Appeals Court Weighs in on Resale of Digital Files

The Second Circuit affirms a copyright judgment against ReDigi, which attempted to assist consumers in reselling purchased iTunes songs, but the appeals court does imagine a legal secondary market for a collection of songs on a thumb drive.
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Those hoping to resell digital files of songs and movies got some mixed news Wednesday when the Second Circuit Court of Appeals affirmed a copyright judgment against ReDigi in a closely followed case.

At the beginning of this decade, ReDigi came along and attempted to create a secondhand marketplace for "used" files purchased on iTunes. The company claimed to be able to move digital files from a user's computer to its servers and then to another user's computer in accordance with the First Sale Doctrine, which allows the owner of a particular copy or phonorecord to sell or otherwise dispose of that copy without copyright liability. That's been the legal doctrine that helped usher in an era of used-book stores and second-hand record stores.

The record industry objected to ReDigi's service — and the subsequent case pointed to the differences between distribution and reproduction and essentially raised the issue of what to do about the First Sale Doctrine in the digital age. The stakes were high. At an early juncture, even Google jumped in with an amicus brief warning how the dispute could impact technologies such as cloud storage and space shifting.

In 2013, a federal judge sided with the record industry and likened ReDigi to a "clearinghouse for copyright infringement."

The decision caused ReDigi to file bankruptcy. Meanwhile, the decision was appealed. It then took a good five years to get to today's decision. At a hearing in August 2017, one of the appellate judges even hinted that this case could eventually land at the Supreme Court.

Writing for the panel of Second Circuit judges, Pierre Leval doesn't buy ReDigi's defense that there is no unauthorized reproduction at play when consumers use ReDigi to resell their digital files.

ReDigi argued that from a technical standpoint, its process of transfer shouldn't be seen as making a reproduction because its system simultaneously causes packets of data to be removed from a consumer's computer as those packets are transferred.

Leval responds, though, that during the transfer, a new copy of the digital file is "fixed...for a period of more than transitory duration," and as such, the fixing creates a new phonorecord, i.e., a reproduction.

That's the bad news for those hoping to resell old digital files. But Leval offers somewhat of a middle ground when dealing with the idea that consumers would be able to sell computer storage devices with files contained on them.

ReDigi argued that it would make no sense to require a customer to sell a valuable computer just to sell an iTunes music file.

"Of course it would make no economic sense for a customer to sell her computer or even a $5.00 thumb drive in order to sell a[n] iTunes music file purchased for $1.00," writes the appellate judge. "But ReDigi far overstates its economic argument.... A secondary market can readily be imagined for first purchasers who cost‐effectively place 50 or 100 (or more) songs on an inexpensive device such as a thumb drive and sell it."

Here's the full decision, which also nods to how the Copyright Office also concluded that the resale of digital files is infringing. The Second Circuit also takes up — and ultimately rejects — ReDigi's fair use arguments.

It's important to note that the decision addresses ReDigi's first iteration of its service. The company came out with a 2.0 version that attempted to leverage cloud computing in stronger fashion, and while a stipulated judgment likely dooms ReDigi, a footnote in today's opinion makes clear that the lawfulness of systems functioning like 2.0 isn't being adjudicated.