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Redigi – World’s First Used Digital Marketplace – Fails “First Sale” at Second Circuit

Redigi – World’s First Used Digital Marketplace – Fails “First Sale” at Second Circuit

I first posted on Capitol Records v. Redigi in March 2012 (Redigi Case Poses A Novel Copyright Question on the Resale of Digital Audio Files – Is “Digital First Sale Legal? Link), and posted a number of follow-up articles on this interesting case.1 Absent an appeal to the Supreme Court this long-running copyright case has finally come to an end with the Second Circuit’s December 12, 2018 decision holding that Redigi infringed the exclusive copyright right of reproduction with respect to the “second-hand” digital music files it sold via the Redigi system.

To understand this case it’s important to appreciate how Redigi’s system works. I explained this in detail in the post linked above, and the Second Circuit opinion describes it quite thoroughly as well. In short, Redigi acts as a broker for music files purchased and downloaded from iTunes. Redigi uploads a seller’s  music file to its own server and offers it for sale, deleting it from the seller’s computer, although the seller can continue to stream the file until it is sold. When a buyer selects it for purchase, it is retitled in the name of the buyer, and the seller loses access to it. The buyer may then stream or download the file to her computer or device.2

Redigi’s service irritated the record companies no end, and they sued for copyright infringement, asserting that Redigi was engaging in copyright infringement. Redigi, relying on the “first sale” doctrine, argued it did not.

The copyright first sale doctrine is an important exception to the copyright exclusive right of “distribution.” It allows the owner of a copyrighted work to sell the copy or phonorecord in which the work is fixed. This explains the existence of markets for second-hand books, records and CDs.3

Redigi argued that its service fell within the protection of first sale. The record companies argued that this analogy was inapt, since Redigi was not distributing the original file, but reproducing it on its server and on the buyer’s computer.4

The federal district court ruled in favor of the record companies (decision here5 and the Second Circuit (in an opinion written by Judge Pierre Leval, the Second Circuit’s prolific and influential copyright judge) agreed, reasoning as follows:

In the course of transferring a digital music file from an original purchaser’s computer, through ReDigi, to a new purchaser, the digital file is first received and stored on ReDigi’s server and then, at the new purchaser’s option, may also be subsequently received and stored on the new purchaser’s device. At each of these steps, the digital file is fixed in a new material object . . . 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’s server and the resale purchaser’s device on which the digital music files are fixed constitute or contain new phonorecords under the statute. (Emphasis added)

Redigi also argued (half-heartedly, it seems) that its system was protected by fair use, but this was an obvious loser. First, Redigi cannot show that it’s system is transformative. Second, Redigi makes identical copies of the whole copyrighted sound recording, which cuts against fair use. Third, the reproductions created by Redigi are sold in competition with the market for the original sound recordings, another negative factor.6 Each of these factors weighed against fair use, and Redigi lost on its fair use defense as well.

The bottom line: Redigi is enjoined from operating its service, and the company and its founders7 are on the hook for $3.5 million.

In an interesting postscript to this case, Redigi has developed a new methodology (“Redigi 2.0”) which allows a user to place a music file in the Redigi cloud server in the first place (it’s never downloaded to the user’s computer) and then simply transfer ownership to that file. Under this system Redigi never makes a copy (or enables users to make a copy), so it may not infringe the reproduction right. However, as part of a stipulated injunction in the district court Redigi agreed not to implement Redigi 2.0, and therefore its unclear whether the legality of this system will ever be tested in the courts.

