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VidAngel, ReDigi, and the Sale of Digital Content

· August 31, 2017

Last week saw developments in two cases involving the sale of digital content. In Disney v. VidAngel, the Ninth Circuit affirmed the district court’s preliminary injunction against VidAngel. Meanwhile, on the other side of the continent, the Second Circuit held the oral argument in Capitol Records v. ReDigi. After the oral argument, Capitol’s lawyer sent the Second Circuit a letter drawing its attention to the VidAngel decision, suggesting that the Ninth Circuit’s opinion should influence the Second Circuit’s reasoning. However, because of significant differences in the facts of the two cases, the Second Circuit should give the VidAngel decision little weight.

VidAngel

VidAngel operates a service that streams films with objectionable content removed. VidAngel purchases multiple copies of DVD or Blu-Ray discs for each film title it offers. It would decrypt one disc for each title, and upload a copy to its computer. It would then break the copy into segments that it tagged for different categories of inappropriate content. VidAngel reencrypted the segments and uploaded them to its cloud server as a master copy.

Customers could then purchase a specific disc from VidAngel’s physical inventory. Although ownership of the disc was transferred to the customer, the physical disc remained in VidAngel’s possession. The customer selected the type of content she wanted filtered, and VidAngel would stream the filtered film from the master copy. (The filter could be as trivial as removing the credits.) After watching the film, the customer could sell the disc back to VidAngel for a dollar less than VidAngel sold her the disc.

Disney and several other studios sued VidAngel for copyright infringement and violation of the Digital Millennium Copyright Act’s prohibition on the circumvention of technological protection measures. The district court found that the studios were likely to prevail on both claims.

On appeal, VidAngel argued that because it lawfully purchased the discs, it was permitted under the first sale doctrine, 17 U.S.C. § 109(a), to re-sell or rent them. In a decision issued on August 24, 2017, a panel of the Ninth Circuit held that the first sale doctrine permits the owner of a particular copy of a work to sell that copy, not to reproduce the work. Here, however, VidAngel had conceded that it copied the discs onto its computer. Thus, the panel found that the district court had not abused its discretion in finding that VidAngel likely infringed the studios’ reproduction right.

The Ninth Circuit panel turned to VidAngel’s defenses to infringing the reproduction right. First, VidAngel had argued that the Family Movie Act, 17 U.S.C. § 110(11), permitted it to stream filtered films to its customers. The panel rejected this defense. Under the statute, the filtered stream must come “from an authorized” copy of the film, but in VidAngel’s system, the stream derives from the unauthorized master copy on the cloud server. VidAngel contented that it fell within the statute because it made the unauthorized master copy from an authorized copy. The panel responded that this interpretation of section 110(11) “would create a giant loophole in copyright law, sanctioning infringement so long as it filters some content and a copy of the work was lawfully purchased at some point. But, virtually all piracy of movies originates in some way from a legitimate copy.”

Second, VidAngel asserted that the copies it made were fair uses under 17 U.S.C. § 107. With respect to the first fair use factor, the nature and purpose of the use, VidAngel stated that its filtered versions of the films were “profoundly transformative” because the omissions affirmed “religious convictions and parental views.” The panel disagreed, finding that VidAngel’s service did not add new meaning to the works and transmitted them for the “same intrinsic entertainment value” as the originals.

With respect to the fourth fair use factor, the panel agreed with the district court that VidAngel’s service was an effective substitute for the studios’ unfiltered films because surveys showed that half of VidAngel’s customers would have watched the films without filters.

To this point, the panel’s opinion was straightforward and uncontroversial. But then it went off the rails. VidAngel had argued that its service was “a paradigmatic example of fair use: space-shifting.” Instead of simply distinguishing VidAngel’s copying of 2500 works onto its server for the purpose of providing a commercial streaming service from a consumer’s personal space-shifting, the panel questioned the fair use status of space-shifting generally. The panel stated that the case VidAngel cited for the proposition that space-shifting was a fair use, the Ninth Circuit’s 1999 decision in RIAA v. Diamond Multimedia, simply found that space-shifting to a portable media device was consistent with the Audio Home Recording Act’s main purpose of facilitating personal use.

But the panel misrepresented the Diamond decision. After stating that the Rio portable media device space-shifting feature was consistent with the Audio Home Recording Act’s purpose of facilitating person use, the Diamond court provided this citation: “Cf. Sony Corp. of America v. Universal City Studios, 464 U.S. 417, 455, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (holding that ‘time-shifting’ of copyrighted television shows with VCR’s constitutes fair use under the Copyright Act, and thus is not an infringement).” In other words, the Diamond court asserted that space-shifting was analogous to the time-shifting permitted by the Supreme Court in the Betamax case. On the basis of the Diamond court’s citation of Betamax, it is reasonable to infer that personal space-shifting by a consumer is a fair use.

The VidAngel court also cited two cases that rejected space-shifting defenses: A&M Records v. Napster and UMG Recordings v. MP3.com. Neither of these cases, however, involved personal space-shifting by consumers. Rather, they involved commercial services that involved space-shifting as a step in providing their service.

Finally, the panel made the only argument it needed to make: it distinguished the VidAngel service from personal space-shifting. It stated that “even assuming that space-shifting could be fair use, VidAngel’s service is not personal and non-commercial space-shifting: it makes illegal copies of pre-selected movies and then sells streams with altered content and in a different format than that in which they were bought.”

