A new case (March 30, 2013) out of the Southern District of New York has ruled that the resale of digital music does not fall within the first dale doctrine of copyright law and constitutes infringement. In a scathing opinion against Redigi, Judge Sullivan draws a distinction between physical copies of records and digital copies of records. This case will cause ripples across the digital environment of file sharing. It is too early to tell if it will be appealed by Redigi.

Brief Facts: Launched on October 13, 2011, ReDigi’s website invites users to “sell their legally acquired digital music files, and buy used digital music from others at a fraction of the price currently available on iTunes.” Thus, much like used record stores, ReDigi permits its users to recoup value on their unwanted music. Unlike used record stores, however, ReDigi’s sales take place entirely in the digital domain.

Issue before the Court: The novel question presented in this case is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine.

Reasons Supporting the Opinion. Why did the Court rule against Redigi? Here is what the Court said.

(1) Violation of right to make copies. The Court focused on the reproduction right of copyright law. The owner of a copyright has the sole and exclusive right to dictate who can reproduce or copy the protected work. The Court said, that when Redigi “migrates” a file from a user’s computer to its Cloud Locker, so that the same file is transferred to the ReDigi server, 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.

(2) Violation of distribution right. The Court also focused on the distribution right of copyright law. The owner of a copyright has the sole and exclusive right to dictate who can “distribute” the protected work. The Court concluded that, absent the existence of an affirmative defense, the sale of digital music files on ReDigi’s website infringes Capitol’s exclusive right of distribution.

(3) Fair Use defense is not applicable. The Court also analyzed the “FAIR USE” defense to copyright infringement. The fair use defense is essentially an analysis of FOUR factors. The Court said, “On the record before it, the Court has little difficulty concluding that ReDigi’s reproduction and distribution of Capitol’s copyrighted works falls well outside the fair use defense. Each of the statutory factors counsels against a finding of fair use. The Court concludes that the fair use defense does not permit ReDigi’s users to upload and download files to and from the Cloud.

The first factor requires the Court to determine whether ReDigi’s use “transforms” the copyrighted work and whether it is commercial. Both inquiries disfavor ReDigi’s claim. Plainly, the upload, sale, and download of digital music files on ReDigi’s website does nothing to “add[] something new, with a further purpose or different character” to the copyrighted works. ReDigi’s use is also undoubtedly commercial. ReDigi and the uploading user directly profit from the sale of a digital music file, and the downloading user saves significantly on the price of the song in the primary market.

The second factor – the nature of the copyrighted work – also weighs against application of the fair use defense, as creative works like sound recordings are “close to the core of the intended copyright protection” and “far removed from the . . . factual or descriptive work more amenable to fair use.”

The third factor – the portion of the work copied – suggests a similar outcome because ReDigi transmits the works in their entirety, “negating any claim of fair use.”

Finally, ReDigi’s sales are likely to undercut the “market for or value of the copyrighted work” and, accordingly, the fourth factor cuts against a finding of fair use. The product sold in ReDigi’s secondary market is indistinguishable from that sold in the legitimate primary market save for its lower price. The clear inference is that ReDigi will divert buyers away from that primary market. In sum, ReDigi facilitates and profits from the sale of copyrighted commercial recordings, transferred in their entirety, with a likely detrimental impact on the primary market for these goods.

(4) First Sale Doctrine does not apply to digital records. Under section 106(3) of the Copyright Law, 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. Under the first sale defense, “once the copyright owner places a copyrighted item [here, a phonorecord] in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.

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.” Moreover, the statute protects only distribution by “the owner of a particular copy or phonorecord of that particular copy or phonorecord . . . of that copy or phonorecord.” Here, 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 defense. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users’ hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era.

The Court goes on to say that “Section 109(a) still protects a lawful owner’s sale of her “particular” record, be it a computer hard disk, iPod, or other memory device onto which the file was originally downloaded. While this limitation clearly presents obstacles to resale that are different from, and perhaps even more onerous than, those involved in the resale of CDs and cassettes, the limitation is hardly absurd –the first sale doctrine was enacted in a world where the ease and speed of data transfer could not have been imagined. There are many reasons, some discussed herein, for why such physical limitations may be desirable. It is left to Congress, and not this Court, to deem them outmoded.”

Accordingly, the Court concludes that the first sale defense does not permit sales of digital music files on ReDigi’s website.

Public Policy Behind Opinion. At the heart of the opinion, is the Court’s reluctance to change copyright law which it believes would result if it ruled in favor of Redigi. The Court says, that, at base, ReDigi seeks judicial amendment of the Copyright Act to reach its desired policy outcome. However, “[s]ound policy, as well as history, supports [the Court's] consistent deference to Congress when major technological innovations alter market for copyrighted materials.

The Court said, “Congress has the constitutional authority and the institutional ability to accommodate fully the varied permutations of competing interests that are inevitably implicated by such new technology.” Such deference often counsels for a limited interpretation of copyright protection. However, here, the Court cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step.”