Here’s my non-exhaustive take on how digital music files are treated under copyright law post-Redigi:

  • You purchase a CD that contains a digital music file authorized for sale by the copyright owner. You may sell it under first sale.8
  • You legally download a copyrighted music file to your computer and you transfer it to your smart phone for your personal use. This form of “space-shifting” is permitted based on fair use. Capital Record’s lawyer conceded this during oral argument before the district court in Redigi, and the Second Circuit commented on it favorably (in dicta) in its decision.9 It’s worth noting that the record companies have never sued a consumer for space-shifting legally acquired music files for personal use.
  • You legally download a music file to your computer and then upload it to a cloud service so you can stream it on your smart phone or speaker (e.g., an Amazon Echo). This is permitted based on fair use.
  • You purchase a device preloaded with music files authorized by the copyright owner. You can sell the device based on first sale, since this is a distribution, not a reproduction.
  • You download music files to your computer and sell your computer with your files on it. This is protected by first sale.
  • You download copyright-protected music files to your computer, transfer them to a thumb drive and delete them from your computer (i.e. “copy and delete”). You then sell the thumb drive. This is not protected by either first sale or fair use – based on Redigi this is an illegal reproduction.10
  • You legally download a music file to your computer, upload it to a cloud service, and then give your password to 25 of your closest friends or college dorm-mates so they can stream it. This is a violation of the copyright rights of reproduction, distribution and public performance. You lose.

Capitol Records LLC v. Redigi, Inc. (2nd Cir. Dec. 12, 2018)

Update: the Supreme Court denied review of this case, leaving the Second Circuit’s decision as the final word.

Footnotes:

An Introduction to the Music Modernization Act

An Introduction to the Music Modernization Act

Every few decades Congress enacts a major amendment to the U.S. Copyright Act. We are at one of those inflection points now. On October 11, 2018 the Orrin G. Hatch–Bob Goodlatte Music Modernization Act (the “MMA”) was signed into law. (click here for full text of the law)

This is a massive, game-changing law for digital music distribution, and it may take years for it to be fully integrated with the complex U.S. music copyright system. But, if you’re at a holiday party this season and someone insists on discussing the MMA with you, this blog post will give you a few talking points.

From a 40,000 foot level the MMA does three things.

First, and most importantly, it completely revamps the U.S. mechanical licensing1 system for interactive digital streaming services2 and digital downloads by shifting the burden of identifying composers from the services to the composers themselves. This is a huge benefit to the digital music services, who in the pre-MMA era were responsible for locating composers entitled to royalties but often failed to do so, creating an enormous potential liability for copyright infringement.

Second, it requires interactive streaming services to make royalty payments to owners of pre-1972 sound recordings for the first time.3

And third, it authorizes and facilitates payments to non-musicians who contribute to sound recordings, such as producers and sound engineers.

Before proceeding bear in mind that this law is very complex – the MMA itself is 66 pages of dense legal text. Millions of words and thousands of lawyer hours will be spent dissecting, analyzing and litigating this law in the coming years. This post is only a high-level introduction to the MMA – just enough that you can comment semi-intelligently if the topic comes up at a party during the holidays. I’ve put more detail into the footnotes, which you can read if you’re interested in going a bit deeper. And, I’ll delve more deeply into some of the issues raised by the MMA in subsequent posts.

With that warning …

Compulsory Licensing and the Mechanical Licensing Collective

The MMA creates a “blanket license”4 for digital music service providers to sell interactive music streams. It authorizes the creation of a quasi-governmental “Mechanical Licensing Collective” (the “Collective” or “MLC”) to administer this system. The Collective will create and maintain an online, publicly available “musical works database” of all the musical works (notes and lyrics), their owners and the percentage ownership of works co-written by multiple songwriters. The interactive digital streaming services will pay the Collective, and the Collective will pay songwriters.

The licensing system is “compulsory,” in the sense that composers are compelled by operation of law to enter into the licenses, there is no “opt-out,” and the license exists whether or not composers take any action to make sure they are properly registered with the Collective.5

Who will create this massive database and how long it will take to populate it is yet to be determined.6

The Collective is charged with developing and maintaining the database. However, in the end it will be up to composers to get accurate ownership information to the Collective – that’s the only way composers can be sure they’ll get paid.7

Once the database is operational the MMA’s goal is for the database to contain ownership data for every musical work protected by U.S. copyright law. This includes musical works owned by non-U.S. songwriters as well as U.S. composers, if their works are streamed in the U.S. Therefore, songwriters outside the U.S. will have to make sure their works are properly registered with the Collective if they want to be paid.

