A Digital Take On The First-Sale Doctrine

I love music. I don’t know about you, but I spent many an hour in used record stores poring over second-hand LPs and CDs.  It was not only a fantastic way to sell old records and CDs that no longer fit my musical tastes, but those shops exposed me (and my ears) to new genres and artists that I may not have otherwise heard. Sadly, these stores filled with seemingly endless musical possibilities have become fewer and father between — advances in technology have shifted the dissemination of music from physical media to digital files and online streaming services.  Although this shift has made music become available at the tips of our fingers, it has created a problem for artists and consumers alike that touches upon copyright law in a very digital way.

The record stores of my youth (and the wonder contained in their endless shelves of vinyl and plastic) were all made possible by a tenet copyright law referred to as the “first-sale doctrine.”  First recognized by the United States Supreme Court in 1908 and later codified in 17 U.S.C. Section 109, the first-sale doctrine permits “the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner … without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.”  Although the copyright owner enjoys certain exclusive rights to copyrighted works, the first-sale doctrine permits those in lawful possession of copies of such works (e.g., as a record, CD, or DVD) to further distribute such copy to another without the copyright owner’s permission.   In essence, the copyright owner cannot prevent the lawful owner of a copy from selling such copy to another (such as when I would sell old CDs to the shop and purchase other new or used CDs for my listening pleasure).

Unfortunately, the digital world has placed a significant wrinkle on this statutory exception.  In Capitol Records, LLC v. ReDigi, Inc., this wrinkle has torn open the question: do consumers of digital works have the right “to sell or otherwise dispose of” the digital files they possess in the same way they do physical media?  In that case, Capitol Records took offense to ReDigi’s attempts to create a viable resale market for iTunes files (and arguably other digital files, such as ebooks and video games, to name a few).  The concept is quite interesting — ReDigi’s technology would effectively delete the digital file from the original owner’s computer, place the file in a private “cloud” service, then eventually transfer the file to the new owner.  ReDigi’s “cloud” service also restricts upload only to files that are lawfully obtained, essentially creating a mechanism (and marketplace) for users to buy and sell lawful copies (as opposed to ReDigi actually repurchasing them).  In a way, ReDigi seemed to be creating its own virtual “store” for the resale of digital works in much the same way record stores would resell records and CDs (or, to be more 21st century, in much the same way as eBay creates a marketplace for the resale of products by its sellers to its user-purhasers).  Unfortunately, this is where the problems occur.

Why doesn’t he first-sale doctrine neatly fit digital works?  Because the doctrine addresses only distribution rights, not necessarily other rights conferred to the copyright owner (such as reproduction and the preparation of derivative works).  If a copy of the work is being made and then transferred, then it is not a lawful copy unless the copyright owner consents.  Without a lawful copy, the first-sale doctrine cannot apply.  This appears to be the problem in the ReDigi case — in his ruling in favor of Capital Records on summary judgment, Judge Sullivan followed this logic.  Although he conceded that ReDigi was trying to operate like a “used record store,” it was impossible for the digital file to “migrate” from one location to another without the file being reproduced (even though the original file may no longer exist).  By limiting the interpretation of the first-sale doctrine to “material items, like records, that the copyright owner puts into the stream of commerce,” he held that the fist-sale doctrine could not apply because ReDigi violated Capitol Records’ exclusive right of reproduction.

ReDigi is currently appealing this ruling, and as you can appreciate, there are strong voices on both sides this issue.  In an amicus brief filed by the American Library Association, the Association of College and Research Libraries, the Association of Research Libraries, and the Internet Archive, they all argue that the first-sale doctrine weighs in favor of a fair use finding.  Not surprisingly, the Association of American Publishers strongly urge affirming the underlying ruling, claiming that a reversal would upend the publishing industry, claiming the “the threat of the so-called ‘digital lending services’ for literary works” would cause and “immediate and profoundly damaging consequences for the publishing industry.”  Although the merits of each argument will be considered, this is not an issue that will be easily resolved anytime soon.

It’s not hard to appreciate both sides of this issue.  Although Judge Sullivan’s analysis is logical (albeit simplified), the ReDigi service does not openly attempt to exploit copyright law.  To the contrary, significant effort appears to have been expended by ReDigi to create a new paradigm, attempting to compensate creators, verify legitimate copies and establish a viable digital marketplace for pre-owned digital works.  In fact, some creators have even stated that they make more from the resale of their works through ReDigi than from the first sale.  Unfortunately, these points are not enough to dislodge the notion that a legitimate resale requires a lawful copy — ReDigi will need to convince the appellate court that the way its technology “migrates” the digital copy to the new owner is no different than the sale of a used CD, leaving the buyer with a copy and the owner no longer in possession of it (even though this argument ultimately sounds like the ends justifying the means).

Without question, the resale of digital files under the first-sale doctrine is far from settled.  If you (or you clients) operate a business that is considering the resale of pre-owned digital works, you will need to tread very carefully — given that the first-sale doctrine as currently codified or interpreted does not cover reproduction or derivative works, any technology that creates a true copy of the original file will not pass muster.  By the same token, however, a technology that actually transfers the original copy without intervening copying may be protected by the first-sale doctrine (although I am not aware of current technologies that do so).  As both a musician and intellectual property attorney, I appreciate what is at stake; however, there is a soft spot in my heart for the resale of digital copies.   I don’t know how this issue will play out, but if it weighs in favor of the first-sale doctrine, I am not ashamed to admit that such a decision would be music to my ears.