Out-Law / Your Daily Need-To-Know

Digital media re-sales over internet require rights holders' permission, rules US court

Out-Law News | 02 Apr 2013 | 5:22 pm | 4 min. read

The trade of second-hand copyrighted digital files over the internet is prohibited unless rights holders give their permission to the activity, a US court has ruled.

New York district court judge Richard J Sullivan said that the rights of Capitol Records (Capitol) to reproduce and distribute music it owned had been infringed (18-page / 238KB PDF) by ReDigi, a US company that sells second hand legally-downloaded digital music tracks.

Users of Redigi upload their files for storage in their own private cloud. They can then 'stream' the music from there to listen to or list the tracks for sale. Redigi only allows files that are legally downloaded to be stored and do not allow tracks to be copied from CDs or other media and uploaded to the cloud.

ReDigi, which takes a percentage cut from the sale of the second hand tracks via its service, had argued that the technology it uses to allow users to trade digital music tracks allowed music to be transferred without any 'reproduction' taking place. However, the judge dismissed those claims, concluding that it was "simply impossible that the same 'material object' can be transferred over the internet".

In addition, he ruled that Capitol had not lost its rights to control the sale of its music after it had first sold the music. The judge said that the 'first sale' doctrine under US copyright law does not apply to digital media.

Under US copyright law copyright owners have exclusive distribution rights to their works, but those rights are qualified by the 'first sale doctrine' under which a person who subsequently buys a legitimate copy of a copyrighted work and sells it on are exempt from the original owners' claims of infringement. The doctrine's exemption does not apply to licensing agreements.

"ReDigi asserts that its service, which involves the resale of digital music files lawfully purchased on iTunes, is protected by the first sale defence," Sullivan said. "The Court disagrees."

"Because the Court has concluded that ReDigi’s service violates Capitol’s reproduction right, the first sale defence does not apply to ReDigi’s infringement of those rights. In addition, the first sale doctrine does not protect ReDigi’s distribution of Capitol’s copyrighted works. This is because, as an unlawful reproduction, a digital music file sold on ReDigi is not 'lawfully made under this title'," he added.

"A ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her 'particular' phonorecord on ReDigi, the first sale statute cannot provide a defence. Put another way, the first sale defence is limited to material items, like records, that the copyright owner put into the stream of commerce," the judge ruled.

ReDigi had also claimed that its activities were protected by the 'fair use' defence under US copyright law, but Sullivan ruled that its "reproduction and distribution of Capitol’s copyrighted works falls well outside the fair use defence".

In the US the 'fair use' exemption in copyright law allows copyright material to be reproduced for the purposes of research and education, commentary, criticism and reporting.

Whether reproduction of copyrighted works is defensible in the US by the 'fair use' defence depends on the consideration of certain factors, including the purpose and character of use and whether it was for commercial gain or not, the nature of the copyrighted work itself, how much of the copyrighted work was reproduced and the effect of that use on the potential market for or value of the work.

"ReDigi obliquely argues that uploading to and downloading from the Cloud Locker for storage and personal use are protected fair use," the judge said. "Significantly, Capitol does not contest that claim. Instead, Capitol asserts only that uploading to and downloading from the Cloud Locker incident to sale fall outside the ambit of fair use. The Court agrees."

In a statement ReDigi said that it was "disappointed" with the ruling. It said that it would appeal against the decision in a bid to support "the fundamental rights of lawful digital consumers".

Previously, intellectual property law experts Iain Connor and Indradeep Bhattacharya of Pinsent Masons, the law firm behind Out-Law.com, said that courts in the UK and across the EU may not deem the service they provide to be an infringement of copyrights. Their view is based on the findings of a judgment delivered by the Court of Justice of the EU last year in a case involving UsedSoft and Oracle which related to a dispute about the re-sale of downloadable software.

"Now that the case has been fully heard by the US court, we can see where the battle lines would be drawn if ReDigi launched in Europe," Iain Connor added on seeing the judgment. "While the UsedSoft  and Oracle case could still provide ReDigi with a defence to a copyright claim based on the exhaustion of the music’s 'distribution rights', ReDigi could still face the problem which was their undoing in the US regarding the primary act of infringing by copying."

"The question under EU law becomes one which asks whether ReDigi would have a defence to the allegation of copying under the Information Society Directive by, for example, creating a business model in which only transient copies of the files were created to facilitate the sale of the music files; something which is permissible in limited circumstances,” Connor added. "However, given that a defeat in the US will be very costly, it seems unlikely that ReDigi will launch in the EU anytime soon and so we may never see how such arguments would play out."

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