Spotify Logo

The MMA allows digital streaming companies to pay the proper owners by paying the Collective. This allows interactive streaming companies (for example, Spotify, Apple Music, Amazon Music, Deezer, Tidal) to stop worrying about whether they are paying songwriter royalties to the proper rights holders, a major liability risk pre-MMA. Their obligations to songwriters under copyright law will be satisfied as long as they pay the Collective. It’s up to the Collective to then pay the songwriters. And it’s up to the songwriters to make sure their compositions are correctly registered with the Collective.8

How much will songwriters be paid under this compulsory license? As was the case before the MMA, royalty rates will be set by the Copyright Royalty Board.9

If it strikes you that this law is a mind-blowingly complex and ambitious undertaking, you are right! How long it will take for the Collective to select a developer and get the database established with correct ownership information is anyone’s guess. However, the target date for the cut-over to this system is January 1, 2021.10

So, a few takeaways your holiday party –

  • “Wow, can they really do this in two years? I’ll bet Congress will have to extend the effective date.”
  • “Who will get the contract for this project – Microsoft or Oracle? Ha ha …”
  • “How many songwriters will never hear about this, or won’t bother to register with the MLC? I mean, lots of musicians haven’t heard of SoundExchange11 even today, 17 years after it was created.”
  • “The MMA prevents songwriters from recovering statutory damages infringements retroactively to January 1, 2018 – is that constitutional? I’ll bet that issue will be litigated.”

Pre-1972 Sound Recordings

People are often surprised to learn that U.S. copyright law did not cover public performances of pre-1972 sound recordings. When you hear Stairway to Heaven (1971) played on the radio or digitally streamed on an interactive service like Spotify, Jimmy Page and Robert Plant (the composers) receive a songwriter royalty. But no one else is paid royalties (the other band members or, more likely, the record company that owns the recording).12

This will change under the MMA, but only for sales by digital streaming services and satellite radio stations, such as Sirius XM. So-called “terrestrial” radio stations (AM/FM radio) can still play pre-1972 sound recordings without paying a royalty to the rights-holders (although they must pay songwriter royalties, as they have in the past, typically through the PROs).

While this seems like a fair start to paying owners of pre-1972 sound recordings, one aspect of the law is particularly controversial – the duration of the new public performance copyright in the sound recordings. I’ll address this issue in a later post. (Hint: the duration is long).

Takeaways for your holiday party:

  • “So, this is digital only? Why doesn’t AM/FM radio have to pay royalties also? That doesn’t seem fair.”
  • “So, even though pre-1972 sound recordings have been in the public domain with respect to public performances for more than 45 years, they will now suddenly be protected by copyright law? Is it right for the law to suddenly protect sound recordings that have been in the public domain (for public performances) after such a long time?”

Payments to Producers

This part of the MMA creates a system for SoundExchange to pay royalties directly to producers based on a “letter of direction” SoundExchange receives from recording artists. For sound recordings fixed before November 1, 1995, even in the absence of a letter of direction SoundExchange will allocate 2% of royalties for a sound recording to be paid to producers involved in the making of that sound recording.

Takeaway for your holiday party:

  • “Music producers contribute a lot to sound recordings. It’s about time the law recognizes this!”

Conclusion

Yes, this is a huge, complicated law, and I’ve barely scraped the surface. It’s going to take a long time for it to percolate fully throughout the music world. And, it’s going to be a challenge for the Copyright Office to implement it under the schedule set by Congress. Whether it turns out to be beneficial for music composers and the copyright system as a whole will not be known for years.

More to come.

Update: On July 5, 2019 the Copyright Office announced that the Mechanical Licensing Collective, Inc. (MLC) has been selected as the entity that would administer the blanket license and distribute collected royalties to songwriters and music publishers. As discussed above, this entity will be responsible for developing and maintaining a comprehensive database of musical works and sound recordings, which will be publicly available. The MLC is led by the National Music Publishers Association (NMPA), the Nashville Songwriters International Association and the Songwriters of North America (AMLC). Ed Christman goes into this decision in detail in his Billboard article, Why The U.S. Copyright Office Chose The Mechanical Licensing Collective.

Footnotes: