Virtual Garage Sales for Used Digital Music Are Barred by Court

(Bloomberg) -- Purchasers of digital music files from services such as Apple Inc.’s iTunes cannot resell them through a virtual marketplace, an appeals court said in a ruling that recalls an era dominated by vinyl records and CDs before streaming services reshaped the music industry.

The decision, issued Wednesday, affirms a district court’s ruling that such sales infringe the exclusive rights of copyright holders. A virtual marketplace designed to resell digital music files as if they were secondhand albums runs afoul of copyright law, the U.S. Court of Appeals for the Second Circuit ruled in a victory for record labels.

ReDigi Inc., a closely held company that created a platform for the resale of legally purchased music files, had argued that its service facilitated the transfer of music from one recipient to another without duplicating the original file.

The appeals court said that the transfers created duplicate copies of the music files and so were not allowed under U.S. law. Any change to develop rules for secondhand sales of digital files would be up to Congress, the court ruled in the closely watched case.

Secondhand Competition

“The establishment of ReDigi’s resale marketplace would benefit some, especially purchasers of digital music, at the expense of others, especially rightsholders,” wrote Circuit Judge Pierre Leval for the three-judge panel. The music companies effectively would be in competition with secondhand merchandise that, “unlike secondhand books and records,” are “as good as new.”

It was a victory for Capitol Records LLC, which had won a $3.5 million judgment in federal court in New York City.

The extent to which the decision might affect consumers who want to resell legally purchased digital music files is unclear, according to Jonathan Band, a Washington-based lawyer who represented the American Library Association in its brief in support of ReDigi.

“On one level, it does seem to preclude a private sale,” said Band, who has helped clients draft legislation including the Digital Millennium Copyright Act and the Stop Online Piracy Act. “It could be, on the other level, because they didn’t address that specific issue, maybe it could be raised in the future.

“The door is not closed on the possibility of maybe an individual being able to sell being a fair use. I think there is this one argument out there that was not rejected.”

A spokeswoman for Universal Music Group, which owns Capitol and is a unit of Vivendi SA, said Wednesday night in a statement that it was “gratified that the Court of Appeals affirmed the lower court’s decision that ReDigi is nothing more than a garden variety copyright infringer.”

Officials at ReDigi didn’t immediately respond to requests for comment.

Courts already had ruled that owners of digital music can’t distribute the works to friends through peer-to-peer networks. ReDigi sought to work around that prohibition by creating a marketplace where people who legally bought music could sell their files and the originals would be permanently eliminated.

Sell and Delete

The service would reproduce the file for transfer to the new owner, and a Music Manager would check the original owner’s computer, directing the owner to delete any duplicate file, or suspending the account for non-compliance.

The court ruled that ReDigi’s system was a way of reproducing the work and so didn’t count as a distribution of an already sold product. The trial judge also rejected the argument that the transfer of digital files falls under the so-called fair use exception that allows the use of copyrighted work for certain purposes.

Besides the library association, ReDigi was supported by the non-profit Internet Archive, which said it would help their plans to create digital libraries, including lending services for people with disabilities.

"A fair use finding in this case would provide libraries with additional legal certainty to roll out innovative services such as the Internet Archive’s Open Library," the library group said. "Such a result would increase users’ access to important content without diminishing authors’ incentive to create new works."

But Terence Ross, an intellectual-property lawyer at Katten Muchin Rosenman LLP, said “a rational economic actor will not be able to resell their digital music after this.”

“Not per se, but for all practical purposes, it makes it economically inefficient to do so,” Ross said. “What the court has literally written is the only way you can resell digital music is to sell your hard drive, or another physical medium.”

The Association of American Publishers and the Copyright Alliance, which represents writers, composers and filmmakers, said a victory for ReDigi would “permit a new, and heretofore illegal, enterprise.”

“ReDigi threatens to damage if not destroy entire markets that are necessary to support the development of creative works,” the copyright group said. “It may start here with music, and by judicial extension, could threaten motion pictures, books, and other works that have enriched our society.”

Band, with the library association, however, noted that the music industry has changed so quickly that the appeals court’s decision might not matter as much as it might have just a few years ago.

“This is all about yesterday’s technology,” Band said. “Now, everybody uses these streaming services. The number of people downloading music has gone way down, so the business model and the technology has evolved. So this is kind of interesting, but the future of the music industry, this is not going to have much of an impact.”

The case is Capitol Records LLC v. ReDigi Inc., 16-2321, U.S. Court of Appeals for the Second Circuit.

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