ReDigi: A Digital Secondary Market (Part 15 of Our Online Music Services Series)

Can ReDigi Take Advantage of the First Sale Doctrine?

When I first contemplated this Online Music Services Series, I decided not to discuss Apple’s iTunes Store service or similar services because (1) they weren’t new, and (2) the relevant law was pretty boring. While it’s true that the U.S. Supreme Court recently let stand a lower-court ruling that downloading songs from iTunes-like services does not constitute a “public performance,” hardly anyone was surprised by the result.* When you download a song from iTunes, Apple is making a copy of the song file and sending it to you–it’s your own copy, which you can play whenever you want. This is different from streaming services in which multiple users receive the streams of music derived from the same “single master” but which they don’t get to keep.

* ASCAP sued because, although its case was a long-shot, the amount of money at stake made it worth the effort. ASCAP is charged with collecting royalties for public performances on behalf of songwriters, so if downloads were public performances… 

ReDigi and the Creation of a Digital Secondary Market

But, then along comes ReDigi, a twist on the iTunes Store model that (1) is brand new, and (2) legally quite interesting. ReDigi purports to create a secondary (i.e., “used”) market for song files. As I mentioned way back here, secondary markets place both and upward and a downward pressure on prices. The downward pressure is obvious: if you can buy something used, you’ll be willing to spend a little bit less on a new product, depending, of course, of the quality of the used product relative to the new one. The upward pressure is less obvious. Secondary markets encourage purchase of new products by decreasing the risk of getting stuck with a product that you don’t like. You know you can always sell it on the secondary market and recoup part of your outlay.

Both of these pressures are heightened in the context of music files, I think. The downward pressure is, if anything, greater because the used product is usually of the exact same quality as the new product (unless the new product’s bitrate is superior or something). When you buy a used car, you expect that it won’t be quite as good as a new car, so you aren’t willing to pay full price. A piece of software code, by contrast, is always pristine and will always have a new-car smell.

At the same time, a major barrier to the sale of music is getting users to take a chance on unfamiliar songs, which is why radio continues to be so important. Even at 99 cents or $1.29, consumers are reluctant to buy music that they’re not sure they like. It’s no fun to delete a paid-for song. The existence of a secondary market would take some of the pressure off: if you decide you don’t like the song, you can get some of your money back.

There is one further difference between a digital secondary market and a traditional one. While there is usually a greater supply of new products on the market than used ones, with digital content, the supply of “new” products is infinitely greater than used ones. At any one time, there might only be a hundred copies of “We R Who We R” on the secondary market, with thousands of potential buyers. But there are as many copies of a “new” version of that song as there are potential buyers. This ought to buoy the price of the “used” songs.

How ReDigi Works

Because ReDigi is so new, I haven’t found a great deal of information describing the nuts and bolts of how ReDigi works (and as you’ve seen in previous entries in this series, the nuts and bolts are often important to our legal analysis). I think it works like this. First, you download a software client from ReDigi and install it on your computer. That software client reads the index your music-management program (e.g., iTunes) has created. It then scans the index and your actual music files looking for files that it can verify as having been legitimately purchased from iTunes or elsewhere. Songs you ripped from CDs, songs you obtained through file-sharing, and the like, are excluded.*

* I’m not exactly sure how this verification process works, but there a number of ways this could be accomplished with sufficient accuracy. It’s probably a combination of looking at the file formats (some will never be legitimate) and the unique identifier or hash/checksum function. One supposes the ReDigi errs on the side of excluding songs.

When you want to sell one of your verified songs, you select it through the software client, and ReDigi places it in a kind of online marketplace that other ReDigi users can access. Here’s the key: you sell only your single copy of the song. Thus, if three ReDigi users are selling their copy of “We R Who We R” at the same time, ReDigi will list that song three times in its marketplace. When a ReDigi user buys one of those songs, only two copies will remain. I emphasize this because, if you’ve become accustomed to the way a digital marketplace works, this seems almost unnatural. ReDigi is doing its level best to take something that’s naturally reproducible–digital content–and constrain it so it’s like a non-reproducible good, like a bike.

