On December 12, 2018, the Second Circuit Court of Appeals rejected all of the arguments put forth by “digital reseller” ReDigi. ¹ The Court ruled ReDigi’s business violated both the right of reproduction of the copyright owners and was not “transformative” or fair use.

It is the second part of the ruling which seems rather significant. The author of the opinion is Judge Pierre Leval, the original proponent of the “transformative use” ²test and the author of some of the most extreme decisions in this regard. ³

The facts of the case are straight forward. ReDigi claims to be in the business of “reselling” digital music files. To accomplish this:

• Install ReDigi’s “Music Manager” software
• Music Manager then analyzes the digital file intended for resale, verifies that the file was originally lawfully purchased from iTunes. If the file was lawfully purchased, Music Manager deems it an “Eligible File” that may be resold.
• Copy file to ReDigi’s “Cloud Locker”
• Music Manager deletes the file on the original computer
• The uploader can continue to stream the file until resold
• When resold, the new owner can either stream the file from ReDigi’s server or download it ⁴

ReDigi claims that this activity is protected by the “first sale” doctrine, ⁵ which provides in part:

“Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” ⁶

The obvious problem with ReDigi’s position is that when you sell a “particular copy or phonorecord” you no longer have a copy. When you “sell” your digital music file to ReDigi, you still have a copy. This is because the ReDigi software only deletes the file from your iTunes library on your computer. It does not delete the file from your iPod or iPhone. As the Court states:

“Plaintiffs point out, and ReDigi does not dispute, that these precautions do not prevent the retention of duplicates after resale through ReDigi. Suspension of the original purchaser’s ReDigi account does not negate the fact that the original purchaser has both sold and retained the digital music file after she sold it. So long as the user retains previously-made duplicates on devices not linked to the computer that hosts Music Manager, Music Manager will not detect them. This means that a user could, prior to resale through ReDigi, store a duplicate on a compact disc, thumb drive, or third-party cloud service unconnected to the computer that hosts Music Manager and access that duplicate post-resale. While ReDigi’s suspension of the original purchaser’s ReDigi account may be a disincentive to the retention of sold files, it does not prevent the user from retaining sold files.” ⁷

Further:

“Defendants do not dispute that, under Apple iCloud’s present arrangements, a user could sell her digital music files on ReDigi, delete Music Manager, and then redownload the same files to her computer for free from the Apple iCloud. Apple’s iCloud service allows one who has purchased a file from iTunes to re-download it without making a new purchase.” ⁸

And as someone who has used iTunes for quite some time, I can also tell you that if you connect your iPhone to the computer and iTunes detects there are songs present on the device that are not present in the iTunes library, it will ask you whether you want to add those songs to the library. And “poof,” back comes the copy you just “sold.”

And as someone who has a brother with a Bachelor’s degree is computer programming, I can tell you that “deleting” a file from your computer does NOT get rid of it. All the “delete” function does is removes the pointer that shows the computer where to find it. The file remains on your computer until it is written over with new data.

So when ReDigi claims it is buying a “used” digital file under the first sale doctrine, what it is really doing is making a copy of a file on someone else’s computer for resale. This, as both the District Court and the Court of Appeals held, violates the reproduction right of a copyright owner under Section 106(1) and the distribution right under 106(3). The Court holds:

“The fixing of the digital file in ReDigi’s server, as well as in the new purchaser’s device, creates a new phonorecord, which is a reproduction. ReDigi version 1.0’s process for enabling the resale of digital files thus inevitably involves the creation of new phonorecords by reproduction, even if the standalone digital file is deemed to be a phonorecord.” ⁹

In an interesting sideline to all of this in the early days of MP3 files, the anti-copyright crowd claimed that MP3 files were not phonorecords because they were not “tangible objects” and thus copyright laws did not apply to them. Now we have ReDigi desperately trying to make MP3 files phonorecords in order to make the first sale doctrine apply to them.

But back to our case.

The fair use defense fairs no better. Despite the fact that all ReDigi does is make an exact copy of a digital file, ReDigi claims that this is somehow “transformative” and fair use. This argument goes down in flames.

“ReDigi makes no change in the copyrighted work. It provides neither criticism, commentary, nor information about it. Nor does it deliver the content in more convenient and usable form to one who has acquired an entitlement to receive the content. What ReDigi does is essentially to provide a market for the resale of digital music files, which resales compete with sales of the same recorded music by the rights holder. These characteristics of ReDigi’s use favor Plaintiffs under Factor One.” ¹⁰

And:

“As noted in Campbell, the less a use provides transformative value, the more its commercialism will weigh against a finding of fair use. [Citation omitted] Here, ReDigi hosts a remunerative marketplace that enables resale by purchasers of digital music files, which is a commercial purpose. Especially in view of the total absence (or at least very low degree) of transformative purpose, the commercial motivation here argues against ReDigi with respect to Factor One.” ¹¹

But it is factor four, the market effect, that really sinks ReDigi’s ship:

“…ReDigi made reproductions of Plaintiffs’ works for the purpose of resale in competition with the Plaintiffs’ market for the sale of their sound recordings. ReDigi’s replicas were sold to the same consumers whose objective in purchasing was to acquire Plaintiffs’ music. It is also of possible relevance that there is a distinction between ReDigi’s resales and resales of physical books and records. The digital files resold by ReDigi, although used, do not deteriorate the way printed books and physical records deteriorate. As the district court observed, the principal difference between the “product sold in ReDigi’s secondary market” and that sold by Plaintiffs or their licensees in the primary market was its lower price.” ¹²

The impact of the case as we move forward is questionable. As the consumption of music moves away from physical product and downloads to streaming, it seems that a business such as ReDigi does not seem as exciting a prospect. ReDigi is currently in bankruptcy proceedings. ¹³ For one, Apple itself has been dogged by rumors that it will terminate the iTunes store, rumors which Apple has consistently denied. ¹⁴ And to put a real stake through the heart of physical product, my car, for the first time in 20 years, does not have a CD player.

But remember one thing. Streaming, while hugely popular remains highly unprofitable. ¹⁵ The digital download, while down, must not be counted out.