Last month, the U.S. Court of Appeals for the Second Circuit decided one of the most highly anticipated copyright cases of the year—Capitol Records v. ReDigi—finding ReDigi liable for direct, contributory, and vicarious copyright infringement. The dispute centered around whether ReDigi Inc.’s online marketplace, which allowed users to buy and sell “used” mp3 music files for a fraction of the price set by iTunes, ran afoul of copyright law. ReDigi’s aim was to create a secondary market for digital music files where people (and of course ReDigi, which took 60% of the profits) could make money for music they no longer wanted.
During oral arguments back in August 2017, Judge Leval signaled that this was a case that the Supreme Court would likely hear. ReDigi has not filed a cert petition yet, and I can’t say whether they actually will. But let’s play what if…
If ReDigi files a cert petition, which issues might it ask the Court to decide?
Whether a reproduction of a digital music file, made incidental to effectuating an online distribution, constitutes an unlawful reproduction when created without authorization from the copyright owner
Both the district court and Second Circuit found that the files transferred to ReDigi’s server in the process of a sale were unlawful reproductions. The appeals court, describing Redigi’s arguments as “designed to characterize its process as involving the transfer of its users’ lawfully made phonorecords, rather than the creation of new phonorecords” said that “[n]one of these arguments negates the crucial fact that each transfer of a digital music file to ReDigi’s server and each new purchaser’s download of a digital music file to his device creates new phonorecords.” In the context of the first sale doctrine—a defense to copyright infringement that permits the owner of a lawfully made copy or phonorecord to sell or otherwise dispose of (i.e. redistribute) that copy or phonorecord without permission from the copyright owner—the district court stated that “the first sale doctrine does not protect ReDigi’s distribution of Capitol’s copyrighted works […] because, as an unlawful reproduction, a digital music file sold on ReDigi is not ‘lawfully made under this title.’ 17 U.S.C. §109(a).”
ReDigi’s principal argument—which the Second Circuit rejected based on the text of the statute—has been that even if a reproduction “technically” occurred, that fact should not be held against them since only one file exists at the end of the process. According to ReDigi, the system was designed to ensure that the original file gets deleted.
In assessing the merit of this argument, it’s important to note that ReDigi’s system could not actually prevent the seller from retaining a copy of the original file, which illustrates a major problem with ReDigi’s position. The reproduction right is the most basic way that a copyright owner can exercise control over her work and its supply in the marketplace. And because unauthorized reproductions are often the starting point for infringement, the reproduction right is the rightsholder’s greatest weapon against the loss of economic control inherent in infringement and piracy. To limit that right, as ReDigi suggests, is to weaken what is arguably the most basic tenet of copyright—the exclusive right to copy. ReDigi’s inability to say with certainty whether the original copies of works “sold” in their marketplace were permanently deleted is just one example of how arbitrarily limiting the reproduction right and sanctioning a system like ReDigi’s can lead to an irreversible loss of economic control for rightsholders. The Supreme Court is unlikely to be persuaded by ReDigi’s line of reasoning which asks the Court to ignore the plain meaning of the statute so that consumers can develop a market for copyrighted content in direct competition with the copyright owner.
And from a consumer standpoint, when we purchase copies of books, music, movies, etc., the price point takes into account the life expectancy of the copy and the rights we’re acquiring along with that purchase. Take a book for example. A book priced at $20 is unlikely to remain in pristine condition forever, and the price point is set to reflect that reality. But in a world where purchasing a single copy also means purchasing limited reproduction rights that essentially immortalize that copy of the work—such that we would never need to buy a replacement copy of the work again—the price point would dramatically increase. So that book that previously cost $20 might now cost no less than $100. That digital music file that previously cost $1.29 might now cost us $10, since we’re acquiring with it limited reproduction rights.
Whether digital music files constitute “phonorecords” as defined by the Copyright Act
This is a more technical issue that deals directly with the first sale doctrine and its application in the digital sphere. The first sale doctrine, codified at 17 U.S.C. 109(a), says:
“…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.”
ReDigi argues that the owner of a digital music file is authorized by the first sale doctrine to sell that file, but that can only be true if the digital file is itself a phonorecord—i.e., the material object embodying the sound recording, like a CD or vinyl disk. According to ReDigi, a digital file is a material object, like a vinyl record, and the computer is akin to the record player.
The most obvious flaw in this argument is the assertion that a digital file is a material object. A digital file is an intangible object that must be embodied on a hard drive, CD, thumbnail, etc. in order to be perceived by a computer. In that sense, the digital file is a particular way of formatting the underlying data—in this case the underlying sounds, but in other cases, this could be text, software code, images, etc.—so that it can be embodied in something like a hard drive or CD.
Think of it like this: if I recite the lyrics to a song orally, those sounds constitute the kind of data necessary to create a sound recording, but until I put that data into a format that is compatible with my chosen medium, it’s just data. No matter how loudly I shout the lyrics to my favorite song at a piece of paper, those words will never become embodied on that paper until I put them into a format compatible with paper—written text. And no matter how loudly I sing at a blank CD, those sounds will not become embodied on that disk because the data exists purely as sound waves rather than in the appropriate format—the digital file.
So, in my opinion, the digital file cannot be considered a material object, and therefore, cannot qualify as a phonorecord. Rather, the hard drive, thumbnail, CD, or other medium embodying the sound recording qualifies as a phonorecord which, when created lawfully, can be resold.
Whether the reproduction and distribution of sound recordings through ReDigi’s marketplace is protected by fair use
ReDigi’s fair use argument was unsuccessful both at the district court and appeals level. Speaking to the strength of ReDigi’s argument, the district court said it had “little difficulty concluding that ReDigi’s reproduction and distribution of Capitol’s copyrighted works falls well outside the fair use defense” and that, by its analysis, each of the four statutory fair use factors “counsels against a finding of fair use.” The Second Circuit similarly found that each fair use factor weighed against a finding of fair use—with the exception of factor two, which it determined was neutral—and noted that ReDigi’s opening brief did not even mention the factors in arguing for fair use. There have been some pretty bad fair use decisions over the years, but the facts in this case made the fair use inquiry here practically a “softball question.”
- Factor one, the purpose and character of the use:
In Campbell v. Acuff-Rose, the Supreme Court explained that this factor looks at “whether the new work merely ‘supersede[s] the objects’ of the original creation … or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message.” ReDigi used music files that were identical to the original, meaning ReDigi added nothing new and did nothing to change the purpose and character of those sound recordings. This is a textbook example of a secondary use that supersedes the objects of the original creation. The fact that this was all done for profit, while not dispositive, further diminishes ReDigi’s argument.
- Factor two, the nature of the copyrighted work:
As courts often do, the appeals court gave this factor only minor consideration before determining that it furnished no “substantial reasoning for favoring or disfavoring fair use.” The district court, however—citing to UMG Recordings, Inc. v. MP3.Com, Inc.—found that this factor “weighs against application of the fair use defense, as creative works like sound recordings are ‘close to the core of the intended copyright protection’ and ‘far removed from the . . . factual or descriptive work more amenable to fair use.’” 
At best, ReDigi can hope that the Supreme Court, like the appeals court, would consider this factor neutral, finding that it weighs neither for nor against a finding of fair use. However, had the appeals court given this factor the same degree of consideration that it gave to the others, I believe it would have determined that the factor weighs against fair use, even if only slightly, for the same reasons articulated by the district court.
- Factor three, the amount and substantiality of the portion used in relation to the copyrighted work as a whole:
Like the lower courts, the Supreme Court would almost certainly find that this factor weighs against fair use, for the simple fact that ReDigi’s infringing use incorporated the entirety of each copyrighted work.
- Factor four, the effect of the use upon the potential market for or value of the copyrighted work:
The Supreme Court has opined—and I tend to agree—that the fourth factor is the most important factor in the fair use inquiry. The factor looks at whether the secondary use harms either existing or potential markets for the copyrighted work. This factor overwhelmingly favors Capitol Records, as ReDigi’s marketplace puts identical copies of Capitol’s copyrighted sound recordings in direct competition with Capitol’s sales, but at a lower price. There’s no way to avoid the conclusion that the entire purpose of ReDigi’s service was to compete with and displace Capitol’s sales.
Weighing all four factors together, ReDigi’s fair use argument fails miserably.
There’s no guarantee that ReDigi will file a cert petition with the Supreme Court—they have until mid-march to do so—and even if they petition the Supreme Court to review the case, there’s no guarantee that the Court would decide to hear it. But many, including Judge Leval, have speculated that this might be a case the Supreme Court would like to weigh in on. For now, we wait and see.
 Capitol Records, LLC v. ReDigi Inc., No. 16-2321 (2d Cir. 2018) (“ReDigi effectuates an unlawful reproduction even if the digital file itself qualifies as a phonorecord”).
 Id. (“We are not free to disregard the terms of the statute merely because the entity performing an unauthorized reproduction makes efforts to nullify its consequences by the counterbalancing destruction of the preexisting phonorecords.”)
 Id. (“…a user could, prior to resale through ReDigi, store a duplicate on a compact disc, thumb drive, or third‐party cloud service unconnected to the computer that hosts Music Manager and access that duplicate post‐resale”).
 510 U.S. 569, 579 (1994).
 UMG Recordings, Inc. v. MP3.Com, Inc., 92 F. Supp. 2d 349, 351 (S.D.N.Y. 2000).