When a song is purchased, ReDigi communicates with your computer via the client software, telling it to (1) wipe all copies of the song file, (2) wipe any copies on any other authorized devices (e.g., your iPod) next time they’re sync’ed; and (3) tell Apple (or whoever) that you no longer have any rights to the copy (so Apple won’t try to download a new copy to replace your missing copy). This is crucial to ReDigi’s legality because it prevents users from selling the same song over and over again.*

* ReDigi also claims to give a portion of its sales directly to the “artists and labels.” I have no idea what that’s about. I’m also unclear how ReDigi prices its used songs.

What About Vernor and the First Sale Doctrine?

But, wait, a few of us asked, what about Vernor? Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010) is the leading decision on whether you can re-sell software. I’ve discussed Vernor before in a slightly different context. In that case, Vernor had legally purchased several boxes of used copies of AutoCAD at a garage sale*, then tried to re-sell them on eBay. These copies were completely legitimate: i.e., they were on the same CD-ROMs that Autodesk itself had published them on. They were not installed on any computer. In short, this wasn’t a case of piracy. As far as Vernor was concerned, he was just selling CD-ROMs, and it should have made no difference whether those discs contained music or software.

* Insane thought of the day: the guy who sold the boxes at the garage sale is just as much of an infringer as Vernor!

And yet, the Ninth Circuit Court of Appeals told Vernor that selling the legitimately-obtained copies of AutoCAD was an infringement of Autodesk’s copyright. How was this different than re-selling a book or a music CD? Under the “First Sale Doctrine,” a legitimate buyer of a copy of a copyrighted work has the right to dispose of that specific copy however he or she wishes. Why didn’t the First Sale Doctrine apply to Vernor’s attempt to re-sell the copies of AutoCAD on eBay?

Vernor had two problems. First was the really unusual nature of software applications. Unlike a book, music CD or movie DVD, you have to make a copy of the application before you can use it. When you call up an application, your computer takes the copy resident on your hard-drive (or other storage device) and loads it into your computer’s RAM. This requires a license.

The other problem was that the First Sale Doctrine applies only to owners of the copy, not mere licensees, so the question was whether Vernor was an actual owner of the AutoCAD copies or whether he possessed them under license. The court wasn’t simply going to take Autodesk’s word for what was and wasn’t a licensee. Not everything that was subject to a license escapes the First Sale Doctrine. Instead, what mattered was whether the terms of the license were so restrictive that the buyer couldn’t be said to “own” the copy.

If you own something, what can you do with it that you couldn’t do if you were, say, only borrowing or renting it? If you borrowed your friend’s CD, for example, your friend would have a legitimate beef if you either (1) got rid of the CD (by selling it or throwing it away), or (2) used it as a coaster.

Thus, the Ninth Circuit created the following test. The possessor of a copy of a copyrighted work is a merely licensee, and not an owner, of the copy if three things are true: that the copyright owner (1) specifies that the purchaser is granted a license; (2) significantly restricts the purchaser’s ability to transfer the software; and (3) imposes notable use restrictions.

Applying Vernor to ReDigi

The first question we have to ask is whether song files are similar to software applications, such that Vernor even applies. The key here is whether you have to use one of the exclusive rights of copyright in order to enjoy the music. As we’ve seen, you have to exercise the reproduction right to use a software application. DO we have to something similar to listen to a song file? I think the answer is, yes,Vernor does apply.

Your song files are kept in a compressed format, but your computer has to decompress them before it can play them. This means your computer has to make a derivative work (the equivalent of a translation) of the compressed song file before it can play the song, and making derivative works is one of the exclusive rights. You need a license to do this. In any event, most users wish to place copies of their song files on their portable devices, and they certainly need a license for that.*

* This line of reasoning isn’t without controversy. There’s something called the “Essential Step Defense,” which allows you to infringe copyright if doing so is necessary to use a product that you’ve purchased. I like to think of it as an implied license. It would seem to apply to software, but it doesn’t.

