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The operators of an online music marketplace that allows users to buy and sell their legally downloaded music tracks are liable for direct and secondary copyright infringement, the U.S. District Court for the Southern District of New York held March 30 (Capitol Records L.L.C. v. ReDigi Inc., S.D.N.Y., No. 12-civ-95, 3/30/13).
The court rejected ReDigi Inc.'s argument that the resale of the digital tracks was protected by the first-sale doctrine.
That doctrine, the court said, only protects a defendant from allegations that he has infringed a copyright owner's distribution rights. But by making a temporary digital copy of a song in order to facilitate its transfer from one computer to another, ReDigi actually infringes the song owner's reproduction rights, the court said. Thus, the court held that the first sale doctrine is inapplicable and that ReDigi is liable for direct and secondary copyright infringement.
In early 2012, Capitol Records L.L.C. filed a copyright infringement claim against ReDigi Inc., a company that was launched in October 2011 and touts itself as “the world's first online marketplace for used digital music.”
Captiol Records alleged that ReDigi directly and indirectly infringed its exclusive rights of reproduction and distribution in various sound recordings.
ReDigi's service allows users to sell digital music files that have been lawfully purchased through iTunes “at a fraction of the price currently available on iTunes.”
ReDigi is a storage locker site that allows a user to upload tracks that have been purchased on iTunes. Once uploaded, a file is deleted from the user's computer. At that point, the user can choose either to stream the file for his or her personal use, or to sell the file to another ReDigi user. Once a user chooses to sell the file, his or her access to it is immediately terminated. The file is then transferred to the user that agreed to purchase the file, and that user in turn can stream, download, or sell the song.
Songs are sold on ReDigi for between 59 and 79 cents. ReDigi keeps approximately 60 percent of each sale; 20 percent goes to the seller, and the remaining 20 percent of each sale is put in an escrow account for the artist.
In February 2012, Judge Richard J. Sullivan denied Capitol's motion for a preliminary injunction after finding that although Capitol had demonstrated a likelihood of success on the merits, it had failed to show irreparable harm in the absence of an injunction. Both parties then filed cross motions for summary judgment.
Section 106 of the Copyright Act, 17 U.S.C. §106, allocates to copyright holders certain exclusive rights. Among those are the exclusive rights “to reproduce the copyrighted work in copies or phonorecords,” and “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.”
The Copyright Act also provides for an affirmative defense to defendants accused of violating a copyright holder's exclusive distribution right. The first-sale doctrine, codified at Section 109(a), states that:
[n]otwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.
“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 said.
The court cited A&M Records Inc. v. Napster Inc., 239 F.3d 1004, 57 U.S.P.Q.2d 1729 (9th Cir. 2001)(58 PTD, 3/26/02), in stating that “Courts have consistently held that the unauthorized duplication of digital music files over the Internet infringes a copyright owner's exclusive right to reproduce.”
The court noted, “However, courts have not previously addressed whether the unauthorized transfer of a digital music file over the Internet--where only one file exists before and after the transfer--constitutes reproduction within the meaning of the Copyright Act.”
After looking to decisions involving peer-to-peer file-sharing systems, the court determined that such transfers are made possible only through the creation of copies of the song file, and thus it determined that the transfers violated Capitol's exclusive right to reproduce the songs.
As an initial matter, the court noted that Section 101 of the Copyright Act defines “copies” as “material objects … in which a work is fixed by any method … and from which the work can be … reproduced.” 17 U.S.C. §101.
The court said decisions involving P2P systems “provide valuable guidance” with respect to how far an owner's exclusive rights extend “in the digital domain.” Specially, the court found instructive a ruling by the District of Massachusetts that provided a summary of how a file is transferred from one computer to another in P2P downloads.
London-Sire Records Inc. v. Doe, 542 F. Supp. 2d 153 (D. Mass. 2008), detailed how a “digital sequence” that represents a song file that one P2P user downloads from another user can be reconstructed with the help of a magnetic sequence to reproduce the song.
“Accordingly, when a user downloads a digital music file or 'digital sequence' to his 'hard disk,' the file is 'reproduce[d]' on a new phonorecord within the meaning of the Copyright Act,” the court here said.
The court noted that this is actually merely a confirmation of a basic law of physics since a song cannot physically be transferred over the internet.
[E]ven if that were the case, the fact that a file has moved from one material object--the user's computer--to another--the ReDigi server--means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.
The court also determined that ReDigi had infringed Capitol's distribution right by offering for sale recordings that were owned by Capitol.
The court turned to ReDigi's affirmative defenses. First, ReDigi argued that it was protected under the fair use doctrine, 17 U.S.C. §107. The court, noting that ReDigi allows users to upload files in order to later resell them, said it “has little difficulty concluding that ReDigi's reproduction and distribution of Capitol's copyrighted works falls well outside the fair use defense.”
ReDigi was also rebuffed with respect to its appeal for protection under the first sale doctrine. The first-sale doctrine applies only to the redistribution of a copyrighted work, and not the reproduction of that work, the court said. Because the court had determined that ReDigi's service necessarily results in the creation of infringing copies of songs, the first-sale doctrine does not apply, the court said.
But the first-sale doctrine also failed with respect to ReDigi's distribution of the songs, the court said. First, the court determined that the copies of the songs that ReDigi offers for sale are not “lawfully made,” and thus Section 109(a) cannot offer any protection, the court said.
Moreover, the court noted that the first-sale doctrine only allows a customer to sell the “particular copy or phonorecord” of a copyrighted item that he or she has purchased. The fact that a digital copy is made of the song in order to upload that file to ReDigi's servers means that the user's “particular copy” is not the one that is available for sale on ReDigi, the court said.
“Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce,” the court said.
The court noted that while technological advances may have rendered Section 109(a) “unsatisfactory to many contemporary observers and consumers, it has not rendered it ambiguous.”
The statute clearly states that only the particular copy purchased by the user can be sold under the first-sale doctrine. It is therefore the statute itself that requires an interpretation that excludes digital goods from the categories of goods covered by the first sale doctrine, the court said.
“It is left to Congress, and not this Court, to deem [the provisions of Section 109(a)] outmoded.”
The court determined that ReDigi was liable for direct infringement and it also found the service liable for contributory and vicarious infringement. The court did not order injunctive relief or set damages, but it asked the parties to submit a joint letter detailing how they wished to proceed with those and other outstanding issues.
Capitol was represented by Richard Stephen Mandel of Cowan, Liebowitz & Latman, New York. ReDigi was represented by Gary Philip Adelman of Davis Shapiro Lewit & Hayes, New York.
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