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ReDigi, Digital First Sale, and the Power of Footnotes

· December 17, 2018

The U.S. Court of Appeals for the Second Circuit has finally issued its long-awaited decision in Capitol Records v. ReDigi. Not surprisingly, the Second Circuit affirmed the district court’s finding that the ReDigi service infringed copyright. The Second Circuit’s reasoning clearly closes the door on the concept of digital first sale in a commercial setting without legislative change. However, the decision contains two footnotes that will greatly assist the development of innovative technology services. The first footnote indicates that the fair use right permits the creation of innocuous, non-competitive copies through the unavoidable function of a computer. The second footnote declares that space-shifting likely is a fair use.

Background

The now defunct ReDigi service allowed a consumer to sell iTunes music files to other consumers. Under ReDigi’s technology, the music file on the seller’s server was broken into small packets, which were transferred one at a time to ReDigi’s server. When a packet was transferred from the seller’s computer, it was deleted from her computer. The same process was repeated when the file was transferred from ReDigi’s server to the buyer’s computer.

Capitol Records and other record labels sued ReDigi and their founders for copyright infringement. In 2013, the district court rejected ReDigi’s first sale defense on the grounds that the first sale doctrine, codified at 17 U.S.C. §109(a), is an exception to the distribution right and not the reproduction right, and ReDigi’s technology infringed the reproduction right. Furthermore, 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 a marathon two-hour oral argument on August 22, 2017. On December 12, 2018, the Second Circuit affirmed the district court’s decision with an opinion written by Judge Leval, one of the country’s leading copyright jurists.

Judge Leval’s Opinion

Judge Leval agreed with the district court that the first sale doctrine provided ReDigi with no defense against Capitol’s claim that ReDigi infringed its reproduction right; the first sale doctrine was a limitation on the distribution right, not the reproduction right. Judge Leval then turned to ReDigi’s contention that it had not infringed Capitol’s reproduction right. ReDigi noted that in its system, each packet was deleted from the seller’s computer as soon as it was transferred to ReDigi’s server. According to ReDigi, at no time was there a copy of a file on both the seller’s computer and ReDigi’s server. ReDigi argued that this meant that it didn’t reproduce the file, but just transferred it. Judge Leval rejected this interpretation, finding that the “phonorecord”—a defined term in the Copyright Act—that ended up on ReDigi’s server was a different “material object” from the phonorecord that had existed on the seller’s computer. Additionally, Judge Leval observed that as a factual matter, ReDigi could not ensure that a user had not retained duplicates stored on devices other than the computer on which the user installed the ReDigi software.

Next, Judge Leval considered whether the creation of this new phonorecord was a fair use. His analysis of fair use was more thorough and thoughtful than the district court’s, although he reached the same conclusion. He focused on the first and fourth factors, the purpose and character of the use and the impact of the use on the market for the work. His first factor analysis centered on whether the use was transformative—whether the use “adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message, that than merely superseding the original work.” He explained, “uses that criticize, comment on, provide information about, or provide new uses for the copyrighted work are those likely to be deemed transformative.”

Additionally, Judge Leval stated that a secondary use may be transformative if it expands the utility of the original. Examples of utility-expanding transformative fair uses include scanning books to create a full text searchable database (Authors Guild v. HathiTrust); copying works into a database to detect plagiarism (A.V. ex. rel. Vanderhye v. iParadigms); and displaying low resolution thumbnail images to facilitate image search (Perfect 10 v. Amazon; Kelly v. Arriba Soft).

To this familiar list of utility-expanding uses, Judge Leval added the Supreme Court’s decision in Sony v. Universal, where the Court found that fair use permitted a consumer to record a television broadcast for viewing at a more convenient time. Sony typically is treated as a paradigmatic example of a non-transformative fair use. Judge Leval, however, endorsed the Second Circuit’s interpretation earlier this year in Fox News v. TVEyes that the consumers’ use in Sony was transformative: a use may be fair “if it utilizes technology to achieve the transformative purpose of improving the efficiency of delivering content without unreasonably encroaching on the commercial entitlements of the rights holder.”

Judge Leval found that ReDigi’s use was not transformative because “it provides neither criticism, commentary, nor information” about copyrighted works. Moreover, it did not “deliver the content in a more convenient and usable form to one who has acquired an entitlement to receive the content.” Instead, it just provided “a market for the resale of digital music files, which sales compete with sales of the same recorded music by the rights holder.” Further tilting the first factor against fair use was the commercial nature of ReDigi’s activity.

After cursory treatment of the second and third factors, the nature of the copyright work and the amount and substantiality of the portion used, Judge Leval examined the fourth factor, the effect of the use upon the potential market for or value of the copyrighted work, in more detail. Judge Leval noted that ReDigi made reproductions for “the purpose of resale in competition with the Plaintiffs’ market for the sale of their sound recordings.” ReDigi sold its copies “to the same consumers whose objective in purchasing was to acquire Plaintiffs’ music.”

Judge Leval then weighed the four factors together. He found that “even if ReDigi is credited with some faint showing of a transformative purpose, that purpose is overwhelmed by the substantial harm ReDigi inflicts on the value of Plaintiffs’ copyrights through direct competition in the rights holders’ legitimate market, offering consumers a substitute for purchasing from the rights holders.”

At the end of the opinion, Judge Leval considered an argument raised in an amicus brief by copyright law professors that the first sale doctrine “must be read to vindicate purchasers’ ability to alienate digital copyright works…without regard to technological medium.” Judge Leval expressed reluctance to wade into this policy argument. “Courts are poorly equipped to assess the inevitably multifarious economic consequences that would result from such changes of law.” Furthermore, reading section 109(a) to accommodate digital resale “would exceed the proper exercise of the court’s authority.” Here, “Congress dictated the terms of the statutory entitlement.” Section 109(a) clearly “negates a claim of unauthorized distribution in violation of the author’s exclusive rights…but not a claim of unauthorized reproduction.” Accordingly, “if ReDigi and its champions have persuasive arguments in favor of the change of law they advocate, it is Congress they should persuade.”

Two Helpful Footnotes

The issue of digital first sale was of great interest in copyright circles when iTunes and other digital download services became popular. It was anticipated that consumers would accumulate large libraries of digital files that they might want to sell, just as previous generations of consumers sold used books and records. The ReDigi service was conceived in this era. Now that consumers receive much of the content they use via streaming services, the interest in a digital first sale right has diminished. In this sense, the ReDigi decision concerns yesterday’s technology and business model, and thus appears less significant than it may have when the litigation began more than five years ago.

However, Judge Leval included two footnotes that should prove extremely helpful in the development of innovative services. First, in footnote 12, Judge Leval stated, “We recognize that the use of computers with digital files of protected matter will often result in the creation of innocuous copies which we would be loath to consider infringements because doing so would effectively bar society from using invaluable computer technology in relation to protected works.” Judge Leval explained that this decision should not have this effect under the fair use doctrine. Judge Leval underscored that “what we consider here is [] the making of unauthorized reproductions in pursuit of an objective to distribute protected matter in competition with the rights holder.” (Italics in the original.) In contrast, “the production of innocuous, unauthorized reproductions through the unavoidable function of a computer, when done for purposes that do not involve competing with the rights holder in its exclusive market, is outside of the scope of this dispute.” This is a clear standard technology companies can follow without the involvement of copyright counsel.

Second, in footnote 16, Judge Leval stated, “[t]o the extent a reproduction was made solely for cloud storage of the user’s music on ReDigi’s server, and not to facilitate resale, the reproduction would likely be fair use just as the copying at issue in Sony was fair use.” This declaration that “space-shifting” to the cloud likely is fair use is enormously helpful. For decades there has been a debate whether space-shifting is a fair use. In 1999, the Ninth Circuit in RIAA v. Diamond indicated that is was, but then last year, in Disney v. VidAngel, it suggested that it wasn’t. A declaration by Judge Leval, writing for the Second Circuit, that space-shifting is a fair use will be of great benefit to technology companies and their customers.

Although ReDigi and the concept of digital first sale did not prevail, these two footnotes will be of lasting value to innovative services.

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.