Resale Of Legal Digital Music Downloads Not Covered Under First Sale Copyright Doctrine

The U.S. District Court for the Southern District of New York held that digital music files lawfully made and purchased cannot be resold under the first sale doctrine of the Copyright Act.  Capitol Records, LLC v. ReDigi Inc., Case No. 12 Civ. 95 (RJS) (S.D. N.Y., March 30, 2013) (available here).  Capitol Records (“Capitol”) sued ReDigi, a virtual marketplace for pre-owned digital music, for copyright infringement.  The Court granted Capitol’s motion for partial summary judgment on the claims that ReDigi directly and secondarily infringed Capitol’s reproduction and distribution rights under the Copyright Act, 17 U.S.C. § 106

ReDigi’s website is the first of its kind, offering a market place for used digital music.  The website allows users to buy and sell legally downloaded music online.  ReDigi’s software analyzes the user’s computer and compiles a list of digital music files eligible for sale based on where the music file original source.  ReDigi’s software constantly runs on the user’s computer to ensure that the user does not retain a copy of a music file previously sold or uploaded for sale.  While the software cannot detect copies stored elsewhere, if a copy is detected, the software prompts the user to delete the file.  If the user does not delete the file, the user’s account is suspended.  ReDigi sends its users to YouTube or iTunes to listen and view promotional material of the songs.  ReDigi also has several incentives to encourage marketplace activity, such as offering credits for users who post files.  ReDigi earns 60% of from each digital music file sale on its website.

Under the Copyright Act, 17 U.S.C. § 106, the owner of a copyright has the exclusive right to reproduce and distribute copies of the copyrighted work.  However, these rights are limited by the “first sale doctrine” of § 109, which states that “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.”  17 U.S.C. § 109.

“Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act.”  ReDigi, Slip Op. P. 6.  As a result, the Court concluded that ReDigi’s services infringed on Capitol’s right to reproduction because the process of moving the digital music file from a seller’s computer to ReDigi’s virtual storage locker, and then to the buyer’s computer, constitutes two instances of reproduction.

Capitol also has the exclusive right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership.” 17 U. S. C. § 106(3).  ReDigi did not dispute that sales (distribution) occurred on its website.  ReDigi’s argument was that the distribution falls under the fair use and first sale defenses of the Copyright Act.  The Court concluded that ReDigi’s website infringed Capitol’s exclusive right to distribution.

ReDigi argued that its use fell under the first sale doctrine of the Copyright Act.  Under the first sale defense, “once the copyright owner places a copyrighted item [here, a phonorecord] in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.”  ReDigi, Slip Op. P. 11 (internal citations removed).  The Court held that ReDigi’s distribution of Capitol’s copyrighted works was not protected by the first sale doctrine because the distribution was not “lawfully made” under the Copyright Act.  Further, the first sale doctrine only protects the owner of a particular copy’s distribution of that copy.  “Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her ‘particular’ phonorecord on ReDigi, the first sale statute cannot provide a defense.”  ReDigi, Slip Op. P. 12.  The Court rejected ReDigi’s contention that the first sale doctrine was ambiguous given the changes in technology since its enactment, stating that the term “phonorecord” cannot, by definition, be uploaded and sold on ReDigi’s website.

Supreme Court Extends Reach Of The First Sale Doctrine Under The Copyright Act

The U.S. Supreme Court held that the first sale doctrine under the Copyright Act extends to goods lawfully manufactured abroad and purchased in the United States.  Kirtsaeng v. John Wiley & Sons, Inc., Case No. 11-697 (U.S. March 19, 2013) (available here).  John Wiley & Sons, Inc. (“Wiley”) publishes academic textbooks and often assigns its rights to publish, print, and sell foreign editions of the books to its wholly owned foreign subsidiary (“Wiley Asia”).  Wiley Asia’s books have a warning on them that they are not to be brought into the United States without permission.  Supap Kirtsaeng moved from Thailand to the United States to study mathematics, and purchased English textbooks in Thailand for a lower price than their U.S. counterparts.  Kirtsaeng then sold the books and kept the profits.  Wiley sued, claiming the unauthorized importation and resale of the textbooks was infringing Wiley’s right to distribute under § 106(3) of the Copyright Act and infringed on § 602’s import prohibition.  17 U.S.C.  §§ 106(3), 602.  Kirtsaeng’s defense was that his actions were protected by the “first sale” doctrine under § 109 of the Copyright Act.  The lower court rejected his defense, stating that the first sale doctrine does not apply to goods produced abroad.  At the jury trial, Kirtsaeng was found have willfully infringed on Wiley’s U.S. copyrights.  The appellate court affirmed, finding that §109(a)’s “lawfully made under this title” language implied that the first sale doctrine did not apply to copies of U.S. copyrighted works manufactured abroad.  The Supreme Court reversed, holding that the first sale doctrine applies to copies of a copyrighted work lawfully made abroad.

§ 106 of the Copyright Act lays out the exclusive rights a copyright owner has over the copyrighted work, including the exclusive right to distribute copies to the public.  17 U. S. C. §106(3).  The Copyright Act places limitations on these exclusive rights.  The statutory “first sale” doctrine provides: “Notwithstanding the provisions of section 106(3) [for exclusive distribution rights], the owner of a particular copy or phonorecord lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.”  17 U. S. C. §109(a).  This means that once a copyright owner lawfully sells a copy of the copyrighted work, the purchaser of that copy, and subsequent owners, can dispose of that copy as they wish.  However, §602(a)(1) states that unauthorized importation into the U.S. of copies of a work that were acquired outside of the U.S. is an infringement of the copyright owner’s exclusive right to distribute.  Thus, §602 refers directly to §106(3).  In an older Supreme Court case, the Court held that §602(a)(1)’s reference to §106(3)’s exclusive distribution right incorporates the limitations of §106(3), including the first sale doctrine of §109.  Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U. S. 135, 145 (1998).  However, the L’anza decision considered a copy that was manufactured in the U.S. and purchased abroad.

The issue before the Supreme Court was whether the first sale doctrine protects a buyer of a copyrighted work lawfully manufactured abroad (whether § 109’s “lawfully made under this title” language creates a geographic limitation on the first sale doctrine).  The Court determined that it did.  “[A] nongeographical interpretation provides each word of the five-word phrase with a distinct purpose. The first two words of the phrase, ‘lawfully made,’ suggest an effort to distinguish those copies that were made lawfully from those that were not, and the last three words, ‘under this title,’ set forth the standard of ‘lawful[ness].’ Thus, the nongeographical reading is simple, it promotes a traditional copyright objective (combatting piracy), and it makes word-by-word linguistic sense.”  Wiley, Slip Op. P. 9.  To support its conclusion, the Court compared § 109(a)’s present language of  “lawfully made under this title” with its predecessor’s  “lawfully obtained” language.  Neither language mentions geography, and Congress had other reasons for editing the language text.

The Court did concede that a non-geographical interpretation would make it nearly impossible for copyright holders to divide foreign and domestic markets.  However, the Court did not see how this theory helped Wiley’s case because nothing in the Copyright Act suggests that a copyright holder is entitled to such a right.  “To the contrary, Congress enacted a copyright law that (through the ‘first sale’ doctrine) limits copyright holders’ ability to divide domestic markets. And that limitation is consistent with antitrust laws that ordinarily forbid market divisions.”  Wiley, Slip Op. P. 32.  As a result, the Court reversed, finding that the first sale doctrine extends to copies of copyrighted materials lawfully manufactured abroad.

Computer Program License Not a First Sale Under the Copyright Act

The Ninth Circuit Court of Appeals in Vernor v. Autodesk Inc., Case No. No. 09-35969 (9th Cir. Sept. 10, 2010)(available here) held that when purchaser Vernor (a reseller of used software) obtained copies of AutoDesk’s AutoCAD program from earlier purchaser-licensees of copyright owner Autodesk, Vernor was not permitted to resell the AutoCAD on eBay.  Vernor purchased several used copies of AutoCAD software from one of Autodesk’s direct customers, and resold the software copies on eBay. Vernor brought a declaratory judgment action in the U.S. District Court against Autodesk to establish that these resales did not infringe Autodesk’s copyright. The District Court had earlier held that Vernor’s sales were lawful in light of two of the Copyright Act’s affirmative defenses that apply to owners of copies of copyrighted works, the first sale doctrine and the essential step defense.  See generally the Copyright Act, 17 U.S.C. sec. 101 et seq.  The 9th Circuit disagreed and reversed and remanded the case to the District Court.

“We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.”  Also, the Court stated: “Autodesk retained title to the software and imposed significant transfer restrictions: it stated that the license is nontransferable, the software could not be transferred or leased without Autodesk’s written consent, and the software could not be transferred outside the Western Hemisphere. The SLA [Service Level Agreement] also imposed use restrictions against the use of the software outside the Western Hemisphere and against modifying, translating, or reverse-engineering the software, removing any proprietary marks from the software or documentation, or defeating any copy protection device. Furthermore, the SLA provided for termination of the license upon the licensee’s unauthorized copying or failure to comply with other license restrictions. Thus, because Autodesk reserved title to [AutoCAD] Release 14 copies and imposed significant transfer and use restrictions, we conclude that its customers are licensees of their copies of Release 14 rather than owners.”  See Vernor.

As a result, “Autodesk distributes [AutoCAD] Release 14 pursuant to a limited license agreement in which it reserves title to the software copies and imposes significant use and transfer restrictions on its customers. We determine that Autodesk’s direct customers are licensees of their copies of the software rather than owners.”  See Vernor.

The federal Copyright Act protects an author’s “original works of authorship,” including software programs. 17 U.S.C. §§ 101-103. The Copyright Act confers several exclusive rights on copyright owners, including the exclusive rights to reproduce their works and to distribute their works by sale or rental. Id. § 106(1), (3). The exclusive distribution right is limited by the first sale doctrine, an affirmative defense to copyright infringement that allows owners of copies of copyrighted works to resell those copies. The exclusive reproduction right is limited within the software context by the essential step defense, another affirmative defense to copyright infringement. Both of these affirmative defenses are unavailable to those who are only licensed to use their copies of copyrighted works.

The First Sale Doctrine
The Supreme Court articulated the first sale doctrine in 1908, holding that a copyright owner’s exclusive distribution right is exhausted after the owner’s first sale of a particular copy of the copyrighted work. See Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350-51 (1908).  The Vernor Court stated: “To determine whether a first sale occurred, we considered multiple factors pertaining to each film distribution agreement. Specifically, we considered whether the agreement (a) was labeled a license, (b) provided that the copyright owner retained title to the prints, (c) required the return or destruction of the prints, (d) forbade duplication of prints, or (e) required the transferee to maintain possession of the prints for the agreement’s duration.” See Vernor, citing  United States v. Wise, 550 F.2d 1180, 1190-92 (9th Cir. 1977)(a criminal copyright infringement case).

The Essential Step Defense
With respect to software, the enforcement of copyright owners’ exclusive right to reproduce their work under the Copyright Act, 17 U.S.C. § 106(1), has posed special challenges. “In order to use a software program, a user’s computer will automatically copy the software into the computer’s random access memory (‘RAM’), which is a form of computer data storage. See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 513 (9th Cir. 1993). Congress enacted the essential step defense to codify that a software user who is the ‘owner of a copy’ of a copyrighted software program does not infringe by making a copy of the computer program, if the new copy is ‘created as an essential step in the utilization of the computer program in conjunction with a machine and . . . is used in no other manner.’” See Vernor, quoting 17 U.S.C. § 117(a)(1).

Background Facts
In May 2005, Vernor purchased an authentic used copy of AutoCAD Release 14 at a garage sale from an unspecified seller. He never agreed to the SLA’s terms, apparently never opened a sealed software packet, or installed the Release 14 software on any computer. Though he was aware of the SLA’s existence, he believed that he was not bound by its terms. He posted the software copy for sale on eBay as an auction item.

Autodesk filed a Digital Millennium Copyright Act (“DMCA”) take-down notice with eBay claiming that Vernor’s sale infringed its copyright 17 U.S.C. § 512(c)(1)(C). Vernor filed a DMCA counter-notice with eBay contesting the validity of Autodesk’s copyright claim.  The DMCA provides that a user whose material has been removed or disabled may provide a “counter-notification” to the service provider (herein eBay), including a sworn statement that the user has a good-faith belief that the material was mistakenly removed or disabled. 17 U.S.C. § 512(g)(3)(C). Autodesk did not respond to the counter-notice. eBay then reinstated the auction.  Vernor then filed his declaratory judgment action in the U.S. District Court.  Although Vernor won in the District Court, the 9th Circuit reversed the lower court, found against Vernor on the “first sale” affirmative defense and the “essential step” affirmative defense, and remanded the case back to the lower court for a ruling on Vernor’s copyright misuse defense.