The second hand digital market – US court rejects ‘First Sale’

Author: Eddie Powell

Last year we reported on the European Court of Justice’s (ECJ) decision in Oracle v UsedSoft (1), in which the court held that a licensee of computer software could legitimately sell it on a second hand basis, where the licence was akin to a ‘sale’ of the software.

We commented that, although the case was confined to software applications, it could have repercussions for the digital content industry if the principle that an effective sale meant the product could be resold on a used basis was applied more generally.

In the US, ReDigi set up an online service to allow consumers to upload to ReDigi’s server their music legitimately purchased on Apple’s iTunes service and sell it to other ReDigi subscribers on a ‘second hand’ basis. To join the scheme, ReDigi users had to download software that would monitor their computers and delete copies of any ‘sold’ music files that remained after the upload. ReDigi maintained that the effect was instantaneous, so that the same music file did not exist in two places at once (and was likened to the transporter device in Star Trek).

ReDigi were sued by Capitol Records (2) who alleged that the service infringed copyright in the sound recordings being traded because:

  • use of the service involved making unauthorised copies of the music files; and
  • ReDigi were ‘distributing’ copies of such music.

In February 2012, the US court refused to grant a temporary injunction to halt the service. However, in a summary judgment decision on 30 March 2013,
the US District Court accepted Capitol’s claim and granted a permanent injunction (3).

The court held that the making of a copy on a new hard disk (in this case on ReDigi’s server) amounted to a reproduction of the music file and, as it was done without the copyright owner’s permission, it infringed copyright – even though the original file was simultaneously deleted.

ReDigi did not contest that its activities were a prima facie breach of the distribution right, but argued that its activities were caught by the ‘First Sale’ doctrine of US law, which provides that the lawful purchaser of a copy of a copyright work is entitled to sell that copy. However, the court’s finding that the ReDigi service involved the creation of an infringing copy scuppered the defence. The court stated that the defence would only apply to the particular copy of the work acquired by the purchaser and went on to say that “the First Sale doctrine is limited to material items, like records”.

It is possible that, following the UsedSoft case, the ReDigi service would have been ruled as legal in Europe; in UsedSoft, the ECJ was not bothered that there could potentially be two copies of the same work in existence on sale, as long as the first copy was deleted as soon as the transfer was complete.

Without the US market, anyone committing resources to a second hand digital content market on a consumer basis is taking a big risk. However, the US decision may be appealed and the issue of downloaded content being a consumer’s property, capable of transfer like physical goods, did get exposure in a bizarre story last year about Bruce Willis allegedly wanting to sue Apple because he could not include his iTunes library in his will, a story denied by his family. This highlighted the issue that consumers – of all ages – spend a lot of money on lawful downloaded content and are increasingly questioning why they should not have the right to transfer their purchases legally if they no longer want them.

Eddie Powell, Partner, Fladgate LLP

(2) Capitol Records, LLC v.ReDigi Inc. Case No 12 Civ.95 (RJS) US District Court, Southern District of New York


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