by Lee Gesmer | May 29, 2019 | Antitrust, Copyright
[This post was updated in September 2019: “Contract, Combination or Conspiracy” – Can Peloton’s Lawsuit Survive the Music Publishers’ Motion to Dismiss?]
Can a trade association negotiate sales or licenses on behalf of its members? Can it tell members, “don’t negotiate individually with a specific purchaser, and if you are already in negotiations with that purchaser cut them off and let us negotiate on behalf of you and other members”? At what point does this conduct become an antitrust violation?
These are the issues raised in a lawsuit between Peloton Interactive, Inc. on the one hand, and a group of music publishers and the National Music Publishers Association, Inc. (NMPA) on the other.
Peloton and Music Licensing. Peloton sells high-end, in-home stationary bicycles. An important feature of Peloton’s service is music-backed, instructor-led workout classes streamed to users via a built-in video screen. Some of these classes are broadcast live, and many are recorded and accessed on-demand.
Peloton doesn’t own its music, instead Peloton instructors create their playlists using popular recordings drawn from Peloton’s commercial music library.
To do this Peloton needs several music licenses. To play the sound recordings it needs master licenses from record companies. For public performance of the musical works (the compositions) it needs licenses from the performance rights organizations, ASCAP, BMI and SESAC. And, to reproduce the musical works along with videos, it needs synchronization licenses, so-called “sync licenses,” from the owners of the musical works.
A sync license does not fall under any of the compulsory license provisions of the Copyright Act, and therefore sync licenses must be negotiated directly with the publishing companies that hold the copyrights. Here, it seems, is where Peloton’s attempt to acquire music rights fell short – Peloton was able to purchase blanket or “catalog-wide” sync licenses from what it calls the “major” publishers and many (but not all) “independent” publishers.
The Publishers’ Copyright Suit. In March 2019 nine independent publishers filed suit against Peloton, claiming copyright infringement of more than a thousand musical works and seeking total damages as high as $150 million. According to the publishers Peloton transmitted these compositions with exercise videos without a sync license.
Based on the complaint the publishers appear to have a strong case, and it is unlikely that their core allegation – that Peloton was using these songs in videos without sync licenses – was false. If true, Peloton is looking at a significant settlement (or worse, a large court judgment). And, Peloton didn’t assert a credible public defense to the suit – in fact, it reacted by withdrawing the songs at issue from the library of tunes available to its instructors.
But it’s often the case that the best defense is a good offense, and Peloton has attempted to strike back in its countersuit.
Peloton’s Antitrust Counterclaim. In April Peloton filed a counterclaim against the nine publishers and NMPA, which it added as a defendant to its counterclaim. The heart of its claim is that, under the influence and urging of NMPA, the nine publishers refused to negotiate directly and individually with Peloton. Rather, they engaged in price fixing and a group boycott by insisting that Peloton negotiate licenses with NMPA on behalf of all the publishers. Peloton’s counterclaim states:
NMPA has instigated a coordinated effort with the Counterclaim Defendant music publishers to fix prices and to engage in a concerted refusal to deal with Peloton. Through these actions, NMPA has exceeded the bounds of legitimate conduct for a trade association and become the ringleader of concerted activity among would-be competitor music publishers, all in violation of the antitrust laws. . . . NMPA first sought to extract supracompetitive license terms from Peloton by negotiating collectively on behalf of a large (though unidentified) number of member publishers. . . . When NMPA’s collective negotiations with Peloton later stalled (for reasons NMPA never disclosed to Peloton), Peloton pursued direct negotiations with a number of music publishers. After participating in seemingly meaningful negotiations, however, several of the Coordinating Publishers suddenly — and virtually at the same time — cut off their negotiations and collectively refused to deal with Peloton. This refusal to deal with Peloton was at the urging of NMPA …
Does Peloton have a viable antitrust claim? It’s a close call.
Buying Groups and Selling Groups. To understand the antitrust issues here I start with the concept of buying groups, or group purchasing organizations. The courts have recognized that most buying groups are economically efficient and (for example), enable small retailers to compete more effectively with larger retailers. Consequently, buying groups are “not a form of concerted activity characteristically likely to result in predominantly anticompetitive effects.” Northwest Wholesale Stationers v. Pac. Stationery & Printing Co. (USSC 1985). So long as the members of the buying group have a market share of less than 40% of buyers, they are protected by an FTC and court-approved safe harbor from antitrust liability for group negotiation of “input prices.”
However, the same is not true of “selling groups” – competitors who agree to set “output prices” at which they will sell or license their products. Output pricing by members of a trade association can easily cross the line over into price fixing, a per se violation under the antitrust laws.
“Hub-and-Spokes” Conspiracy. And that is what Peloton alleges occurred here. The antitrust theory behind Peloton’s counterclaim appears to be based on a “hub-and-spokes” conspiracy, similar to United States v. Apple (2nd Cir. 2015), where Apple acted as the organizer of an illegal horizontal price-fixing conspiracy among publishers in the e-book market. Peloton alleges that NMPA has acted as a “ringleader” similar to the role played by Apple in that case.
Twombly “Plausibility.” However, the NMPA and the publishers have already informed the court that they intend to file a motion to dismiss Peloton’s counterclaim. This motion is likely to rely on the argument that the counterclaim fails to allege facts that satisfy the Twombly “plausibility” requirement required for pleading an antitrust conspiracy. The publishers are likely to argue that the complaint contains insufficient allegations of concerted action between the publishers to support the inference that the publishers engaged in a horizontal conspiracy. In other words, in the language of the hub-and-spoke metaphor, there is no “rim.”
Indeed, Peloton’s antitrust claim provides no direct evidence of an overarching conspiracy between the publishers. There are no allegations of communications between the publishers from which the court could infer an agreement or conspiracy between them; there are no statements by informants or witnesses that support a horizontal conspiracy; and there are no specific allegations of back-room conspiratorial meetings between the publishers. Peloton alleges that several publishers pulled out of direct negotiations with Peloton at about the same time, but even these allegations of parallel conduct appear lacking: of the nine publishers alleged to be part of the conspiracy, Peloton provides specific allegations of parallel conduct as to only three.
On this record Peloton may be hard-pressed to meet the “plausibility” standard and persuade the court that the conduct at issue is not the result of independent decision making on the part of the publishers – that is, that they would be better off having NMPA negotiate with Peloton on their behalf then negotiating directly.
Consequences if Peloton Prevails. That said, court rulings on motions to dismiss are unpredictable, and unappealable by a losing defendant. If Peloton’s counterclaim does survive a motion to dismiss its antitrust case represents a real threat to NMPA and the publishers. Any damages Peloton can prove will be subject to trebling, and NMPA and the publishers may be liable for Peloton’s attorney’s fees, which in an antitrust case can be substantial. And, the publishers’ copyrights may be unenforceable against Peloton based on the doctrine of copyright misuse.
To add to this, there are practical issues that are not immediately apparent from the court filings. Can Peloton’s law firm represent all ten defendants (NMPA and the nine publishers) against this counterclaim? Or, are there sufficiently different interests that will require the publishers to each retain separate counsel, increasing their overall defense costs?
If the publishers’ lawyers are representing the publishers on a contingent fee basis, did they agree that this would include the defense of any counterclaims? If not, are the publishers (many of which are relatively small entities) prepared to incur the substantial cost of defending a complex, multi-party antitrust suit? Are they prepared, on behalf of their artist clients, to risk losing the right to enforce their copyrights against Peloton under the copyright misuse doctrine?
