Capitol Records, LLC v. Redigi Inc.
910 F.3d 649 (2018)
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Rule of Law:
The first sale doctrine, which allows the resale of a particular lawfully made copy or phonorecord, does not protect the resale of a digital music file if the transfer process requires the creation of a new copy on a different storage medium, as this act constitutes an unauthorized reproduction that violates the copyright holder's exclusive rights under 17 U.S.C. § 106(1).
Facts:
- Capitol Records, LLC and other record companies (Plaintiffs) own the copyrights to sound recordings, which they distribute in digital file format through authorized vendors like Apple iTunes.
- ReDigi, Inc., founded by Larry Rudolph and John Ossenmacher, created an online marketplace for users to resell their lawfully purchased digital music files.
- To sell a file, a user had to download ReDigi's 'Music Manager' software, which verified the file was lawfully purchased from iTunes.
- The software then transferred the file to ReDigi's remote server using a process called 'data migration,' which broke the file into data packets.
- During migration, as each packet was copied to a temporary buffer on the user's computer, a command was sent to delete that packet from the user's permanent storage before the packet was sent to ReDigi's server.
- This process was designed to ensure the complete file never existed in two places at once, mimicking the transfer of a single physical object.
- Once the file was reassembled on ReDigi's server, it could be sold to a new purchaser, who could then download it to their own device.
- While ReDigi's software attempted to find and delete duplicates on the seller's connected devices, it could not detect copies stored on unlinked devices like thumb drives or third-party cloud services.
Procedural Posture:
- Capitol Records, LLC sued ReDigi, Inc. in the U.S. District Court for the Southern District of New York, alleging copyright infringement.
- Both parties filed cross-motions for summary judgment.
- The district court granted partial summary judgment in favor of Capitol Records, finding that ReDigi's system infringed on their reproduction and distribution rights.
- The complaint was amended to add ReDigi's founders, Ossenmacher and Rudolph, as individual defendants.
- A stipulated final judgment was entered, awarding Plaintiffs $3.5 million and permanently enjoining the ReDigi system.
- In the stipulation, the Defendants reserved the right to appeal the district court's liability finding.
- ReDigi, Ossenmacher, and Rudolph (appellants) appealed the finding of liability to the U.S. Court of Appeals for the Second Circuit, where Capitol Records (appellees) sought to have the judgment affirmed.
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Issue:
Does the resale of a lawfully purchased digital music file through an online platform, which transfers the file by creating a new copy on a server and then on a new purchaser's device while deleting the original, violate the copyright holder's exclusive right of reproduction under the Copyright Act?
Opinions:
Majority - Leval, Circuit Judge
Yes, the resale of a digital music file through this process violates the copyright holder's exclusive right of reproduction. The first sale doctrine codified in § 109(a) provides a defense to claims of unauthorized distribution under § 106(3), but it does not excuse unauthorized reproduction under § 106(1). The court reasoned that a 'phonorecord' is a 'material object' in which sounds are fixed. When ReDigi's system transfers a digital file, it is necessarily fixed in a new material object—first on ReDigi's server and then on the new purchaser's hard drive. Each time the file is fixed on a new device, a new phonorecord is created, which constitutes a 'reproduction.' ReDigi's argument that no reproduction occurs because the file never exists in two places at once is unavailing; the creation of a new phonorecord on a new medium is dispositive. Furthermore, ReDigi's actions do not constitute fair use because the use is not transformative, involves copying the entire work, is commercial in nature, and directly harms the potential market for the original work by creating a competing secondary market with a perfect, non-degrading substitute.
Analysis:
This decision reinforces the significant legal barrier to creating a secondary market for 'used' digital goods under current U.S. copyright law. By holding that the transfer of a digital file inherently involves reproduction, the court strictly confined the first sale doctrine to the distribution of specific physical objects. This ruling places the burden on Congress to create a 'digital first sale' doctrine if it wishes to extend the principle of ownership and alienation to digital media like e-books, music files, and software. The case signals that technological workarounds designed to mimic physical transfers will likely fail in court without a change in the underlying statute.