The next step is to see whether license under which the music files were sold sufficiently restricts the ability to transfer and use the song file. Here is a link to the iTunes Store end user license agreement (“EULA”), which I believe governs a buyer’s rights to user and transfer his or her purchases.

The iTunes Store EULA is long, and I’ve taken the lazy expedient of simply running searches across the EULA. I’ve searched for the terms license, transfer and termination, and their cognates, and I paid particular attention to the “Usage Rules” section. Here are some salient points:

  • The iTunes Store EULA doesn’t actually term the purchases as “licenses,” which is surprising.
  • It is silent (as far as I can tell) about transferring the purchases.
  • It is silent as the effects of termination of the EULA on the purchaser’s right to continue using the songs.
  • It imposes some use restrictions, but I wouldn’t say they’re “notable.” In fact, they’re liberal. For example, you’re allowed to place copies of the song files on five authorized devices, but without that license, you wouldn’t be able to make even one such copy. That’s the exact opposite of a use restriction.

My instinct, based on this limited analysis, is that ReDigi is on fairly solid legal ground. The key to ReDigi’s legal success (if my instincts bear out) is that it eradicates the seller’s song from the seller’s computer and devices. That way, ReDigi can’t be used to pirate digital content. This situation is, therefore, not the same as someone selling a pre-loaded iPod while keeping his rights to the song.

Update: A commentator posted the relevant portions of the Amazon EULA for its digital content. It’s not only a lot shorter than Apple’s, but it’s quite clear about restricting transfers, and its use restrictions seem more significant. Does ReDigi somehow avoid Amazon-purchased content?

I haven’t seen any reaction by the music industry to ReDigi. It could be that the music industry has already signed on with the service (which would explain how and why ReDigi is apparently giving a cut to the artists). But it shouldn’t automatically reject ReDigi. It might be counter-intuitive, but the creation of a digital secondary market might help the sale of legal new music more than it hurts.

Thanks for reading!

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24 Comments »

  1. Very well explained.

    Comment by John Pisciotta — October 19, 2011 @ 2:10 pm

  2. I enjoyed your analysis, but what about the fact that ReDigi must create a new copy of the file to sell it to a new person? Even if it deletes it from the seller’s computer, it still needs a license to reproduce it for the buyer. Of course, if, as you suspect, the labels and publishers are in on it, they may have a license. But frankly I’m dubious that the labels and publishers would get on board with a startup like this.

    Comment by Matt — October 24, 2011 @ 11:49 am

  3. Yes, good point. No matter how ReDigi does it, it has to make a couple of copies (or have its customers do so): once to its server and once again to the buyer. The fact that the “old” copy is deleted simultaneously as the “new” copy doesn’t make it any less of an infringement, at least technically. I have to think that ReDigi is counting on a fair use argument. As you know, I think fair use arguments are usually crap-shoots, unless there’s specific legal authority on point. I’ll try to update the post with a fair-use analysis when I get back from my travels.

    Comment by Rick Sanders — October 25, 2011 @ 10:35 am

  4. Hi – quick question: You mention that listening to song files generally requires a license because the computer must decompress the file, thereby creating a derivative work. You also briefly mention the Essential Step Defense. So, even before the computer decompresses the file, isn’t a license already needed to load the file itself from permanent storage (i.e., hard drive, etc.) into the computer’s RAM? Or does the Essential Step Defense apply to such a copy?

    Comment by Ira — October 26, 2011 @ 6:48 pm

  5. Perhaps the iTunes EULA doesn’t characterize purchases as “licenses” because many recording agreements treat “sales” and “licenses” differently. An artist may receive up to 50% of revenue from licenses, but only a few cents for every dollar accruing to the recording company from sales. The EULA’s language could be a result of iTunes’ agreements with record labels. See Em2m LLC v. Records, 621 F.3d 958 (9th Cir. 2010).