I would venture that the answers to most of these questions is “no.” Quite likely, once the potential impact of Peloton’s counterclaim sinks in, and assuming the counterclaim survives the motion to dismiss, some of the publishers will negotiate directly with Peloton and settle their copyright claims in exchange for a release from Peloton’s antitrust claims, leaving fewer and fewer of the “starting ten” counterclaim defendants to fight with Peloton. As the number of publishers left in the case decreases, the pressure on the remaining publishers will increase, eventually forcing them to the settlement table. How NMPA, the alleged “ringleader” – which owns none of the music involved – will navigate this minefield and emerge from this litigation is an open question.
Update: The music publishers have filed a proposed amended complaint greatly increasing the number of compositions at issue – and therefore the damages they are seeking from Peloton. Link here.
Update: This case was settled after the court dismissed Peloton’s antitrust counterclaim. (Link)
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by Lee Gesmer | Apr 24, 2019 | Copyright
It looks like the music copyright world is facing another high-profile infringement trial. This time the songs at issue are Marvin Gaye’s 1973 “Get Lets it On“ and Ed Sheeran’s 2014 “Thinking Out Loud.” On January 2, 2019, a federal judge denied Sheeran’s motion for summary judgment in this case. Absent a settlement, the case will proceed to trial in federal court in New York.
This case raises some of the same questions that were at issue in the two cases decided recently by the Ninth Circuit – the Blurred Lines case (where the Ninth Circuit upheld a jury finding of infringement of another Marvin Gaye song), and the Led Zeppelin/Spirit Stairway to Heaven case, where the Ninth Circuit reversed a judgment for Led Zeppelin and remanded the case for a second trial. See Blurred Lines At The Ninth Circuit and Led Zeppelin, Spirit and a Bustle at the Ninth Circuit.
I discuss a few of the interesting aspects of the Get It On case below, but the bottom line is that Sheeran should settle rather than take the risk of proceeding to trial.
Admissibility of pre-1978 Sound Recordings. One issue present in the Ninth Circuit cases and here as well is the admissibility of a pre-1978 sound recording, in this case Get It On, which was recorded in 1973. The plaintiffs have rights to the musical work (the composition), but they do not claim a copyright in the sound recording. However, the plaintiffs argue that under the 1909 Copyright Act (in effect in 1973) a musical composition’s copyright extends to it first mechanical reproduction – in other words the 1973 sound recording of Get It On. Sheeran disagrees.
The judge dodged this arcane issue, leaving it for a later stage of the case. He held that his ruling on Sheeran’s summary judgment motion would be the same whether or not the copyright extends to the sound recording. Given the Ninth Circuit’s ruling in the Stairway to Heaven litigation, it’s unlikely the plaintiffs will be able to use the 1973 sound recording to prove infringement. This would leave them in the awkward position that faced the plaintiffs in Blurred Lines and Stairway, where the juries did not hear the original recordings of the plaintiffs’ songs, and the plaintiffs were left with no choice but to have a witness perform the sheet music in court. While this is a positive for Sheeran, it’s not enough to overcome the negatives in this case, especially given his live performance of the two songs, as I discuss below.
Commonplace Musical Elements. With respect to the substantive merits of the case, Judge Stanton rightly noted that many elements of Get It On are unprotectable. However, the parties and their musicologist experts disagreed on whether the chord progressions and harmonic rhythms present in the two songs are unprotectable as commonplace musical elements. This, the court held, is a factual question to be determined at trial.
The problem that Sheeran faces is copyright law’s recognition that a musical work may receive copyright protection based on a combination of commonly used and public domain elements. As the Ninth Circuit stated in its Stairway decision, “there can be copyright protection on the basis of a sufficiently original combination of otherwise non-protectable music elements. . . . the selection and arrangement of public domain elements could be considered original.” This is Second Circuit law as well – a work “may be copyrightable even though it is entirely a compilation of unprotectable elements.”(Knitwaves, Inc. v. Lollytogs (2nd Cir. 1995)).
