Tag: first sale

Second Circuit Rules Against ReDigi in Major Decision

VidAngel.  TVEyes.  ReDigi.  

Copyright interests might view these enterprises as the unholy trinity of tech ventures that have attempted in recent years to strain statutory limitations to such extremes that their interpretations would actually vitiate copyright protection itself.  In August of 2017, the Ninth Circuit denied VidAngel’s crusade to push the fair use doctrine beyond any meaningful scope; in February 2018, the Second Circuit held that TVEyes’s methods for making news content available was substantially different from Google Books under the fair use doctrine of “transformativeness”; and yesterday, also in the Second Circuit, ReDigi was rebuffed in its attempts to assert fair use and first-sale doctrine to legitimize its trade in “used” digital files.

ReDigi has been the subject of several rather long posts on this blog, but to recap, the venture was based on administering transactions in “used” digital media.  The concept was that if Consumer A no longer wants to listen to a particular digital audio file (MP3), she would be able to sell that file to Consumer B, via the ReDigi interface, at a “secondary market” price on the basis that the file would be considered “used.”  

The obvious market-based problem with this proposal is that because digital files cannot accurately be considered “used,” a ReDigi enterprise would result not in a secondary market but rather in a substitute for at least some portion of the primary market.  This is the reason why the court held that the Fourth Fair Use Factor (potential market harm to the original works) “weighed powerfully against” ReDigi in its appeal to the fair use defense.  

Further, ReDigi attempted, as many others have done, to assert that its use of the files was “transformative” under the First Fair Use Factor (nature of the use and commerciality), and this was most notably rejected by Judge Pierre Leval, the author of the “transformativeness” doctrine.  From the opinion …

“Even if ReDigi is credited with some faint showing of a transformative purpose, that purpose is overwhelmed by the substantial harm ReDigi inflicts on the value of Plaintiff’s copyrights through its direct competition in the rights holders’ legitimate market, offering consumers a substitute for purchasing from the rights holders.”

This is a very important decision as a matter of doctrine because so many users of works, both large and small, have repeatedly tried to exploit the relative vagueness of the word transformative to argue that merely migrating content from one context to another is sufficient to meet that standard.  In finding against TVEyes, this same court drew essential boundaries to reign in the meaning of the term, and now ReDigi further solidifies that opinion.  

Based on these two decisions, it seems fair to summarize thus:  in order to be “transformative” without authoring a new creative expression, a user of works must a) truly offer society something novel and useful; and b) limit the use of protected works to avoid creating a substitute for fair market access to those works.  For instance, Google Books meets these standards while these other business ventures do not.

The court was also not persuaded by ReDigi’s defense under the doctrine of first sale.  As discussed in detail in those other posts, first sale is the limitation in copyright law that allows you to resell your personal copies of works for whatever price a secondary consumer is willing to pay, whether that’s a quarter at a yard sale or thousands of dollars in a rare book shop.  The first sale doctrine dates back to 1908 and, as I have theorized in the past, the principle itself may not ever have been written in a purely digital market where “copies” themselves are no longer limited to one-off, physical objects like paper, plastic, vinyl, etc. 

With regard to ReDigi, the courts agree that our digital music files qualify as “phonorecords” under copyright law and that we consumers have the right to resell our phonorecords.  The problem is that the law also holds that files are “reproduced” in the process of transferring from one device to another.  Even if the ones and zeros that compose “Silent Night” on my computer are erased while they are written onto someone else’s computer, this act is legally held to be one of “reproduction,” which is not exempted by the first sale doctrine.  

Add the interim step of copying the data temporarily to ReDigi’s servers, plus the mass-market implications of such an enterprise, and the company’s first sale defense strays very far from the individual’s right to resell one legally-acquired copy of a work one time.  

ReDigi and its proponents seem to have hoped to make a case that this “reproduction” transaction is, in principle, analogous to the transfer of used copies in the physical world that spawned the first sale doctrine; but as the court held in its opinion, it would be the job of Congress to rewrite the statute to say what they seem to wish it said.  Meanwhile, I suspect that if such a legislative proposal were to be attempted, then history, case law, and market analysis would dictate that the first sale doctrine is untenable in a purely digital market. 

