Capitol Records, LLC v. ReDigi, Inc.

District court grants summary judgment in favor of plaintiff Capitol Records on its copyright claims against ReDigi, online “reseller” of pre-owned digital music files, finding that ReDigi infringed Capitol Records’ exclusive rights to reproduce and distribute works, and that neither fair use defense nor first sale doctrine protected ReDigi from liability.

ReDigi, Inc., operates a website offering users the ability to sell (and buy) at a discount legally acquired digital music files, including those songs for which plaintiff Capitol Records holds the copyrights. Capitol Records sued ReDigi, asserting multiple copyright infringement claims, including direct copyright infringement and secondary infringement, and seeking damages as well as preliminary and permanent injunctions of ReDigi’s services. The district court previously denied Capitol’s motion for a preliminary injunction, finding that the record company had failed to establish irreparable harm. On cross-motions for summary judgment, Capitol sought partial summary judgment on its claims that ReDigi directly and secondarily infringed the record company’s reproduction and distribution rights, and ReDigi sought summary judgment on all of Capitol’s claims, asserting both fair use and first sale defenses. The district court granted summary judgment in favor of Capitol and denied summary judgment in favor of ReDigi, finding that ReDigi’s service infringed Capitol’s reproduction and distribution rights and that neither the first sale doctrine nor fair use protected ReDigi from plaintiff’s claims.

ReDigi’s service allows users to sell (and buy) music files using its Media Manager program, which users must download to their computers and which facilitates both the cataloging of users’ eligible music files and uploading of those files to ReDigi’s Cloud Locker, a storage space on a remote server from which users either access or sell their files. According to the court, ReDigi actively encourages activity in its marketplace by giving credits (in the form of ReDigi currency with which users buy and sell files) to users who post music files for sale, entering active sellers into contests for prizes, advising users by e-mail that they can “cash in” their music by selling it, notifying users when they are low on credits to either sell more music or buy more credits, and connecting users who are seeking unavailable songs with potential sellers. ReDigi earns a fee for every transaction – 60 percent of the purchase price in credits.

ReDigi argued that its service does not infringe Capitol’s reproduction rights because it merely migrates music files from users’ computers to its servers, meaning that the same files are transferred to the server and no copying occurs. Noting that courts have consistently held that the unauthorized duplication of digital music files over the Internet infringes a copyright owner’s exclusive right of reproduction, the court rejected ReDigi’s argument, finding that the unauthorized transfer of digital music files over the Internet, where only one file exists before and after the transfer, constitutes reproduction within the meaning of the Copyright Act. According to the court, the plain text of the Copyright Act makes clear that reproduction occurs when a copyrighted work is fixed in a new material object (a phonorecord), and the copyright holder’s reproduction right is “the exclusive right to embody, and to prevent others from embodying, the copyrighted work (or sound recording) in a new material object (or phonorecord).” When the music file moves from one material object (a user’s computer) to another (ReDigi’s server) over the Internet, the embodiment of the copyrighted work into the new material object constitutes a reproduction within the meaning of the Copyright Act. According to the court, this is so, regardless of whether one or multiple copies of the file exist after the transfer and regardless of whether the user’s original file continues to exist, because the creation of a new material object, not an additional object, constitutes reproduction. Reproduction also occurs when purchasers of music files download the files to their computers or other devices.

ReDigi asserted defenses based on both fair use and the first sale doctrine, contending that even if its system resulted in reproduction of the music files, it was fair use. In addition, while ReDigi does not contest that its service results in the sale of Capitol’s copyrighted works – and therefore the distribution of those works within the meaning of the Copyright Act – ReDigi contends that it is protected from liability for infringement by the fair use and first sale defenses. The court disagreed, concluding that “uploading to and downloading from the Cloud Locker incident to sale fall outside the ambit of fair use.” (Capitol did not contest, and the court agreed, that the uploading and downloading of files from the Cloud Locker for storage and personal use constituted permissible fair use). Looking to the four statutory factors that guide the application of the fair use doctrine (the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use upon the potential market for or value of the copyrighted work), the court concluded that all four factors weighed against a finding of fair use. Specifically, the court found that ReDigi’s use – the upload, sale and download of digital music files – is not transformative and is entirely a commercial enterprise. Creative works like sound recordings are also close to the core of the intended copyright protection, and ReDigi’s use transmits the works in their entirety. ReDigi’s products are also indistinguishable from those sold in the primary marketplace and are likely to undercut the market for and value of the copyrighted work.

The court also rejected ReDigi’s first sale defense, finding that a digital music file, lawfully made and purchased, could not be resold by its owner through ReDigi under the first sale doctrine. Under §109(a) of the Copyright Act, once the copyright owner places a copyrighted item, “lawfully made under this title,” in the stream of commerce by selling “that particular copy or phonorecord,” it has exhausted its exclusive statutory right to control its distribution. The court found that, because ReDigi’s service violated Capitol’s reproduction right, none of the digital music sold on its site was “lawfully made under this title” and therefore not protected under the first sale doctrine. Further, the court found that, because the files on ReDigi’s service are unauthorized reproductions, they are not the specific and particular phonorecords that the consumer had originally purchased and therefore fall outside the scope of the first sale doctrine.

The court found that ReDigi directly infringed Capitol’s reproduction and distribution rights because ReDigi’s founders programmed their software to choose copyrighted content to be uploaded for sale from a user’s computer. This conduct, though automated, was indistinguishable from and akin to those cases in which human review of content gave rise to direct liability. ReDigi also provided the infrastructure for the infringing sales and affirmatively brokered sales by connecting users seeking unavailable songs with potential sellers. The court held ReDigi to be contributorily liable to Capitol, finding ReDigi knew or should have known that its service would encourage infringement. The court noted that ReDigi had received a cease and desist letter from the RIAA, had warned investors that it could not guarantee that it would prevail on its copyright defenses, and had claimed to have researched copyright law and consulted with attorneys concerning its service. It also materially contributed to the infringing activity, admitting that it is intimately involved in examining the content to be sold, supervising the steps involved in making the music available for sale, and selling it. Likewise, the court found ReDigi vicariously liable, finding that ReDigi had complete control over its website’s content, access, and sales; benefited from each infringing sale; brokered sales; and encouraged users to put up music for sale.