At the heart of the infringement claim is Get It On’s “I-III-IV-V” chord progression and its distinctive harmonic rhythm, where the second and fourth chords are “anticipated” or placed ahead of the beat. Sheeran argued that this progression/rhythm is a common musical technique, but he has been able to point to only one pre-Get It On song that shared this chord progression and rhythm. While it’s unusual for a music copyright case to be based on a chord progression, it’s not unheard of, and the chord progression/rhythm in this case appears to be sufficiently original to avoid disqualification based on the scènes à faire doctrine and serve as the basis for a copyright claim.
The Substantial Similarity Test in the Second Circuit. A third factor that is likely to weigh against Sheeran at trial is the Second Circuit’s notoriously confusing test for substantial similarity in cases where the plaintiff’s work has both protectible and unprotectible elements, as is the case here..
In cases involving protectible and unprotective elements the court must apply the “more discerning” test and “attempt to extract the unprotectible elements from consideration and ask whether the protectible elements, standing alone, are substantially similar.” (Knitwaves, supra). Complicating what can be a challenging task even for trained musicians is the Second Circuit’s seemingly contradictory instruction that “we have disavowed any notion that we are required to dissect the works into their separate components and compare only those which are in themselves copyrightable.” Rather, the court (and presumably the jury) is “principally guided by comparing the contested design’s total concept and overall feel with that of the allegedly infringing work . . . as instructed by our good eyes and common sense.”
In my experience, jurors are easily confused by substantial similarity instructions in copyright cases, and the state of the law in the Second Circuit is likely to make that problem even worse than usual. Add to that the risk that some (perhaps all) of the jurors may be musically unsophisticated and the trial of a case like this becomes even more of a coin toss than most jury trials. The case may be vulnerable to the opinion of one or two jurors who have a musical background or be familiar with the musical genres at issue in the case.
The Sheeran Video. The capstone of the plaintiffs’ case against Sheeran is the unusual fact that Sheeran performed Thinking Out Loud in concert, during which he transitioned back and forth between Thinking Out Loud and Get It On (4:30 in the video). This is likely a first in a music copyright case.
While the judge may not permit the jury to listen to the 1973 recording of Get It On, he will be hard-pressed to preclude the plaintiffs from playing this video at trial. The plaintiffs have a near-insurmountable argument that this is an admission that the two songs are substantially similar. In fact, the judge refers to this video in his decision, suggesting that the video will be admitted at trial. That may be all the jury needs to conclude that the two works have the same “total concept and feel” or “aesthetic appeal” (another substantial similarity copyright standard in the Second Circuit).
Sheeran Should Settle. I’m well aware that many trained musicians (and amateurs) have weighed-in on Sheeran’s side of this case, and they may well be right. However, it’s unlikely Adam Neely or Rick Beato, or any knowledgeable musician, will end up on the jury in this case. Sheeran is more likely to end up with what one online wag described as a tone deaf judge and joe sixpack jury.
Assuming the plaintiffs are not grossly unreasonable, Sheeran would be better off settling this case, rather than risking an unfavorable outcome at trial that is likely to cost him more money than a settlement and damage his reputation.
Sheeran seems to know he’s in trouble. After the judge denied his motion for summary judgment he took the unusual step of asking the judge to rehear the motion or, alternatively, certify an interlocutory appeal to the Second Circuit, a motion the judge promptly denied. This motion had virtually no chance of success, and served only to signal Sheeran’s desperation as the case proceeds toward trial.
Trial is scheduled for September 11, 2019.
[Update, July 2019]: The judge is delaying the trial of this case pending the Ninth Circuit’s en banc decision in Skidmore v. Led Zeppelin. That decision will probably not arrive until Spring 2020, so the trial is likely delayed by at least a year. Court order here.