In this regard, it is funny how often copyright proponents are accused of clinging to our metaphorical buggy whips.  Because when the Supreme Court ruled in favor of retailer R.H. Macy in the case that established the first sale doctrine, New Yorkers were in fact still taking hansom cabs to go shopping! 

Relatedly, as I opined in one of those previous posts, it seems both futile and myopic to propose amending the copyright law in order to foster “resale” of digital files in a market that has already shifted so dramatically to streaming nearly everything on demand.  So, ReDigi was not so much clinging to old models as it was seemingly trying to cobble together a legal framework to support a new business model that may already be obsolete.    

Either way, rights holders should be very pleased with the outcomes in what I’ve called the unholy trinity of VidAngel, TVEyes, and ReDigi because the courts have upheld the principle that copyright’s limitations are meaningless if they stray so far as to eradicate its protections. 

ReDigi Is Not About Consumer Rights

ReDigi is a business venture whose revenue model is based on brokering online transactions between sellers and buyers of “used” music files.  A prospective seller has a collection of legally-purchased digital files of songs purchased from iTunes that he will never access again, so he places these for sale via ReDigi, which connects him with a buyer. The buyer purchases the file(s) for less than the current retail price, and ReDigi takes a cut. According to their testimony, ReDigi’s software removes the file from the seller’s computer before copying it to the buyer’s computer.

It is understandable that consumers might look at this story on the surface and think it seems like a great idea; but ReDigi is in fact a classic example of yet another digital-market business venture trying very hard to get a court to conclude that the copyright law says something other than what it says.  In addition to the company’s multiple statutory conflicts, the business model itself would have a devastating effect on the primary market by creating a parallel market that is “secondary” in price only.  Moreover, despite its claims, ReDigi has no way of controlling whether or not its users would store files in offline devices while selling copies of the same files through the service.  And it goes without saying that the implications of this proposal would quickly affect digital books, movies, software, etc.

ReDigi has tried to argue its legality based on two limitations to copyright:  fair use (§107) and first sale (§109).   In March of 2013, the Court for the Southern District of New York soundly rejected all of ReDigi’s affirmative defenses after Capitol Records sued the company for infringement of the reproduction right (§106(1)), the distribution right (§106(3)), and the rights of performance and display (§106(4) & §106(5)).  ReDigi has appealed; amicus briefs have been filed; and a hearing at the Second Circuit Court is imminent.  Although the fair use defense in this case is infuriatingly funny, I think the defense argued by ReDigi that is most-widely reported, and which would gain the attention of most consumers, is the assertion that the business is covered by first sale doctrine.

First Sale is a Tangible Peg That Doesn’t Fit Into Intangible Holes

(Photo source photo by jgroup)

Like fair use, the principle of first sale has a common law lineage and was codified into the federal copyright law with the 1976 Copyright Act.  The seminal case involved a 1904 novel called The Castaway, written by Hallie Erminie, who was highly controversial for her pro-Southern views on race and the Civil War.  Publisher Bobbs-Merrill had set the retail price for this book at one dollar and notified retailers that any reduction of that price would be deemed an “infringement of copyright.”  When the R.H. Macy company sold copies at 89 cents each, the publisher sued; and in 1908, the Supreme Court unanimously held that Bobbs-Merrill had erred in its attempt to control the price via copyright after having sold the books wholesale to Macy.  The opinion contains the following quote:

“It is not denied that one who has sold a copyrighted article, without restriction, has parted with all right to control the sale of it. The purchaser of a book, once sold by authority of the owner of the copyright, may sell it again, although he could not publish a new edition of it.”

