On Dec. 12, the U.S. Court of Appeals for the Second Circuit issued a long-awaited ruling in Capitol Records v. ReDigi, No. 16-2321 (2d Cir. 2018) (slip op.) (ReDigi), affirming a grant of summary judgment in favor of Capitol Records in a case that raised issues of first impression concerning first sale and fair use in the age of digital music distribution. The defendant, ReDigi, developed technology that allowed buyers of authorized digital music files, such as downloaded songs from iTunes, to re-sell those files in a manner intended to mimic the resale of physical LPs or CDs. Both the District Court and the Second Circuit, however, found that defendant's technology was not shielded by either the first sale doctrine under §109(a) of the Copyright Act, or the fair use doctrine under §107.

First Sale

Section 109(a) provides:

Notwithstanding [the copyright owner's distribution right], the owner of a particular copy or phonorecord lawfully made under this title, …is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

“Copy” and “phonorecord” are then defined in the statute as material objects in which a work or sound recording is fixed. In an effort to take advantage of this provision in a digital environment, ReDigi developed technology that worked roughly as follows: a user would download a “media manager” program, which would analyze the user's computer to identify each digital music file that might be eligible for sale through ReDigi. Once a user had decided to sell an eligible track, and initiated an upload process, the end result was a new copy of the digital music file on ReDigi's server and the deletion of the corresponding file from the user's computer.

Granting summary judgment for Capitol in 2013, the Southern District of New York (Richard J. Sullivan, J.) found that, semantics aside, at the end of the process there was a digital music file on ReDigi's server and not on the user's computer, so reproduction had occurred; under the laws of physics, it was simply impossible that the same material object, i.e., the same “copy or phonorecord,” could be transferred over the Internet. Therefore, because first sale is only a defense to violation of the distribution right, first sale did not immunize ReDigi's violation of the plaintiff's reproduction right. The District Court observed that “[t]he first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era.”

The Second Circuit affirmed: “We are not free to disregard the terms of the statute merely because the entity performing an unauthorized reproduction makes efforts to nullify its consequences by the counterbalancing destruction of the preexisting [copies].” ReDigi at 19. ReDigi argued that since a technological change had rendered the literal terms of §109(a) ambiguous, the Act must be construed more broadly.

The court rejected that argument, holding the “crucial fact” was that “each transfer of a digital music file to ReDigi's server and each new purchaser's download of a digital music file to his device creates new [copies].” ReDigi at 17. “We conclude that the operation of ReDigi version 1.0 in effectuating a resale results in the making of at least one unauthorized reproduction. Unauthorized reproduction is not protected by 109(a).” Id. at 22.

Fair Use

The Second Circuit also affirmed the Southern District's holding that ReDigi's use of the plaintiff's recordings was not a fair use under §107 of the Act. Section 107 requires a court to consider several factors in determining whether a use is fair, most significantly whether the defendant's use is commercial, whether it is “transformative” of the plaintiff's work, and whether is likely to harm the actual or potential market for the plaintiff's work. The Southern District had wasted little time in concluding that ReDigi's reproduction and distribution of plaintiffs' works was not a fair use, because it was commercial, did not “transform” the original works in any way, used the works in their entirety and was a direct market substitute for plaintiffs' own sale of authorized digital music files.

The Second Circuit agreed. Defendant cited Author's Guild v. Google, 804 F.3d 202 (2d Cir. 2015), also by Judge Pierre Leval, to argue that its use was transformative because it “expanded the utility” of the plaintiffs' works, as in the “Google Books” case involving digitization of library books, but Leval in ReDigi made clear that “such utility-expanding transformative fair uses have included scanning books to create a full-text searchable database and public search function (in a manner that did not allow users to read the texts)” (emphasis added).

The ReDigi court also cited and quoted Fox News Network v. TV Eyes, 883 F.3d 169 (2d Cir. 2018) to emphasize that use of an unaltered work that “compete[s] with sales of the same [work] by the rights holder” is not consistent with transformative use. Because Leval himself first articulated the concept of “transformative use” in an influential 1990 law review article that was ultimately adopted by the Supreme Court in Campbell v. Acuff Rose Music, 510 U.S. 569 (1994), his clarification of the limits of the doctrine in ReDigi is particularly authoritative.

ReDigi also argued that fair use should favor its activities because they were consistent with the broad “principles” of first sale, even if not literally within the parameters of §109(a). For ReDigi, because the end result was technologically equivalent to a physical resale, the purposes of copyright would be better served by excusing the copying under fair use, just as those purposes are served by physical resale.

The Second Circuit disagreed, observing that §109(a) does not state broad “principles,” but rather is a provision “for which Congress has taken control, dictating both policy and the means of its execution,” ReDigi at 35 (emphasis added). “Notwithstanding the purported breadth of the first sale doctrine as originally articulated by the courts, [citations omitted], Congress in promulgating §109(a) adopted a narrower conception…. If ReDigi and its champions have persuasive arguments in support of the change of law they advocate, it is Congress they should persuade.”

In so holding, the court also confirmed that there is no universal principle of technological neutrality that requires equivalent treatment of various means and processes for accomplishing a result, when those means and processes interact differently with the definitions in the Copyright Act. Id. at 34 (rejecting “the principle of technological neutrality”).

 Conclusion

The ReDigi decision is very recent and may yet be subject to a petition for certiorari, but reversal would appear to be unlikely. It is a thorough, well-reasoned opinion by a unanimous Second Circuit panel, written by Judge Leval, who is a very influential and highly-regarded judge on copyright matters, particularly with respect to fair use. The panel took almost 16 months, after an unusually lengthy oral argument, to draft the opinion. No other court has reached a contrary result, and the decision is solidly grounded in the literal text of several inter-related provisions the Copyright Act. The court noted further that the decision is also consistent with leading treatises and the longstanding views of the Copyright Office. Id. at 22, citing Digital Millennium Copyright Act (DMCA) Section 104 Report.

While the decision does not foreclose the possibility that some technical means might permit the “resale” of digital music files without running afoul of the Copyright Act, and drops a footnote to emphasize that a reproduction “made soley for cloud storage of the user's music on ReDigi's server, and not to facilitate resale, …would likely be fair use…,” the ReDigi ruling states clearly that the court is not “free to disregard the terms of the statute” in the digital environment.

Robert J. Bernstein practices law in The Law Office of Robert J. Bernstein. Robert W. Clarida is a partner at Reitler, Kailas & Rosenblatt and the author of the treatise Copyright Law Deskbook (BNA).