Second Circuit: No First Sale Doctrine for Reproduced Digital Files
Holding that reproduction of a digital file for purposes of resale does not fall under the “first sale” doctrine of the Copyright Act, the US Court of Appeals for the Second Circuit affirmed the district court’s grant of summary judgment and stipulated final judgment on claims of copyright infringement in favor of the record companies whose copyrighted sound recordings were resold through ReDigi Inc.’s online resale platform. Capitol Records, LLC, et al. v. ReDigi Inc., et al., Case No. 16-2321 (2d Cir. Dec. 12, 2018) (Leval, J).
ReDigi’s founders set out to create an internet platform to facilitate the lawful resale of lawfully purchased digital music files under the Copyright Act’s first sale doctrine. The Second Circuit’s opinion explains in detail how the ReDigi system version 1.0 operated—essentially breaking digital music files into transferrable data packets that were reassembled first on the ReDigi servers and then again on the purchaser’s computer. According to ReDigi, the packet transfer process ensured that a digital song file would never exist in its whole, useable form in two places at once.
Plaintiffs, including Capitol Records and Virgin Records, being the owners or licensees of the sound recordings contained in the digital files resold by ReDigi, filed suit for copyright infringement. Finding such infringement, the district court granted summary judgment in favor of plaintiffs and awarded $3.5 million in damages and a permanent injunction on the operation of the ReDigi business. ReDigi appealed.
On appeal, the Second Circuit examined the primary issue of whether ReDigi’s system lawfully enabled resales of digital files that were first lawfully purchased by its users. The Court explained the Copyright Act’s first sale doctrine, noting that § 109(a) confirms that a copyright owner’s exclusive right to control the distribution of any particular copy or phonorecord of a copyrighted work effectively terminates when that copy or phonorecord is distributed or resold to its first recipient. Section 109(a), however, says nothing about terminating the copyright holder’s control over reproduction of a copy or phonorecord. Therefore, the district court found that resales of digital music through the ReDigi platform were infringing because in the course of the ReDigi file transfer, a phonorecord has been reproduced in a manner that violates plaintiffs’ exclusive control over reproduction.
The Second Circuit rejected ReDigi’s argument that its technical data migration process should not be seen as making a reproduction of the digital music files because the files never exist “in more than one place at the same time.” Rather, the Court noted that the fixing of the digital file in ReDigi’s server, and later in the new purchaser’s device, creates a new phonorecord, which is a reproduction. According to the Court, unauthorized reproduction is “not protected, or even addressed, by § 109(a).”
The Second Circuit went on to explain that unauthorized reproduction violates the copyright owner’s exclusive reproduction rights unless excused as fair use. The Court considered the four fair use factors and found that ReDigi’s reproductions of the phonorecords did not qualify as fair use because of a “total absence (or at least very low degree) of transformative purpose” of the works, the commercial motivation of the ReDigi system, the fact that the entirety of the sound recordings were reproduced, and the fact that ReDigi’s resale market competed directly with plaintiffs’ commercial market for the original recordings. Specifically, regarding fair use factor four, which looks at the effect of the copying upon the potential market for or value of the copyrighted work, the Court focused on the fact that resales of digital files are not the same as reselling used books or CDs, because the digital files are as good as new.
Finally, the Second Circuit addressed ReDigi’s policy arguments around the application of first sale doctrine to digital files but declined to legislate from the bench. The Court instead urged ReDigi to petition Congress on its policy argument.