Bobbs-Merrill v Strauss is the case law precedent for the federal statute which today allows you to legally dispose of your physical copies of books, CDs, albums, and DVDs in any way you want—from reselling them to gifting them to making sculptural works of the materials and copyrighting those sculptures if you are so inclined.  The rights holders have no interest in the paper, plastic, and vinyl, even if these physical objects might later obtain intrinsic value far beyond their original purchase prices.  Copyright protects the intangible, or as the same court opinion stated …

“The copyright is an exclusive right to the multiplication of the copies, for the benefit of the author or his assigns, disconnected from the plate, or any other physical existence.  It is an incorporeal right to print and publish …” 

This, by the way, is why that pro-piracy assertion that says, “copying isn’t theft because nothing physical has been taken” is absolute gibberish. Copyright grants exclusive rights to the author, and it is the rights which are stolen via piracy.  And on the subject of the rights ReDigi is infringing, it has two major problems with its defense under the first sale doctrine.

The first problem is that courts frequently take a dim view of corporations that attempt to “stand in the shoes” of their customers. In other words, even if first sale doctrine could ever properly apply for you and me in the digital market (and that’s a big if), that does not give a business like ReDigi the right to commit mass infringements in order to facilitate, and profit from, our individual exercise of that right.  This pretense that the for-profit business is acting on behalf of consumers is SOP for many contemporary ventures; and it’s usually the way the story is reported in the press because the actual legal issues are less sexy. But ReDigi really isn’t about our rights as consumers, it’s an attempted end-run around copyright to make millions on the backs of creators—again.

The second problem for ReDigi’s claim—and indeed with applying first sale in a digital market in general—is that the statutes in §109 only provide a narrow exception to the right of distribution (§106(3)) and not to the right of reproduction (§106(1)). You can sell your copy of Toni Morrison’s The Bluest Eye, but you may not make copies of the book. Because ReDigi cannot function without making copies—and the courts have held since Napster that this form of copying infringes the reproduction right—its attempt to assert a first sale defense to the restriction against reproduction is asking the courts to read something other than what the statute clearly says. In fact, ReDigi is seeking such a dramatic expansion of the law that it not only wants to “stand in the shoes” of the public, but it wants to claim a right the public doesn’t even have.

Either Digital is Different or It Isn’t

What I find amusing about stories like this one is that the tech-utopian, anti-copyright crowd loves to accuse copyright advocates of clinging to buggy-whip paradigms in a automobile world.  Yet when there is a potentially profitable outcome, these same pundits are happy to support “innovators” who whack cars with buggy whips all the time.  Copyrighted works that are fixed in physical objects are fundamentally different from works fixed as digital files, and contemporary copyright law must recognize this difference.  To be blunt, the intangible digital file obliterates the whole idea of a secondary market.

There’s no such thing as a “used” digital copy, which is more properly called a clone, because it is identical in every way to the original file and not subject to the degradation—or for that matter, the appreciation—associated with creative works that are fixed in physical objects like books, albums, etc. Nobody will ever enter a rare bookshop and sell her “first edition” ones and zeroes that represent the poems of Dylan Thomas. No father will pass along his digital file of Dark Side of the Moon to his son and feel the gift imbued with the same meaning as a vinyl album that has been lovingly preserved.

Both intrinsic and sentimental value is lost through digital, with works now “fixed” as intangibly as the copyrights that are supposed to protect them. This is why it is more essential than ever to understand what copyright protects:  because authors can no longer rely on the natural barriers to infringement created by physical objects.

What we consumers get in lieu of physical treasures—for better or worse—are more flexible ways to experience more works, and at very low prices. In fact, the idea that I can legally stream a large library of musical works on demand for about $9/month suggests that ReDigi’s proposal is kind of a buggy-whip concept itself—seeking to trade stored files in a world gone streaming. Ultimately, ReDigi does not provide the market with anything that justifies the scope of revision it seeks, in the service of its own short-term gain, to the copyright law.

The concept that is usually lost in these conversations, as people focus on the immediate ends they want to achieve, is that copyright’s exceptions must be weighed against its original purpose. And this has always been true as the law confronts each new technological change.  As the first sale principle was articulated a century and half ago in a world very much composed of physical objects, it is easy to imagine that the doctrine itself would simply never be considered in a market that looks like the one we have now.

While many consumers may feel that any price above zero for creative works is too high, the fact remains that there is a price threshold below which we can destroy the incentive to create and distribute, which is the reason we have copyrights in the first place. By making available identical, digital products for lower prices not negotiated by producers, the ReDigi model would further degrade one of the already-limited channels of distribution that actually compensate authors for their work.

ReDigi, Fair Use, and Libraries

Photo by author.

In my last post, I opined that the fair use interests of librarians and educators are not necessarily aligned with for-profit business ventures seeking to exploit creative works in ways that can harm authors.  For instance, in the case of Capitol Records v ReDigi, now on appeal at the Second Circuit,  Jonathan Band filed an amicus brief on behalf of the American Library Association, the Association of College and Research Libraries, the Association of Research Libraries, and the Internet Archive in favor of a reversal of the district court opinion, which held that ReDigi is infringing.

To the casual observer, ReDigi is a service that acts as a middle-man to broker the sale of “used” MP3 files.  The idea is that, when you decide you’ve listened to your iTunes-purchased copy of Meat Loaf’s “Bat Out of Hell”* for the last time and think somebody else might want it,  you can sell the MP3 files via ReDigi as “used” items for a portion of the original price, with a cut going to ReDigi.  From a legal standpoint, however, ReDigi is a somewhat complex, computer-to-computer model hoping to avail itself of a copyright limitation written for a purely physical world.

To the best of my knowledge, the ReDigi model has changed a couple of times, but the way the system works is that the MP3 files being offered for sale are removed from the seller’s devices and copied onto the ReDigi server from which the seller alone may still listen to the tracks until they are purchased by someone else.  Upon sale, the files are removed from the server and copied again onto a device belonging to the purchaser. Naturally, this sounds attractive to many consumers, and ReDigi seems to have made an effort to ensure, to the best of its ability, that only one owner at a time has the files.  But that doesn’t necessarily make the service legal, or even a good idea in the market.

The district court held that ReDigi infringes the plaintiff’s rights of reproduction and distribution. ReDigi’s defenses that it is non-infringing were based on the first sale doctrine and fair use; and it is with regard to the fair use defense that the libraries apparently see a common interest.

Band’s amicus brief argues that a finding of fair use in ReDigi would set a precedent that furthers the interest of libraries to develop new models for digital-age lending and other services. And this is where I personally see a necessary distinction between the interests of libraries—which sometimes receive specific carve-outs in copyright law—and avoiding the particular harms caused by a ReDigi model, which could very easily be an Amazon-scale service overnight.

Digital First Sale Creates an Artificially Deflated Market

The first sale doctrine (Section 109(a) of the copyright law) is the reason you are allowed to sell your individual copies of books, CDs, DVDs, etc. as used items without infringing the copyright interest of the authors.  Its predicate is a case from 1908, long before anyone could possibly imagine “owning” entertainment media in the form of data that is not exclusively bound by a physical object like paper or a disk.   ReDigi argued that the first sale doctrine makes its business non-infringing, but the court disagreed on statutory grounds—namely that the language “plainly applies to the lawful owner’s ‘particular’ phonorecord, a phonorecord that by definition cannot be uploaded and sold on ReDigi’s website.”

As a technical matter, ReDigi has to make a copy of the files from the “seller’s” computer to ReDigi’s server. That copy is already an infringement of the rights holders’ exclusive right of reproduction, and that copying is not protected by first sale doctrine.  But even if one wishes to argue that this is a mere technicality, there is still ample reason not to apply first sale doctrine in a purely digital market.

The District Court stated that if ReDigi seeks amendment  to the Copyright Act to satisfy its interpretation of first sale, that this is job of Congress and not the courts. On that subject, Congress has reviewed first sale doctrine as part of its comprehensive review of the Copyright Act. (In fact, I sat on a panel in 2014 hosted by the USPTO discussing this very issue.) And the Department of Commerce examined the subject of digital first sale and concluded that the principle did not apply to digital transmissions and that there is no evidence warranting any change to existing law.

I advocate against digital first sale for the simple reason that digital files cannot be “used” according to any rational definition of that term.  Since 1908, the distinction between the used, secondary market for these goods and the primary market has been clear, with the former posing no threat to the latter.  Even in cases in which used items appreciate in value (e.g. rare books), I would argue this will only ever apply to physical goods and not to raw data that may be endlessly copied from device to device. (A signed, first edition Yeats is worth a couple grand; an eBook containing the same written material is free.)

Because a “used” digital file is as pristine as a “new” digital file, a service operating at scale like a ReDigi (or an Amazon) would simply create a new primary (or alternative) market that artificially degrades pricing for digital-only works.  Regardless of the fact that some consumers feel that any price above zero is a “rip off,” the reality is that we pay comparatively low prices for the media we store today, and even lower prices for media we access through subscription or ad-funded models.  If anything, Congress should reaffirm that first sale applies solely to physically-bound, legally acquired, copies of works.

ReDigi’s Fair Use Argument and the Libraries’ Interests

Apparently unconcerned with the potential harms of a ReDigi model in the consumer market, the above-named library organization would like the appeals court to find that ReDigi’s service is a fair use under the first prong of the fair use test:  1) The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit purposes.

Initially, ReDigi sought to defend its position as a cloud service—that users have a fair use right to store their files in the cloud; and Capitol did not dispute this part of the argument.  But the fact that this storage was “incident to sale” of the works meant that ReDigi’s service falls “outside the ambit of fair use.”  The district court agreed.  Moreover, the court held that ReDigi’s use was not “transformative” because its service does not add anything to the works and that the commercial nature of the use tilted away from a finding of fair use.  The other three prongs of the fair use test do not favor ReDigi, particularly the fourth, given that their use can clearly cause market harm to the rights holders.

In his brief, Jonathan Band takes a curious position that the lower court failed to understand how ReDigi is protected by first sale doctrine and that a reversal of this reasoning would support a finding of fair use.  He writes …

“The district court overlooked the obvious fact that the use ReDigi sought to enable was analogous to one permitted by a central feature of the Copyright Act: the first sale right, codified at 17 U.S.C. § 109(a). The district court found that ReDigi’s uses did not fall within the scope of section 109(a) because the first sale doctrine is a limitation on the distribution right, not the reproduction right, and ReDigi’s service involves reproduction. However, the similarity between ReDigi’s service and conduct permitted under section 109(a) should have weighed in ReDigi’s favor under the first fair use factor.”

Going back to what first sale allows—namely that you are free to sell that “Bat Out of Hell” CD at a yard sale—fair use doesn’t enter the picture at all. Your right to sell your particular copy of a book or album is not a use of a copyrighted work that in any way implicates a fair use defense.  So, even if these petitioners could persuade the court that it is sufficient that ReDigi is “analogous” to the application of the first sale principle, it is hard to imagine how this favors a finding of fair use, which is supposedly the real interest among these librarians.

My read is that the argument Band presents seems over-broad—a hope that a finding of fair use in ReDigi will open a wider door for libraries to develop new means to fulfill their missions in a digital world.  In this sense, Band appeals to the Google Books case, in which Google Books prevailed on fair use analysis to the benefit of library interests. But without writing another thousand words, suffice to say that Google Books is nothing like ReDigi.  Google Books does not engage in commercial transactions, it does not make whole works available, and it provides services that are either “transformative” (e.g. full-text search) or fair use prima-facie (making works available to the print-disabled).

A finding of fair use in ReDigi may generically support the interests of libraries (or it may not), but it seems a high price to pay to allow a harmful, for-profit company to vitiate fundamental copyright protections. As implied, this paves the way for a massive organization like Amazon to decimate what remains of the primary market for sales of creative works.  I believe these matters should be viewed separately, with libraries and universities pursuing their own interests in context to copyright law rather than riding the coattails of predatory and opportunistic business ventures.

*Nothing personal, Meat Loaf. First album that came to mind.