    Comment by Ryan Hinshaw — October 27, 2011 @ 12:46 pm

  6. That’s an interesting point. My initial thought is that the Essential Step Defense wouldn’t apply because the “essential step” must be toward using a “program” (which might not include digital content, just things like applications) in conjunction with a machine. Fair use might be a better bet. I’m thinking of addressing these points in a new post.

    Comment by Rick Sanders — October 27, 2011 @ 5:48 pm

  7. Thanks for the great comment! One thing is for certain: Apple can’t to its customers more than what the copyright owner licensed to Apple. Thus, if the record labels had placed restrictions on the end-user’s use of the music files in their agreement with Apple, Apple’s license with its customers would have to reflect that. I’m glad you brought up the Emimem case, because I think there’s a bit of tension between that decision and Vernor (both 9th Circuit), but I *think* (initially, at least) that tension can be resolved. I think Apple can be a licensee as to the masters but could still have the right to “sell” copies of those masters to its customers. I think the key is that different exclusive rights are implicated (distribution vs. limited reproduction). I’ll try to include a fuller analysis in a later blog post (and I reserve the right to change my mind).

    Comment by Rick Sanders — October 27, 2011 @ 6:21 pm

  8. By the way, are any of Apple’s iTunes deals with music labels public? If anyone out there knows of one, could you point me to it? That’d help clear up a lot of this.

    Comment by Rick Sanders — October 27, 2011 @ 6:25 pm

  9. The iTunes Store EULA is actually very clear. The buyer cannot transfer the personal license he has paid for.

    Comment by Leo Tillits — October 29, 2011 @ 1:03 pm

  10. Thanks. Where in the iTunes Store EULA do you see this restriction against transfer of purchased music? (The link to it is in my blog post.) I’ve read it a few times and searched for the term “transfer” and don’t see it. I also don’t see any explicit mention that the songs are restricted licenses. (There *is* a restriction on the transfer of the iTunes application itself, as well as a restriction on in-app purchases, but those aren’t relevant.) The thing is, I’m as surprised as anyone by this, and I wonder if we aren’t remembering an older EULA (i.e., back when Apple actually enfaced the music companies’ DRM). I’ll admit that, in a long agreement a term like this might be easy to miss (even if you search for the expected keywords), but it’d sure be nice if you could back up a blanket assertion like this.

    Comment by Rick Sanders — October 29, 2011 @ 2:43 pm

  11. Simple: download iTunes, install it and double click on its icon to run the software for the first time on your computer. You will be presented with a full EULA. Scroll down to the parts that refer to the iTunes Store.

    Comment by Leo Tillits — October 30, 2011 @ 1:48 pm

  12. I have done so, and I still don’t see where it limits the transfer of “iTunes Products” (other than rentals and audio-visual products). It actually links you here to the current EULA. I ran a search on “transfer,” and didn’t see anything. There are some serious restrictions on the use of items purchased through the App Store, but those aren’t relevant. In fact, the contrast between the restrictions on the apps and the digital content (particularly the music) is striking–the restrictions on the apps shows you how it’s done. Since you seem to have access to it, could you cut and paste the relevant language and either post it here or email it to me? I’m eager to get to the bottom of this. I’m just not seeing a restriction on transfer, which really surprises me, so I’m overlooking something, I’d really like to know.

    Comment by Rick Sanders — October 30, 2011 @ 4:24 pm

  13. Amazon and CD-Baby EULA are similar. You are granted a personal, non transferable and non commercial license.

    Comment by Natalie — October 31, 2011 @ 12:19 am

  14. Except that, by my reading of the Apple iTunes Store EULA (which is by no means definitive), those EULAs would significantly different because the iTunes EULA seems to lack a non-trasnfer clause (again by my reading). Do you think you could link us to the Amazon and CD-Baby EULAs? Thanks!

    Comment by Rick Sanders — October 31, 2011 @ 10:25 am

  15. I find it very interesting that you don’t have an iTunes or an Amazon customer account, yet you feel the need to defend Redigi.

