Capitol Records, LLC v. ReDigi Inc. and the Future of Digital Resale

In 2013, the Southern District of New York decided a case, Capitol Records, LLC v. ReDigi Inc., that effectively eliminated a consumer’s ability to resell lawfully owned digital goods. Now the Second Circuit will hear the appeal, and anyone interested in a coherent future for copyright law, or an effective right to sell their goods, would do well to pay attention.

ReDigi’s software provided users with an online market for buying and selling digital music, as long as the music was purchased legally through iTunes, or from another ReDigi user. If a ReDigi user wanted to sell a song, they would simply upload it to the ReDigi cloud server, where it was offered for sale. When the song was purchased, it would be transferred from the cloud server to the buyer’s device. The transfer was done in pieces, so that the full song only ever existed in one place at one time. ReDigi’s technology also checked to make sure that the seller’s device did not contain another copy of the same song file.

ReDigi argued that the song transfers were covered by the first sale doctrine, a doctrine that limits a copyright holder’s distribution right. In the most basic terms, once a good, like a book, has been sold, the copyright holder cannot then control certain aspects of what the purchaser does with the book. For example, the purchaser can sell it again, or give it away, or even tear it up if they feel so inclined, without the copyright holder’s permission. ReDigi also argued that each song transfer was a fair use. However, along with denying the fair use argument, the District Court found that each time a song was transferred through ReDigi, an infringing reproduction of the song was created, which in turn meant that the distribution of the song was outside the scope of the first sale right. In so deciding, the District Court not only wrongly interpreted the fair use factors, but also the first sale doctrine’s purpose and history.

Unlike every other limitation on a copyright holder’s rights, first sale, codified in § 109(a), is characterized as an entitlement; the other limitations are “not an infringement of copyright.” This distinction highlights that first sale is more than just an exemption from liability, it is an affirmative right that an owner has to sell or dispose of his or her good. And in fact, courts  have given the first sale entitlement great latitude for over a hundred years. See, e.g., Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350 (1908) (“The copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract.”); Doan v. American Book Co., 105 F. 772, 778 (7th Cir. 1901) (permitting a bookseller to acquire damaged school books and “rebind and re-cover these books in exact similitude of the originals”); Kipling v. G.P. Putnam’s Sons, 120 F. 631 (2d Cir. 1903) (permitting the resale of poems that had been assembled into a new collection); Harrison v. Maynard, Merrill & Co., 61 F. 689 (2d Cir. 1894) (permitting the resell of books that had been repaired after they were damaged); Bureau of Nat’l Literature v. Sells, 211 F. 379, 382 (W.D. Wash. 1914) (permitting the resale of used books that had been restored to “new” condition). The Supreme Court has been clear that the broad scope of these earlier first sale cases was not limited just because the first sale right was codified in 17 U.S.C. § 109(a). Quality King Distribs. v. L’Anza Research Int’l, 523 U.S. 135, 137 (1998) (“There is no reason to assume that Congress intended either § 109(a) or the earlier codifications of the doctrine to limit its broad scope.”). Much like the repairing, adapting, and restoring that courts have allowed under the first sale entitlement, incidental copying that effectuates a first sale entitlement should be permitted. Otherwise, the owners of lawfully purchased digital goods will be barred from their statutory entitlement.

Even if the Second Circuit decides that ReDigi does violate a copyright holder’s reproduction right through their technology, their actions should still be considered fair use. There are four main factors that courts consider when determining if something is a fair use. The first fair use factor considers the “purpose and character of the work.” 17 U.S.C. § 107(1). In many instances, courts will ask whether the new work is transformative, and whether the new work is commercial. However, that does not have to end the inquiry, which is where the District Court faltered: Courts may also consider whether the purpose and character of the work align with the goals of the Copyright Act and whether that purpose advances socially beneficial outcomes. See Authors Guild v. Google, Inc., 804 F.3d 202 (2d Cir. 2015) (holding that the copying of millions of books into a searchable database was a fair use because it benefited society); Authors Guild, Inc. v. HathiTrust, 755 F.3d 87 (2d Cir. 2014) (holding that a full text searchable database of copyrighted works was fair use). ReDigi provided users with a means of effectuating their first sale entitlement, a purpose that is not only socially beneficial—it creates digital secondary markets—but also advances the goals of the Copyright Act.

The second and third fair use factors, “the nature of the copyrighted work” and “the amount and substantiality” of the work used, respectively, are both rarely dispositive in a fair use analysis. 17 U.S.C. § 107(2)-(3). Still, neither disfavor ReDigi. The nature of the copyrighted work is of limited importance when considered in light of the use’s purpose. See Sega Enters. v. Accolade, Inc., 977 F.2d 1510, 1524 (9th Cir. 1992). Here, as mentioned above, ReDigi allowed users to effectuate their first sale entitlement. And the amount of the work used was acceptable in relation to the “purposes of the copying.” See Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 586 (1994). In fact, some cases have found that copying of an entire work is fair use. See Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984). Here, in order for the song to be transferred to the new buyer, the entire song had to be used.

The final fair use factor looks to the “effect of the use upon the potential market or value of the copyrighted work.” 17 U.S.C. § 107(4). The District Court found that sales on ReDigi would effect the market for those copyrighted works, and so found against ReDigi on this factor. However, as traditional secondary markets prove, the fact that a market might be affected is not fatal to the right to resell goods. Copyright owners are not entitled to every single profit available from their goods. If they were, § 109(a) would not have been created.

So, why does this matter? As mentioned above, the District Court’s decision effectively eliminates the first sale right in digital markets. The decision, then, has the potential to eradicate secondary markets in digital works. We encounter secondary markets everywhere, from libraries and donations, to used bookstores and garage sales. Under the decision below, in order to sell a $1 song on an iPod, the owner would have to sell the entire iPod; in order to sell an eBook, the eBook owner would have to sell the entire device. That would be like selling your entire bookshelf in order to sell one book on it. That is not only absurd, but also unlikely to ever occur. As more of our goods arise in the digital sphere, secondary markets will all but cease to exist. This is especially problematic because secondary markets, which are usually far cheaper than their initial-sale counterpart, play an important role in promoting knowledge and preserving culture.

I, along with my clinic partner, recently filed an amicus brief on behalf of ReDigi through the NYU Technology Law and Policy clinic. If you would like to read our arguments in full, the brief can be read here.

Kristen Iglesias isJD candidate, 2018, at NYU School of Law.