[Update: May 2023]: After trial a jury rendered a decision in favor of Sheeran. Here is the Sheeran jury verdict. The jury only had to answer the first question on the verdict form –
by Lee Gesmer | Feb 6, 2019 | Litigation
Good decisions come from experience. Experience comes from making bad decisions. Mark Twain
I’ve been reading about mental models. Everyone has these, whether they are aware of them or not. Doctors, engineers, sports coaches, electricians, architects, they all have them. Gary Kasparov has them for chess. Warren Buffett for investing. Nancy Pelosi for legislative politics. Bill Belichick for football (Tony Romo too). And, whether they are aware of it or not, lawyers have them.
Here’s Charlie Munger’s description of mental models:
you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.
You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.
You can read what Shane Parrish and James Clear have to say about mental models at the links attached to their names.
This got me thinking about mental models for lawyering. Of course, the only ones I’m familiar with are my own. I know I have a bunch of them – how to evaluate a case, how to conduct discovery or a deposition, prepare or oppose a preliminary injunction or summary judgment motion, prepare an opening statement, prepare for trial, conduct direct examination, conduct cross-examination, research a legal issue …. But, I’ve never spent much time thinking in any detail about my “latticework” of mental models.
Richard Feynman
I thought it would be interesting (self-indulgent?), if I took a shot at this for one mental model. I chose what I think is the easiest of the several I listed above – how to evaluate a new case. So, here goes. And yes, I get that “mental models” is just a fancy term for what people have called “experience” since time immemorial. But if it’s good enough for Charlie Munger, it’s good enough for me.
A Case Evaluation Mental Model
First, think about jurisdiction and venue. Does the client have personal jurisdiction over the defendant in Massachusetts? If so, where does venue lie, state court or federal court (diversity, federal cause of action)? If I file in state court can the defendant remove the case to federal court? Which court do I prefer, and can I exert some control over this based on the claims asserted (e.g. assert/not assert a federal claim)? Either way, state or federal, which court has venue? Do I want to handle a case that must be filed or defended in Springfield, Mass., an hour-and-a-half drive from my office?
Look for an arbitration clause. If it appears to be enforceable, it can change my thinking on many of the issues described below. If the clause calls for a three-member arbitration panel, warn the client that the potential cost of the case may be about to sky rocket, and that a three-member panel complicates the case in a variety of ways.
What are the disputed/undisputed facts and potential causes of action? What is the black letter law on the legal claims? Where is the law uncertain or unclear and how might that effect the case? What research will I have to do to update myself on these issues and what resources will I use to do it? Can I start identifying strengths or weaknesses on each side of the case? Do I have adequate expertise in the relevant area of law? If not, what will it take for me to get up to speed? Can I do that economically, given the cost constraints of the case?
Who is on the other side of the case, if that is known? Do I know that lawyer, or her reputation? What is my experience with the opposing law firm. Is it a thousand-plus lawyer firm or a solo?
What are the economics of the case? What are the relative resources of the parties? Is my client is financially weaker than the adverse party? If so, how big a problem will that be for my client? Is the client hinting that it wants representation on a full or partial contingent fee basis? Is that the client’s only option? Is that of interest to me? How will that work for my firm economically? When will I be in a position to give the client a cost estimate? What more do I need to know to provide an estimate?
How much electronic evidence is involved? How will that be handled as a technical matter, how will if affect cost, and what evidentiary issues does it raise?
How experienced and savvy does the client appear to be? Will the client be easy to work with or difficult? Am I being asked to replace another lawyer (often a negative indicator)? Does the client have an unrealistic view of the merits of the case? How likely is that to change as the case progresses? Will I be able to persuade the client to see the case objectively for purposes of settlement? Is the case motivated by emotion/passion or money?
Is the case likely to involve a motion for preliminary injunction? A motion to dismiss? A motion for summary judgment? How should I factor these into a cost estimate? Sometimes the client shows up with a motion for preliminary injunction against it already pending. This is typically a fire drill situation where time is short and the focus must be on defending against that motion before other factors are considered. How does that urgency affect my decision to take the case?
