Appeals Court Grapples With Digital Files, and the Business of Selling "Used" Songs

With predictions of a high-stakes Supreme Court review, a marathon court hearing is held over whether the first-sale doctrine has survived the digital era.

Every now and then, a technology comes along that is disruptive, legally provocative and has the entertainment industry screaming and kicking and foretelling of impending doom. A million years ago, or at least that's what 2013 now feels like in the digital era, a federal judge put the breaks on one such technology called ReDigi. Back then, consumers were getting many of their tunes by purchasing digital downloads off of iTunes. Before streaming outlets like Spotify and Apple Music really took off, ReDigi launched a service whereby consumers could sell their "used" iTunes music in a secondary market for digital files. A New York judge likened it to a "clearinghouse for copyright infringement" after the record industry brought suit.

On Tuesday, that judgment finally got reviewed by the 2nd Circuit Court of Appeals. In a hearing that was scheduled to last 24 minutes but stretched past two hours, a panel of three judges regarded the past, present and future of digital entertainment. Plus, there was a touch of quantum physics. A group of copyright law scholars participated in the highly charged debate, and 2nd Circuit Court judge Pierre Leval might have exploded some minds in the audience by commenting that the case had a "high likelihood" of being taken up by the Supreme Court in the midst of expressing some frustration that what would be adjudicated was ReDigi 1.0 instead of ReDigi 2.0, where cloud computing comes stronger into play.

ReDigi is now in bankruptcy, so it's unclear whether a decision in its favor would really save the company. Robert Welsh, the Baker & Hostetler attorney appearing on behalf of the appellant, did say there were investors in the wings interested in ReDigi should the 2nd Circuit reverse and remand the case. Regardless, the coming decision by all signs will be a landmark one that will impact the next disruptive, legally provocative technology to enter the fray.

For the first 45 minutes, before the 2nd Circuit got to the crucial issue of whether the first sale doctrine has survived the digital era, a three-judge panel grappled with figuring out the technology at hand. 

Welsh had no easy task.

"This is not some hocus pocus, not some 'Beam Me Up Scotty' technology," he told the judges.

In ReDigi's view, it's effectuating the transfer of a digital file. A song gets purchased on iTunes and it goes to a consumer's computer. When the digital file is then resold on the ReDigi market, the purchaser's copy is moved to ReDigi's server, and later, to the second buyer's computer. To show what happens, Welsh took a book in his left hand and then moved it over to his right hand. 

"It's the same book," said Welsh. "That's what ReDigi's technology does."

The appellate judges struggled with understanding this. Leval, for instance, brought up how an iTunes buyer could transfer their favorite song to a few friends before then reselling through ReDigi. In essense, the appellate judges echoed what the lower district court had concluded: There simply had to be a copy made. It wasn't redistribution. It was reproduction, and that's an exclusive right reserved for copyright owners, not property owners.

Slowly, though, some of the appellate judges accepted — or at least played the game of accepting — the premise. "The key to the argument is that it's not a copy," said circuit judge Jon Newman, later asking, "Is [the copy of the song] still on the purchaser's hard drive? What happened to it? Has it been eliminated?"

"No, it's been moved," responded Welsh.

That led to some of the nitty gritty legal debate.

Under the first-sale doctrine, once a work is lawfully sold, the copyright owner's interest in the material object in which the copyrighted work is embodied is exhausted. Think about used book stores or second-hand record stores. It's legally permissible to sell one's used vinyl copy of Miles Davis' Kind of Blue or a used paperback version of Jack Kerouac's On the Road because copyright ownership isn't without limitations as to distribution. Once a vendor sells the album or book, the purchaser is free to dispose of it as he or she wishes. The publisher for Miles Davis or Jack Kerouac can't get in the way.

But note the phrase, "material object," above.

What exactly is a digital file?

"I don't understand your argument how materiality isn't essential," said Leval.

As Welsh told the appeals court, there's no difference between a phonograph and a computer, and the digital files are either material enough or that doesn't matter at all. The discussion then addressed whether physicality matters, and lest anyone think Leval has tipped his vote, the judge addressed the record industry's argument that materiality requires someone to sense the object. "That's broad enough to be perceptible by sound," Leval observed.

Appearing on behalf of the copyright scholars (allowed to participate because this is an important issue acknowledged by all and there was some question as whether a bankrupt company would have its act together), Jason Schultz at New York University School of Law argued that the first-sale doctrine didn't die with the emergence of digital files. He spoke of how Congress had opportunities over the years to expressly limit the first-sale doctrine, but failed to do so in laws like the Digital Millennium Copyright Act.

As such, he believes that the copyright law passed in 1976 affords equal treatment for analog and digital works.

"If Capitol Records wants a change, we can discuss, but we don't think the law discriminates," he said.

Urged to ensure there's a digital version of used book stores and second-hand record stores — which brought out a parade of horrified amici like the Motion Picture Association of America, the Record Industry Association of America and the Association of American Publishers — the 2nd Circuit pressed the issue with Richard Mandel, the Cowan, Liebowitz attorney for the record companies.

"Why is this not like a used CD store?" asked circuit court judge Rosemary Pooler.

"It's not possible to transfer without making a reproduction," answered Mandel.

The attorney then told the judges that Congress "has continually refused to enact a digital first sale doctrine," adding that at one point a proposal came and was studied by the Copyright Office before being rejected.

Mandel also has a different view of materiality and ReDigi's system and brought his own analogy. He said that if one photocopies a book, throws the book out, one can't sell the photo copy. 

"For all practical purposes, if we affirm, we're saying the first-sale doctrine doesn't apply to digital works, right?" asked Newman.

Responded Mandel, "I think that's correct."

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