By Kevin Smith

Over the last two weeks, I have been putting together a syllabus to teach a course in copyright law at the University of Kansas law school.  Although I have taught copyright a lot, I have never done so in a formal law school class, so this is both an exciting and intimidating process for me.

As part of planning a class session about the doctrine of first sale, I was doing a little bit of research about the Capitol Records v. ReDigi  case, which squarely confronts the issue of whether or not first sale can survive in a digital age.  The case has been going on for a while, so I will claim the process of creating a syllabus as my justification for writing about it now.

As many readers will know, in the past few years the Supreme Court has significantly clarified and strengthened the doctrine of first sale, or “exhaustion,” as it is known in many countries, by ruling that the doctrine applies, in both copyright and patents, even to items manufactured and sold abroad.  The idea, of course, is that after the “first sale” of any copyrighted work, the exclusive right to control further distribution of that particular copy of the work is “exhausted.” Hence both first sale and exhaustion as names for this doctrine, which clearly allows lending and resale of physical copies.  But the question is, can the doctrine move from the realm of physical objects to the digital environment?  Can you, in short, resell your music files or eBooks?  If not, in what sense do you own those items?

ReDigi developed a platform to allow people to do just that; it facilitated resale of iTunes music files.  The company worked pretty hard to design a system on the “one in, one out” principle, where, at each stage of a transaction, the system would verify that a file had been deleted on the source computer once a copy had been delivered to a new machine.  Thus a seller could upload the file to ReDigi and the system would verify that the original had been deleted, and the same process would repeat when the file was sold to a new “owner” and transferred to them.  If any digital re-sale system could make a case for the application of first sale, ReDigi seemed like the one.

Unfortunately, the district court in the Southern District of New York didn’t see it this way.  In the lawsuit brought against ReDigi by Capitol Records, Judge Sullivan of the SDNY court ruled back in 2013 that ReDigi operated “a clearinghouse for infringement” and essentially shut the company down.  In its decision the court insisted that the doctrine of first sale applied only to material objects.  Because digital resale always involves making a copy, first sale could not apply, the court felt.  The copy the buyer would have would be different from the copy the seller had “owned,” so there could be no first sale defense, even in a “one in, one out” situation.  Essentially, this ruling suggests that ownership of digital content is radically different from ownership in the analog world.  The district court also rejected ReDigi’s proffered fair use defense.

Now there is an appeal of the decision, which has come with a twist.  ReDigi has filed for bankruptcy, and Capitol Records has asked the bankruptcy court to force a liquidation of the company (Chapter 7) to pay the judgment against it.  ReDigi is seeking a reorganization (Chapter 11), contingent on the outcome of its appeal.  As the linked article says, the debate is about whether ReDigi faces a contingent judgment, which might be reversed on appeal, or a fixed debt.  Obviously, Capitol Records is extremely confident.

Nevertheless, the appeal, in the Second Circuit Court of Appeals, raises some interesting issues, and the amicus briefs make for interesting reading.  The brief from the American Library Association focuses primarily on the fair use argument; it is particularly interesting in the way it looks at specific exceptions in the copyright law, such as first sale, as policy decisions that Congress has made which can inform a court’s think about fair use.  In a sense, this brief makes the argument, surely correct, that a fair use analysis is not done in a vacuum, but should take account of the overall scheme that the law has created, and make judgments within that context.

Two other briefs, as reported in the story linked above, make especially interesting arguments.  The group of law professors who wrote in support of ReDigi make precisely the point I have emphasized, that this is a whole new definition of ownership in the digital environment:

“By eliminating all practical methods of transferring digital purchases, the District Court completely foreclosed the sorts of secondary markets – used book and record stores, libraries, garage sales, even gifts and bequests – in the digital marketplace that have played a crucial role in promoting access and preserving culture in the analogue market”.

Of course, this is precisely the point.  Just as in the Kirtsaeng litigation and several other lawsuits, the content industry is trying to use copyright to give it a kind of market power that no other industry has.  For at least a century, various content producers or intermediaries have wanted to leverage copyright to set prices, reduce competition, and, especially, eliminate secondary markets.  From their point of view, this is not a bug in the district court’s ruling, it is its most important feature.

Two aspects of the brief filed by the Association of American Publishers (AAP) are noteworthy, I think.  First is the cataclysmic language that it uses; it describes the consequences of a reversal in the ReDigi case as “catastrophic” for the publishing industry and claim it would “swamp” their ability to sell ebooks.  We often see this kind over-the-top language about the consequences of specific court cases from the industry; they were sure that Kirtsaeng would put them out of business as well, and are equally hyperbolic in there claims in the Georgia State case.  I am confident that the same kind of language was used when the Supreme Court created the doctrine of first sale in the U.S. with its decision in Bobbs Merrill v. Strauss, back in 1908.

The other point is that the AAP brief essentially argues throughout that the courts must protect their business model.  The AAP often seems to forget that they are arguing about the law, and simply tells the court that it is obligated to keep them, the publishing industry, as hugely profitable tomorrow as it is today.  But copyright is not about any specific business method or industry; it is to “promote the progress of science and the useful arts,” and the needs of no specific industry should be allowed to derail a court from pursuing that purpose.  What is more, the http://blog.jipel.law.nyu.edu/2017/03/capitol-records-llc-v-redigi-inc-and-the-future-of-digital-resale/doctrine of first sale is unique among the limitations in copyright; section 109 of the copyright law says very clearly that first sale is an entitlement: “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”(my emphasis).  If this right to resell is an entitlement that is attendant on owning a copy, then an alteration of first sale really is a redefinition of ownership.  This is a radical position for a court to take; it might be far less presumptuous for a court to either readjust its conception of a “copy” or to use fair use in this case, as in so many others, to create a more equitable situation.

 

Kevin Smith

Kevin Smith is a librarian, a lawyer focusing on copyright issues, a scholarly communications advocate, and the Dean of Libraries at the University of Kansas.

Comments (1)

  1. So, how did ReDigi guarantee that the seller would not simply transfer a copy to another computer before deleting it from the computer on which it was originally stored? And how would this presumably illegal action ever be detected and penalized?

    It may be noted that the Kirtsaeng decision helped undermine the market for cheaper student editions in India and led to the India Supreme Court decision there about fair use based on complaints about high prices. Wasn’t this a direct intrusion into market pricing by the court? You can do anything if the price is too high?

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