Is the case likely to involve a jury trial? If so, how is a jury likely to see the equities based on “person on the street” values? How is a jury likely to view my client in 
term of socioeconomic status and credibility? Does the case lend itself to a “story” that I could present persuasively in my opening statement? In that regard, I begin to think about the “theory of the case” as early as possible.
Do I need to interview any witnesses before taking on the case to get a better handle on the facts or to give the client a better evaluation of the case? How many witnesses will be involved? Are they friendly or unfriendly? Are any witnesses out-of-state, requiring travel to take their depositions and increasing the cost?
Does the case lend itself to mediation? The majority of cases that go to mediation settle – at what stage of this case should I recommend that we pursue mediation, if at all? Is early mediation an option?
If the case does go to trial how likely is an appeal, which could delay resolution for an additional year or two? At what point should I mention this possibility to the client? How does this risk factor into my decision to take the case on a full or partial contingent fee basis? On what terms should the full/partial contingent fee agreement cover an appeal?
Can I (or my office) handle the time and resource demands of this case? How will I staff the case? How do those demands impact my overall case load?
What is my initial impression of the case? I’ve learned that once I get deeply involved in a case I can lose sight of this. But, this is how a judge or jury is likely to view the case. It’s important to capture this before I start thinking about the case at a level of detail a judge/jury is unlikely to apply. I might even take the time to write this down so I can go back and read it months or years later.
What does my intuition tell me about the case? As Joel Tillinghast describes it (in a different context), my evaluation of the case should be a combination of thinking and trained intuition.
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If you are a client and you’re describing your case to a lawyer, this will give you some idea of what may be going through her head. If the lawyer appears to be thinking hard, now you know why.
Do you have a law-related mental model that you’d like to share? If so, email it to me at lee.gesmer@gesmer.com and perhaps I’ll feature it in a follow-up post. No “this-is-my-mental-model-when-I’m-meeting-with-a-lawyer” humor please! 
FOOTNOTES
by Lee Gesmer | Jan 31, 2019 | General
This extraordinary software copyright case — Oracle v. Google — has been in the courts for eight years, and I’ve blogged about it almost every step of the way. After winning twice in district court and losing two appeals before the Federal Circuit the case is on appeal to the Supreme Court for the second time. In its petition to the Court Google’s “questions presented” are:
- Whether copyright protection extends to a software interface.
- Whether, as the jury found, Google’s use of a software interface in the context of creating a new computer program constitutes fair use.
The first question was the focus of the first trial and appeal by Oracle. Google asked the Supreme Court to decide this issue after losing the first appeal, but was rebuffed. The second question was the subject of the second trial, which Google won on a jury verdict and lost on Oracle’s appeal to the Federal Circuit.
To recap, Google need a mobile operating system for its smartphones, and wanted to use Java. After negotiations to license Java from Oracle were unsuccessful Google rewrote the programming language code for Java (the implementing code) to be compatible with Java. It called this Android. It was careful to do this without copying the code for the Java language or infringing Oracle’s copyright in this work.
However, Google did copy the Java “declaring code” or naming structure (basically function calls), in order to make Android more familiar and accessible to Java programmers.
In the first appeal in this case the Federal Circuit reversed a decision by the trial judge and held that the declaring code was copyright protected, and therefore Google had engaged in copyright infringement. However, this conclusion was subject to Google’s fair use defense, which the jury had hung on at the first trial. It therefore remanded the case to the district court for a second trial on fair use.
At the second trial the jury found that Google’s copying was protected by fair use. However, Oracle appealed to the Federal Circuit again, and the Federal Circuit found that Google’s copy of the declaring code was not protected by fair use. This decision was extremely controversial – it was the first time a federal appeals court has overruled a jury verdict on fair use.
With respect to the first question presented — whether copyright protection extends to a software interface — Google’s current appeal focuses on the First Circuit’s 1995 decision in Lotus v. Borland. In that case the First Circuit held that the menu command hierarchy in the Lotus 1-2-3 spreadsheet program was a “method of operation,” and therefore excluded from copyright protection under Section 102(b) of the Copyright Act.
