Should there be a legal market for reselling “used” digital files, like the secondary market that currently exists for books or CDs in the analog world? That’s the heart of the question now before the U.S. Court of Appeals for the Second Circuit, after a lively hearing on Tuesday in the case of Capitol Records vs. ReDigi.
The appeal hearing comes more than four years after district court judge Richard Sullivan effectively shut down ReDigi, an upstart online service that enabled consumers to resell their legally purchased iTunes files. Users could upload their files to ReDigi; ReDigi’s technology then removed the files from the seller's device, and transferred them to a buyer’s device, keeping a 60% cut of the sale price.
Although Sullivan conceded in his March, 2013, summary judgment that ReDigi’s program mimicked the analog resale of a copyrighted work, (which is protected under section 109 of the Copyright Act, known as the doctrine of First Sale) Sullivan held that ReDigi’s service was not lawful because it necessarily created unauthorized “material" reproductions.
"The fact that a file has moved from one material object—the user’s computer—to another—the ReDigi server—means a reproduction has occurred," Sullivan wrote. “Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.”
Put another way, "the first sale defense,” Sullivan concluded, is “limited to material items, like records, that the copyright owner puts into the stream of commerce.”
At Tuesday’s hearing, however, ReDigi attorney Robert Welsh argued that Sullivan got it wrong. Nowhere does the law does restrict the first sale right to content fixed in "material" form, "like a record." Further, Welsh argued that Sullivan fundamentally misunderstood how ReDigi’s technology worked.
In a lengthy and at times strained back-and-forth, Welsh stressed that ReDigi's service creates no reproductions. He told the judges to think of an iTunes file as a completed jigsaw puzzle. ReDigi's service breaks apart the puzzle—the original iTunes file—and moves it, piece by piece, and bit for bit, from the seller’s device to the buyer’s, he said. At no point does ReDigi "create," hold, or distribute a new phonorecord. It just moves pieces of the original iTunes file. And though it exists in no tangible form, the iTunes file that holds the sound recording is the "material object," that counts, Welsh explained, not whose device it resides on. "The computer is just the record player."
Capitol Records attorney Richard Mandel, on the other hand, told the judges that Sullivan got it right—ReDigi was trafficking in illegal copies. At one point, Judge Rosemary Pooler put the question directly to Mandel: why is ReDigi not like a used book or record store?
“Because it is not possible to transfer a [digital work] without making a reproduction,” Mandel replied, later insisting that, “if you embody a copyrighted work in a new device, you have reproduced it.”
In addition to Welsh, Jason Schultz, director of NYU's Technology Law & Policy Clinic, also argued on behalf of ReDigi. During his time, Schultz stressed that both the case law and the legislative history demonstrate Congress’s desire to maintain a strong first sale doctrine, and vibrant secondary markets—most recently in the Supreme Court’s decision in Kirtsaeng v. Wiley. And when the first sale right is in "tension" with the desires of content owners (as it was in Kirtsaeng), the court, he argued, should lean toward a strong first sale doctrine.
Pressed by Judge Jon O. Newman about this interpretation, Mandel argued that it was Congress's call to extend first sale to digital files, rather than the court's, adding that the Copyright Office had studied the issue and advised that digital first sale was too risky to content owners. Asked if it was Capitol's contention that the first sale doctrine does not apply in the digital environment, Mandel answered yes, which seemed to trouble Newman.
The three-judge panel did not address the fair use defense put forth by ReDigi—notable because the fair use question has drawn the interest of a number of amici in the case and because the panel includes two fair use heavyweights—Pierre Leval (considered the nation’s most distinguished fair use jurist, and author most recently of the appeals court decision in Authors Guild v. Google) and Newman, who penned the decision in the 1994 landmark copyright case American Geophysical Union v. Texaco Inc.
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.
In an amicus brief filed this spring, the Association of American Publishers urged the court to uphold Sullivan’s decision, contending 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 threaten the industry's primary market.
There is no timetable for a decision by the appeals court, although, after years of languishing, the appeal was recently expedited as it holds bearing on ReDigi's bankruptcy proceedings.