The VidAngel panel’s comments about personal, non-commercial space-shifting are mere dicta, and thus of limited precedential weight. Moreover, in the three decades since the Betamax decision, personal space-shifting has become expected consumer practice widely accepted by the copyright industries. Thus, these comments should have little impact on personal space-shifting.

The VidAngel panel also affirmed the district court’s holding that the studios were likely to prevail on their DMCA claims. It agreed with the district court that VidAngel did not have the authority to circumvent the discs’ technological protection measures on its server, as opposed to on a device approved by the copyright owners.

ReDigi 

The ReDigi service allows a consumer to sell iTunes music files to other consumers. Under ReDigi’s technology, the music file on the seller’s server is broken into small blocks, which are transferred one at a time to ReDigi’s server. When a block is transferred from the seller’s computer, it is deleted from her computer. The same process is repeated when the file is transferred from ReDigi’s server to the buyer’s computer.

Capitol Records and other record labels sued ReDigi for copyright infringement. In 2013, the district court rejected ReDigi’s first sale defense on the grounds that the first sale doctrine is an exception to the distribution right and not the reproduction right, and ReDigi’s technology infringed the reproduction right. Further, the district court rejected ReDigi’s fair use defense with little discussion, noting that ReDigi’s use was commercial, non-transformative, and harmful to the market for music files.

The Second Circuit held the oral argument on August 22, 2017. The oral argument was noteworthy in several respects. First, it lasted for two hours, although it was originally scheduled for 24 minutes. This indicates that the panel thought that the appeal raised serious and complex issues that needed to be handled with care.

Second, the panel had no questions concerning fair use, even though two members of the panel are among the bench’s leading fair use jurists: Pierre Leval, inventor of the transformative use doctrine and author of the Authors Guild v. Google fair use decision; and Jon Newman, author of the American Geophysical Union v. Texaco fair use decision. Moreover, the parties and their amici devoted significant space in their briefs to fair use. (I filed an amicus brief for library organizations and the Internet Archive in support of a fair use finding.) The lack of questions about fair use suggests that the panel thought the fair use issues were relatively straightforward, although there is no way to know in which direction they thought the issues were straightforward.

Third, Judge Newman was troubled by the argument made by Capitol’s counsel, Richard Mandel, that the first sale doctrine did not apply in the digital environment because any transfer involved a reproduction. Judge Newman evidently was swayed by Jason Schultz, representing a group of copyright law scholars, who argued that the Supreme Court in Kirtsaeng v. Wiley had recognized the centrality of the first sale doctrine to the copyright law, and that the panel should interpret the relevant provisions of the Copyright Act in this case in a manner respectful of the first sale right.

Fourth, ReDigi’s counsel, Robert Welsh, provided the panel with an interpretation that would achieve this end. Section 106(1) grants the copyright owner with the exclusive right “to reproduce the copyrighted work in copies or phonorecords.” The term “reproduce” is not defined in the Act. The panel could interpret “reproduce” to mean proliferate—to go from one copy to at least two copies of the protected expression. However, ReDigi’s technology does not result in a proliferation of copies. Welsh analogized ReDigi’s process to a jigsaw puzzle, where one piece at a time is moved from the seller’s computer to ReDigi’s server. At no point are there copies simultaneously on the seller’s computer and the ReDigi server. Without proliferation, there is no reproduction.

Rule 28(j) Letters

Just after the Ninth Circuit published its VidAngel decision, Capitol’s counsel sent the Second Circuit a letter pursuant to Rule 28(j) of the Federal Rules of Appellate Procedure, drawing the court’s attention to new authority—the VidAngel decision. Capitol asserted that the VidAngel decision confirms that “there is no first sale defense to violations of the reproduction right” and that “uploading content to a computer violated the reproduction right.”

ReDigi’s counsel responded that VidAngel had no relevance to the copyright issues in this case. VidAngel “explicitly premised its technology and business model on the ability to proliferate copies.” VidAngel’s process involved making a copy of each DVD it purchased on its server. “Thus, under VidAngel’s system, at least two copies of any copyrighted movie[] and television show[] always exist[s]—the DVD copy and the server copy.”

In contrast, “ReDigi’s technology does not cause the proliferation of copies. Instead, ReDigi’s technology transfers the particular digital copy owned by the consumer block by block (or jigsaw piece by jigsaw piece) from the consumer’s computer to ReDigi’s server such that no second copy is ever created.”

Given the fundamental difference between the VidAngel and ReDigi systems, the wisdom of Capitol sending a Rule 28(j) letter to the Second Circuit is questionable. It provided ReDigi with the opportunity to repeat its argument that unlike VidAngel, its technology did not result in a proliferation of copies. This basic fact should impel the panel to interpret the Copyright Act in a manner that does not result in infringement liability for ReDigi.

Capitol, however, is not the only plaintiff making questionable use of VidAngel. On August 29, 2017, Oracle’s counsel filed a Rule 28(j) letter concerning VidAngel to the Federal Circuit in its appeal of the fair use determination in its litigation against Google. Oracle argued that the VidAngel decision supported its position that Google’s use of elements of the Java Application Program Interface (API) in the Android API was not transformative. Filing a Rule 28(j) letter concerning VidAngel will simply provide Google with the opportunity to demonstrate the profound difference between its copying of less than 0.4% of the Java code and VidAngel’s verbatim copying of 2500 movies and television shows.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.