By Patrick B. Monahan
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The Second Circuit recently affirmed a lower court ruling that an online marketplace purporting to allow legal resale of digital music files in fact infringed the plaintiff record companies’ exclusive right to reproduce their copyrighted works.
The founders and operators of ReDigi Inc. (“ReDigi”) contended that their service allowed consumers to sell digital music files purchased on iTunes (or from another ReDigi user) without committing copyright infringement. Users installed Redigi’s Media Manager, a scanning and monitoring program to identify music files eligible for resale, and had the option to upload those files into a “Cloud Locker.” The central innovation of ReDigi was the method by which the files were transferred. The files were broken up into a series of “packets”, which were delivered individually (and deleted as they were delivered) and then reassembled at their destination. At the end of the upload process, the file existed in the Cloud Locker and not on the user’s computer.–Similarly, if a music file was purchased from a user’s Cloud Locker by another user, that file would be transferred packet-by-packet and, at the end of the process, would exist on the purchaser’s computer and not in the Cloud Locker. The effect of this packet-transfer system, ReDigi claimed, was that only one full copy of a given music file existed at any time and the transfer complied with copyright law.
First Sale Doctrine not applicable
ReDigi argued that sales of digital music files using its service was protected under the Copyright Act’s first sale doctrine, which entitles the owner of “a particular copy or phonorecord” purchased from or otherwise authorized by the copyright holder to sell or otherwise dispose of that particular copy or phonorecord without the copyright holder’s authorization. However, the Second Circuit, in affirming the Southern District of New York’s holding, found that ReDigi’s packet-transfer system, by its very nature, creates an unauthorized reproduction of a given digital music file and violates copyright holders’ exclusive right to reproduction. The first sale doctrine, the Court noted, only establishes when a copyright holder’s distribution right of a particular copy of a copyrighted work terminates, that is, once it is sold to the consumer. Digital music files are phonorecords, that is, a material object in which sound is fixed. When a user uploads a digital music file to its ReDigi “Cloud Locker”, or when it is transferred from the “Cloud Locker” to a purchaser’s computer, that sound is fixed in a new material object for a sufficient amount of time to create a new phonorecord. Each time a new phonorecord is made constitutes a violation of the copyright holder’s exclusive right to reproduction under the Copyright Act, and the separate distribution right is not implicated. The Second Circuit was not persuaded that the “packet transfer” method, or ReDigi requiring deletion of the file from a user’s computer once it was uploaded, negated the fact that an unauthorized copy was made.
ReDigi system is not fair use
Turning to ReDigi’s affirmative defense of fair use, the Second Circuit held that ReDigi’s operation did not constitute fair use of the copyrighted music files. The Copyright Act shields from liability those making “fair use” of a copyrighted work and lists a number of factors for courts to consider, including the (1) the purpose and nature of the use, including whether the use is for commercial or nonprofit purposes and whether the use is transformative in some way; (2) the nature of the copyrighted work; (3) the portion of the copyrighted work used; and (4) the effect of the use on the potential market for or value of the copyrighted work. Of particular importance to the Second Circuit was the fact that ReDigi’s use was for commercial purpose and was in no way transformative; that its operation necessitates copying of the entire works, and the fact that ReDigi’s resale market directly competes with the primary market (i.e., digital music marketplaces such as iTunes).
The ReDigi litigation has raised philosophical questions about how copyright law, and in particular the right of reproduction and the first sale doctrine, should be adapted in an increasingly digital world, but the Second Circuit, while acknowledging those questions, issued a limited ruling, relying on the specific wording of the Copyright Act.