By John Seay, Atlanta Entertainment Lawyer: The Seay Firm LLC (@TheSeayFirmLLC)
Sure, it may have seemed like a good idea last night to download Snow’s 12 Inches of Snow, but what do you do the next day when buyer’s remorse sets in? Do you delete the album entirely so that your friends don’t see it when browsing your iTunes collection? Fortunately for you, if one digital startup has its way, then assuming you can find another willing buyer, you may be able to unload that album, and some of the other duds you’ve collected over the years, in an online marketplace for pre-owned digital music.
ReDigi opened its digital storefront in October of 2011, and since that time has allowed users to “buy used digital music from others at a fraction of the price currently available on iTunes.” Not surprisingly, many entities in the recording industry don’t find that statement amusing. In their eyes, ReDigi is directly infringing copyrights, as well as enabling and inducing its users to infringe copyright. In a lawsuit filed in New York District Court on January 6, 2012, Capitol Records seeks as much as $150,000 in damages per track sold.
One of the major issues in the case is whether the “first-sale doctrine” applies to pre-owned digital tracks. Although you might not have realized it, when you purchase a used CD or vinyl from a record store, you’re availing yourself of the first-sale doctrine. The first-sale doctrine limits a copyright owner’s exclusive right of distribution and enables a secondary market for the sale of copyrighted works. The first-sale doctrine is why your local record store can sell used CDs and vinyl without facing lawsuits for copyright infringement.
But while the first-sale doctrine is well established in the context of used CDs and vinyl, ReDigi is the first company brave enough to propose extending its purview into the world of digital media. The most obvious reasons why no one has attempted this business model before are that digitally downloaded songs are not embodied in physical mediums like CDs or vinyl, and neither are they scarce in the same way that other physical embodiments are scarce. Theoretically, you can copy and re-copy digital tracks without noticeable degradation in the sound quality, whereas CDs and vinyl degrade over time, and in fact, the price of a used CD or vinyl is largely based on condition. If digital tracks never degrade, then you can re-sell them ad infinitum without having to lower the price to attract buyers.
Also, the first-sale doctrine only applies to sale of the original, purchased copy. In its lawsuit, Capital Records argues that you cannot sell pre-owned digital music online without somehow making another additional copy, either when the track is uploaded to the site or when it is purchased and then downloaded by another user. Even if the first-sale doctrine applies, thus protecting ReDigi’s right to distribute the tracks, then—according to Capital Records—ReDigi would still be in violation of the exclusive right to reproduce the work.
With regard to the applicability of the first-sale doctrine, in a response to the lawsuit ReDigi first argues that the distribution right is not implicated because it only applies to “material objects,” which it argues digital files are not. However, ReDigi then goes on to argue that in the event digital files are considered material objects and therefore subject to the distribution right, then under the current wording of the first-sale doctrine, ReDigi’s business model would qualify for the exception just like your local used record store would.
As for the concerns over unlawful reproduction, ReDigi argues that no copying occurs. Instead, when an owner of a digital track wants to list that track for sale, he first downloads ReDigi’s proprietary “Music Manager” software that verifies that the tracks in question were lawfully purchased from iTunes. At this time, only iTunes tracks are eligible for sale on ReDigi because the iTunes license agreement, unlike the license from Amazon, transfers full ownership of the tracks to its users instead of just providing them with a license.
Once a track is verified, Music Manager uploads the track into the user’s Cloud Locker and then deletes the track from the user’s computer so that it only exists in the Cloud Locker. If the user decides not to sell the track, then he can re-download it to his computer, but if the track sells (usually for between .49 and .87 cents), then ReDigi simply changes the owner of the Cloud Locker from the user who uploaded the track to the user who purchased it. Once the track is sold, the new owner can leave it in the Cloud Locker, download it, or resell it.
According to ReDigi, this elaborate maneuver means that no unlawful copying occurs, and to the extent any copying occurs at all, then the copying is a “fair use” of the track. In this context, fair use refers to the generally recognizable right of owners of digital tracks to place those tracks in a place and in a format that is more desirable or convenient for the owner—a process known as space and format shifting. This argument also applies whenever you convert your tracks into another file format or sync them with another device. Conveniently, the iTunes license allows for such space and format shifting.
Among other issues not discussed here, the judge in this case will have to decide whether to expand the interpretation of the first-sale doctrine to include the online sale of pre-owned digital tracks, as well as whether ReDigi’s processes are legitimate or designed to hide unlawful copying. The answers to those questions might be influenced by whether ReDigi’s business model is good for the marketplace. While iTunes sales might diminish as more users instead purchase pre-owned digital tracks, ReDigi has recently announced a place to share 20% of each transaction fee with artists every time an artist’s track sells. Some artists could therefore make more money from ReDigi than they make from iTunes.
Of course, all of that is assuming that ReDigi remains in business. ReDigi is operating in a legal gray area, and it’s racking up massive debt defending itself in court. Whether ReDigi will succeed in the fight of its life is an interesting question worth monitoring. But just in case the hammer does drop, I’d recommend going ahead and unloading that Snow album. Your wallet—and the shuffle function on your digital music player—will thank you.