of its indisputably automated system also directly infringed Capitol’s copyrights. The Court acknowledged that under the Second Circuit’s decision in Cartoon Network LP, LLLP v. CSC Holdings, Inc. (the “Cablevision” decision), mere operation of a fully automated service (in that case, a digital video recording service in which users issued the commands that led to the creation, storage, and streaming of copies of cable programming) fails to establish the “volitional conduct” necessary for a finding of direct infringement by the service provider. The district court, however, declined to follow that holding. It focused its attention instead on a dictum in the Cablevision decision that allowed “that a case may exist where one’s contribution to the creation of an infringing copy is so great that it warrants holding that party directly liable for the infringement, even though another party has actually made the copy.” Latching on to this language, the Court stated “if such a case could ever occur, it has occurred with ReDigi.” It reasoned that ReDigi’s scanning of a subscriber’s computer for music files that had been verifiably purchased by the subscriber was sufficiently “volitional” to support a finding of direct infringement — despite the fact that this scanning procedure was also a fully automated one. Whether this softening of the sharp distinction between direct and indirect infringement made in Cablevision will survive appellate scrutiny remains to be seen.

The continued progress of this case, particularly with respect to the “first sale” doctrine, should be of interest to copyright owners and digital distributors of all sorts. The ReDigi decision takes the clear position that the purchase of a digital file will not result in the grant of the full panoply of ownership rights that purchase of a corresponding physical album or CD would. But while it is tempting to try to connect the ReDigi court’s rejection of the “first sale” argument with the Supreme Court’s recent “first sale” decision in Kirtsaeng v. Wiley, the two cases are not related. Kirtsaeng upheld the “first sale” doctrine in the context of redistribution in the US of physical copies of books that had been manufactured overseas. By contrast, ReDigi’s rejection of the “first sale” doctrine is firmly limited to the digital realm.