Technology has always been a few light years ahead of the law, and when the law catches up, tech usually has moved on to the next big thing. So, because of the glacial pace in which case law does expand, which is an inverse relationship with tech, it sometimes creates problems on the technical aspects of innovation. An example is the recent ruling from the Court of Appeals for the Second Circuit, in a decision handed down on December 12, 2018, Capitol Records, LLC v. ReDigi Inc.,[1] which held that digital products purchased on the secondary marketplace are not subject to the First Sale Doctrine, IP law’s free-market theory underpinning many rulings affecting IP rights over the last 100 years.
ReDigi Inc. is a secondary marketplace company which provides for resale of lawfully purchased digital products like music, books, and software. ReDigi’s technology works something like this. First, a lawful purchaser’s digital music file, through ReDigi’s downloaded software, is analyzed by the ReDigi software to verify that it is, in fact, a lawful purchase from an online music vendor (e.g., iTunes). Upon verification, the software then transfers the music file to be resold from the lawful purchaser’s computer to the ReDigi server. This process differs from a conventional file transfer in that the ReDigi system migrates the music file by breaking up the data in bits, or “packets,” which is then re-assembled once it is fully transferred in the ReDigi server. The original file is deleted from the lawful purchaser’s hard drive (e.g., computer hard drive or smartphone). This “transitory” copy is then placed in the ReDigi server files, where it remains until purchased by a secondary market purchaser.
Problems occur in the context of the exclusive rights established by copyright protection, and the lawful resale of articles of commerce under the First Sale Doctrine, codified as 17 U.S.C. §109(a).
109(a) states:
Notwithstanding the provisions of section 106(3) [the section that grants the owner exclusive distribution rights], the owner of a particular copy or phonorecord lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.
The First Sale Doctrine has its origins in common law jurisprudence, stemming from the Bobbs-Merrill Co. v. Straus[2] decision from 1908. The theory states that once a lawful purchaser has lawfully obtained a copy of a copyrighted work, that purchaser is then free to resell that copy. This comports fully with free market principles that underlie American jurisprudence and commerce, alike, which abhors restraints against free alienation of goods and chattel in commerce. The Bobbs-Merrill decision was codified as §109(a).
The First Sale Doctrine states that once a lawful purchaser has obtained a copy of a copyrighted work, that purchaser is then free to resell that particular copy in commerce without restrictions from the original copyright owner. The First Sale Doctrine for copyright law, and its analogue exhaustion doctrine for patent law, prevent restraints against alienation of chattel in commerce consistent with free-market principles which underlie both American legal jurisprudence and economic system.
The Second Circuit panel was composed of Judges Newman, Leval, and Pooler, with Judge Leval writing for the court. Judge Leval noted that:
It is undisputed that one who owns a digital file from iTunes of music that is fixed in a material object qualifies as the “owner of a particular . . . phonorecord lawfully made, [] and is thus entitled under §109(a) “to sell or otherwise dispose of the possession of that . . . phonorecord.” On the other hand, §109(a) says nothing about the rights holder’s control under §106(1) over reproduction of a copy or phonorecord.
There is an immediate problem with Judge Leval’s rationale. The First Sale Doctrine principles are either a “copy or phonorecord” but he focuses on phonorecord for purposes of the ruling, yet fails to properly define the term to maintain consistency within it.
ReDigi argued that its innovative system was not an infringing reproduction. Judge Leval disagreed. He wrote:
The Copyright Act defines phonorecords as “material objects in which sounds . . . are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” 17 U.S.C. §101. Accordingly, when the purchaser of a digital music file from iTunes possesses that file, embodied “for a period of more than a transitory duration” in a computer other physical storage device, that device – or at least the portion of it in which the digital music file is fixed (e.g., the location on the hard drive) – becomes a phonorecord. In the course of transferring a digital music file from an original purchaser’s computer, through ReDigi, to a new purchaser, the digital file is first received and stored on ReDigi’s server and then, at the new purchaser’s option, may also be subsequently received and stored on the new purchaser’s device. At each of these steps, the digital file is fixed in a new material object “for a period of more than transitory duration.”
Judge Leval disregarded the technical aspect of the packets, which in the ReDigi 1.0 system is deleted in the user’s device corresponding to the transfer process to the ReDigi server, and then to the new purchaser’s hard drive, and deemed it still a reproduction. However, a couple of problems exist with this line of reasoning. First, Judge Leval does not define what “transitory” means for purposes of the ruling. Second, the definition applied to “digital sound recording” and “phonorecord” appear to be at-odds with the Ninth Circuit’s definition of the these terms in RIAA v. Diamond Multimedia Systs., Inc.,[3] thus, creating a circuit split in §101 copyright terms.
There is a problem with the ReDigi ruling maintaining accord with the U.S. Supreme Court decisions in Kirtsaeng v. John Wiley & Sons, Inc.,[4] and Impression Products, Inc. v. Lexmark Int’l, Inc.[5] In Kirtsaeng, the Supreme Court held that copyrighted-protected products lawfully made abroad were subject to the first sale doctrine under the Copyright Act.[6] In Impression Products, the Supreme Court similarly held that products lawfully sold abroad were subject to patent exhaustion (i.e., first sale doctrine) under the Patent Act.[7] Although both of these recently decided cases are set in the realm of international IP rights, both fit squarely within the first sale doctrine, and limitations on lawfully registered IP rights. Further, although both Kirtsaeng and Impression Products deal with traditional physical commercial products, in theory, both cases extend to digital products, as well. ReDigi flies in the face of these two Supreme Court rulings. A secondhand physical product purchased through a traditional brick and mortar would be subject to IP rights limitations, while a secondary market digital product would not. This does not comport with the underlying notion that case law should be consistent regardless of the media in which the issue exists. ReDigi creates a two unequal systems of First Sale Doctrine jurisprudence – one for physical products and one for digital ones – that creates an economic morass for the secondary marketplace.
This appeal dealt with the technical aspects of ReDigi’s software, and its effect on the reproduction right under §106(1) and first sale doctrine principles under §109(a). However, corollary issues of “digital audio recording,” “phonorecord,” and “transitory,” are also implicated in this ruling, and the ruling leaves woefully undefined. There is also a somewhat unresolved issue of whether songs purchased by a digital music vendor (e.g., iTunes, Google Play) constitutes a license or a sale – with the difference being the different royalty rates paid to artists depending on the definitions.[8]
Anticipate a petition for writ of certiorari before the Supreme Court to be requested by ReDigi. We will continue to update the blog with any developments in this case.
[1] ___F.3d___ (2d Cir. 2018).
[2] 210 U.S. 339 (1908).
[3] 180 F.3d 1072 (9th Cir. 1999).
[4] 133 S. Ct. 1351 (2013).
[5] 137 S. Ct. 1523 (2017).
[6] See Kirtsaeng, 133 S. Ct. at 1355-56.
[7] See Impression Prods., 137 S. Ct. at 1529.
[8] See, e.g., F.B.T. Prods., LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010).