That decision was the subject of an appeal to the Supreme Court. In 1996 the Court deadlocked 4-4, and as a consequence the First Circuit’s decision was affirmed. However, due to the 4-4 deadlock it became law only in the First Circuit, not nationally. Lotus was an important decision at the time, but it has remained an outlier – no other court has fully adopted the holding in Lotus v. Borland.
In seeking Supreme Court review Google argues that there is a circuit split, as follows:
. . . the courts of appeals are deeply divided on the appropriate standard for determining the circumstances under which a software interface is copyrightable … . At a minimum, the Federal Circuit’s standard directly conflicts with the standard adopted by the First and Sixth Circuits. The Court should grant review to resolve the conflict among the courts of appeals on this exceptionally important issue.
On the second question presented — whether Google’s use of a software interface in the context of creating a new computer program constitutes fair use — Google argues:
Because the jury returned a general verdict on fair use, the Federal Circuit correctly stated that it “must assume that the jury resolved all factual issues relating to the historical facts in favor of the verdict.” . . . But the Federal Circuit said one thing and did another: it reconsidered for itself a number of factual issues presented to the jury and resolved those issues in support of the conclusion that Google’s use was unfair as a matter of law. . . . To permit that approach would condone an unprecedented degree of appellate second guessing of factual determinations in fair-use cases. This Court’s intervention is urgently warranted to rectify the Federal Circuit’s profoundly flawed approach.
I’m going to predict that the Supreme Court will accept review of this case on at least one of the two issues presented by Google. This case is of real importance to the software industry, and there is a good chance the Supreme Court will recognize that, as it did when it accepted review of Lotus v. Borland 24 years ago.
However, there are two issues lurking beneath the surface that could impact the Court’s decision of whether to grant review. T’he first is the unusual procedural posture of the case. It came to the Federal Circuit because there were patent infringement claims at an earlier stage of the case. This required that any appeals — even an appeal of a non-patent issue — be directed to the Federal Circuit rather than to the Ninth Circuit Court of Appeals, where the case was tried. However, Federal Circuit decisions that come to it from other circuits and do not involve patent law do not become the law in those circuits for purposes of legal precedent. This means that courts in the Ninth Circuit are not bound by the Federal Circuit’s ruling in this case. This fact diminishes the impact of the “circuit split.” It’s a circuit split between the First Circuit (Lotus) and the Federal Circuit, which hears very few copyright cases, and a First Circuit/Federal Circuit “split” may be less significant than a First Circuit/Ninth Circuit split would have been.
The second issue is the position of the Solicitor General. When Google appealed the Federal Circuit’s first decision the Supreme Court requested the Solicitor General’s opinion on whether it should take the case. The Solicitor General advised against review at that time, noting that the case involved “substantial and important concerns” that should be addressed through the fair use doctrine. The fair use doctrine was the subject of the second trial, and it’s likely the Supreme Court will ask for the Solicitor General’s views again. The recommendation of the current Solicitor General’s office on the issues in this case will be an important factor in the Court’s decision whether to review the case.
These technicalities aside, this is a hugely important case for the U.S. software industry. We can only hope that that Supreme Court recognizes this, and decides to clarify the issues presented by the case.
Please.
First Update: In September 2019 the Solicitor General (representing the United States) filed a brief opposing a grant of certiorari by the Supreme Court. The Supreme Court has agreed with an SG recommendation to deny cert over 90% of the time (Comparing Cert Stage OSG Efforts Under Obama and Trump (link)), so things are not looking good for Google at the moment.
Second Update: The Supreme Court granted cert (review). See my resources page here: link
FOOTNOTES
by Lee Gesmer | Dec 21, 2018 | Copyright
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. 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.
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.
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.
The federal district court ruled in favor of the record companies (decision here 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. 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 founders 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.
- 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. 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.
- 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:
