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IP/Entertainment Case Law Updates

Capitol Records, LLC v. ReDigi, Inc.

Second Circuit affirms district court’s summary judgment decision in favor of plaintiff record company on its claims against defendants ReDigi, an online “reseller” of pre-owned digital music files, finding that by enabling resale of digital sound recordings of plaintiffs’ copyrighted music, defendants infringed plaintiffs’ exclusive rights to reproduce their works.

Plaintiffs, record company Capitol Records LLC and others, filed a suit against defendants ReDigi Inc., an online “reseller” of pre-owned digital music files, alleging multiple copyright violations. In a March 2013 memorandum and order, the district court granted summary judgment in favor of Capitol Records and denied summary judgment in favor of ReDigi, finding that ReDigi’s online service infringed Capitol Record’s reproduction and distribution rights and that neither the first sale doctrine nor fair use protected ReDigi from Capitol Record’s claims. (Read our summary of the district court decision here.) In July 2016, defendants appealed, arguing that ReDigi’s online system lawfully enables resales of digital files under the doctrines of first sale and fair use as well as several policy arguments. The Second Circuit rejected these arguments and held that neither fair use nor first sale doctrine defenses protected defendants from liability under 17 U.S.C. § 106(1) (the exclusive right of reproduction) of the Copyright Act. The Second Circuit made no decision on whether defendants also infringed on plaintiffs’ exclusive rights under 17 U.S.C. § 106(3) (the exclusive right of distribution).

Defendants argued that technically ReDigi’s process is not a “reproduction,” since the ReDigi system copies data for the purchasing user as it deletes the equivalent on the selling user’s device, so the amount of data extant in the transfer process remains constant. The Second Circuit affirmed the district court’s reasoning, similarly concluding that in the course of transferring digital files on ReDigi, new phonorecords are created, thus violating plaintiffs’ exclusive control of reproduction underSection 106(1). The court reached this conclusion by determining that the phonorecord was the physical medium on which the file was located, e.g., the computer hard drive, rather than the digital file itself. The court also found the fact that the amount of data extant in the transfer process remained constant to be immaterial. 

Second, the Second Circuit analyzed whether ReDigi’s online system lawfully enables the resale of its users’ digital files under the fair use doctrine. The Second Circuit evaluated ReDigi’s fair use defense by weighing the four statutory factors in 17 U.S.C. §107.

Factor one favors secondary uses that are “transformative,” meaning that the use “adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message, rather than merely superseding the original work.” The Second Circuit found that factor one weighed in favor of plaintiffs given that defendants made no change to the copyrighted digital files and also because defendants have a commercial motivation. Factor two concerns “the nature of the copyrighted work.” The court glossed over factor two, simply concluding then when looking to the nature of plaintiffs’ copyrighted works, there existed no substantial reason for favoring or disfavoring fair use. Factor three concerns “the amount and substantiality of the portion of the original used in relation to the copyrighted work as a whole.” Since ReDigi’s system makes identical copies of plaintiffs’ copyrighted sound recordings, this disfavors a finding of fair use, weighing factor three in favor of plaintiffs. Factor four, which the court said was “the single most important element of fair use,” focuses on whether the copy competes with the original in the marketplace so as to deprive the original copyright holder of significant revenue because purchasers prefer the copy rather than the original. The digital files resold by the ReDigi system are lower in price than the original, thus competing directly with the original copyright holders. Further, there is no physical deterioration in a digital file, unlike with a used book. For this reason, the Second Circuit weighed factor four in favor of plaintiffs. After collectively weighing all four factors, the Second Circuit found no fair use justification because defendants’ system inflicts substantial harm on the value of plaintiffs’ copyrights by acting as a direct competitor in the marketplace.

Third, the Second Circuit addressed defendants’ policy arguments. Defendants argued that (1) the ReDigi system allows for an economically beneficial practice, authorized by courts in the common law development of copyright and also endorsed by Congress, and (2) the court should read Section 109(a) to accommodate digital resales because the first sale doctrine protects such action regardless of the technological medium. In advancing these two policy arguments, defendants relied on an “equal treatment principle” and a “principle of technological neutrality,” arguing that purchasers of digital works should not be at a disadvantage when compared with purchasers of physical copyrighted works. The Second Circuit rejected both policy arguments, finding that the economic benefits were inconsequential and also that a broad reading of Section 109(a) would “exceed the proper exercise of [its] authority” given that Congress has already ordered that 109(a) be read narrowly. 

Summary prepared by Jonathan Zavin and Lyndsi Allsop

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