First Sale and Fair Use in the Digital Age

Feb 4, 2019 | James T. Nikolai

For decades, music recordings were typically distributed using some type of physical media—records, tapes, CDs, etc. The purchaser of a legitimate copy of music had the right to give or sell that copy to anyone else under the First Sale doctrine without the copyright holder having a claim for infringement, giving rise to used music stores.

recordsToday, virtually all music is distributed digitally either via streaming services or the purchase of digital copies. Following the used music store mode, ReDigi Inc. opened an online used digital music store where consumers could resell digital downloads.

A consumer interested in reselling music using the ReDigi system installs a computer program which scans the computer to identify all legitimate copies of music and creates a list of songs available for resale. If the consumer elects to offer such a song for resale, the program breaks down the digital file for the song into small pieces of code which are then copied to ReDigi’s server (and deleted from the consumer’s computer), where it resides until it is transferred to a purchaser’s computer.

Capitol Records and several other major record labels sued to shut down ReDigi’s used digital music store. At trial, ReDigi presented a technical argument that its system only worked with legitimate copies of the song and there was never more than one complete copy of the song at any point in the process. ReDigi also presented a legal argument there was no infringement, asserting the First Sale and Fair Use doctrines. Recently, the Court of Appeals for the Second Circuit sided with the record labels.

The Court concluded that ReDigi could only rely on the First Sale doctrine if no new copies of the digital file are made. The Court found that the ReDigi system does not transfer the original copy of the digital file for the song. Instead, the ReDigi system creates at least two new copies—one on ReDigi’s server and one on the purchaser’s computer. According to the Court, the destruction of the original file on the seller’s computer such that only one copy remains does not change the fact that two new copies are created and retained for a period of more than transitory duration.

The Court also rejected ReDigi’s Fair Use argument, stating:

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 [the record labels’] copyrights through its direct competition in the [record labels’] legitimate market, offering consumers a substitute for purchasing from the [record labels]. We find no fair use justification.

As this case illustrates, properly advising clients often requires a combination of legal and technical expertise.

In December, DeWitt added three new intellectual property lawyers known for their abilities to analyze complex legal issues related to various technologies. Please contact us when you have legal needs involving technology.