It's been four years since a district court effectively shut down ReDigi, the upstart online service that enabled consumers to resell their iTunes files. But the case is heating up on appeal, and ReDigi attorneys have asked the Second Circuit to expedite oral arguments, before a bankruptcy court potentially impacts ReDigi's ability to litigate the case further.

The latest moves come after judge Richard Sullivan, in his March 2013 summary judgment in Capitol Records vs. ReDigi, dubbed ReDigi “a clearinghouse for copyright infringement.” ReDigi subsequently suspended service, and in 2016 entered into Chapter 11 bankruptcy after agreeing to pay millions to settle Capitol's damages claim, contingent upon ReDigi's liability being upheld on appeal.

But in a twist, Capitol attorneys last month asked a bankruptcy court to convert ReDigi from a Chapter 11 “reorganization” to a Chapter 7 “liquidation.” In a May 1 filing, ReDigi attorneys called that move "transparent chicanery,” meant to “sabotage” the company's liability appeal before it is heard on the merits, and turn Capitol's "contingent judgment into a permanent, fixed debt.”

Capitol attorneys counter that the "significant" copyright issues raised in ReDigi's appeal do not excuse the company from satisfying the requirements of its bankruptcy. “Appellants are pursuing the appeal exclusively for their own purposes," Capitol claims, "without regard to the mounting expenses that they have no ability to pay."

AAP: Reversal Would be 'Catastrophic'

The ReDigi case has been closely watched by the publishing industry, as ReDigi (and other players including Amazon) have expressed interest in creating a resale market for e-books.

More broadly, the case involves a key copyright question for the digital age: do consumers have the right to resell their lawfully acquired digital media, as they are entitled to do with physical media, under a section of the Copyright Act known as the doctrine of first sale?

ReDigi sought to create a legal digital resale solution: users uploaded their iTunes files to ReDigi, ReDigi’s technology deleted the files from the owner's device, held them in cloud-based storage, and then transferred them to a buyer’s device. The "used" files were sold at a discount. ReDigi kept 60% of the proceeds, passing 20% to the seller, while holding 20% for the copyright holder.

In his 2013 ruling, Sullivan conceded that ReDigi’s program mimicks an analog resale, but he could not get past the fact that ReDigi’s system necessarily created unauthorized material reproductions. And because those reproductions were not “lawfully made,” he held, first sale does not apply. “Put another way,” Sullivan explained, “the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce.” He also rejected ReDigi’s fair use defense, a point that could loom large on appeal.

In a joint amicus brief filed in February, a coalition of library groups, including the American Library Association and the Internet Archive claim that Sullivan's “truncated” fair use analysis does not properly weigh the purpose of ReDigi’s alleged infringement—although the brief stops short of endorsing ReDigi.

In its amicus brief, the Association of American Publishers argues that legalizing services like ReDigi would be "catastrophic" for the entire publishing industry.

“Enabling transfer of the right of possession...should be viewed as a favored purpose under the first fair use factor,” the brief argues, while conceding that such a view would not necessarily mean the ReDigi service itself is a fair use. “However, it is worth noting that the ReDigi service has the same market impact as a distribution under [first sale]. At the beginning of a transfer…the seller has a copy, and the buyer does not…at the end of the process, the buyer has a copy, and the seller does not."

But in an amicus brief filed last week, the Association of American Publishers urged the court to uphold Sullivan’s decision. AAP argues that legalizing services like ReDigi would be "catastrophic for the entire publishing industry," as a secondary market made up of cheaper, yet indistinguishable "used" e-books would swamp the industry's primary market.

“With e-books, used copies are a perfect substitute for new copies, and digital ‘lending’ allows multiple readers to access a single digital copy simultaneously,” the brief argues. “Moreover, unlike the makers of films and sound recordings, e-book publishers cannot effectively distribute their works by means of online streaming, rendering the e-book market uniquely vulnerable to the consequences of a reversal in this case on first-sale grounds.”

The AAP brief then takes particular aim at the ALA and the Internet Archive’s Open Library project, a program that converts donated copies of print books to digital copies and enables libraries to lend them, with restrictions.

“The ALA brief makes a plea for this Court to issue an advisory opinion blessing the unfettered distribution of unauthorized electronic copies of printed books,” the AAP brief states. “Such a finding in favor of ReDigi in this case would have grave and immediate consequences for the publishers of literary works in print and digital formats, and would be out of step with the careful calibrations employed by Congress and the courts when considering infringements.”

At press time, oral arguments had yet to be scheduled for ReDigi's appeal.