    Comment by Mike — October 31, 2011 @ 12:58 pm

  16. Here is what Amazon says, right on their website:

    “Upon your payment of our fees for Digital Content, we grant you a non-exclusive, non-transferable right to use the Digital Content for your personal, non-commercial, entertainment use, subject to and in accordance with the Terms of Use. You may copy, store, transfer and burn the Digital Content only for your personal, non-commercial, entertainment use, subject to and in accordance with the Terms of Use.”

    “Restrictions. You represent, warrant and agree that you will use the Service only for your personal, non-commercial, entertainment use and not for any redistribution of the Digital Content or other use restricted in this Section 2.2. You agree not to infringe the rights of the Digital Content’s copyright owners and to comply with all applicable laws in your use of the Digital Content. Except as set forth in Section 2.1 above, you agree that you will not redistribute, transmit, assign, sell, broadcast, rent, share, lend, modify, adapt, edit, license or otherwise transfer or use the Digital Content. You are not granted any synchronization, public performance, promotional use, commercial sale, resale, reproduction or distribution rights for the Digital Content. You acknowledge that the Digital Content embodies the intellectual property of a third party and is protected by law.”

    “Except for the rights explicitly granted to you in the Terms of Use, all right, title and interest in the Service, the Software and the Digital Content are reserved and retained by us, our Digital Content providers, and our licensors. You do not acquire any ownership rights in the Software or Digital Content as a result of downloading Software or Digital Content.”

    “Third-Party Beneficiaries. Digital Content copyright owners are intended third-party beneficiaries under the Terms of Use and may enforce the Terms of Use against you and invoke all rights hereunder including limitations of liability.”

    http://www.amazon.com/gp/help/customer/display.html?nodeId=200154280

    Comment by Natalie — November 1, 2011 @ 12:26 pm

  17. Excellent, thank you! That’s the sort of thing I was expecting to find in the iTunes agreement but that I can’t seem to find. To me, under Vernor, the restrictions on transferring are most significant. Actually, the statement that you can’t “use” the Digital Content, except as provided in section 2.1, is pretty hardcore.

    Comment by Rick Sanders — November 1, 2011 @ 1:02 pm

  18. It’d be more accurate to say that I feel the need to analyze ReDigi’s legal position. I find ReDigi really interesting because I didn’t think a secondary digital marketplace would even be possible, yet ReDigi is giving it a good shot, forcing me to reassess. Then I was very surprised by how permissive (with respect to audio digital content, at least) the iTunes license seems to be (though I haven’t closed the book on that). I don’t plan to use ReDigi myself, but I find the abstract question of whether secondary digital markets really important and really important to think through. The purpose of this blog (not always perfectly realized) is not to tell people how to think, but to give people enough information to think about these issues themselves.

    Comment by Rick Sanders — November 1, 2011 @ 1:15 pm

  19. The iTunes license is not “permissive”. It is very clear. Non-commercial, personal, non-transferable. Perhaps you are not reading the full EULA, but a short version of it? You should download and install the iTunes software, to get the full and latest terms of use.

    Redigi is a scam. Hopefully the E-Parasite act will help shut down such illegal operations in a more efficient way.

    Comment by John — November 2, 2011 @ 3:53 am

  20. People keep saying that, and no one wants to go to the trouble of pointing out to me where in the iTunes Store EULA there is a restriction on transfer (not that I blame them much–it’s a long and involved agreement, especially when compared to Amazon’s). Here is the agreement that I’ve been working off of. It’s the agreement that comes up when I click on “terms & conditions” at the bottom of iTunes. It sure looks like the “long” version to me (and why in the world would Apple have two versions of the same agreement, and if Apple did, why would Apple fail to include in the short version the really crucial restriction against transfer of audio files?) I see where there is “personal” and “non-commercial” use restriction, but as I read Vernor, those aren’t nearly as important as a restriction on transfer. I also see where Apple restrictions the transfer of in-app purchases, audiovisual works and software applications, but none of those restrictions seem to include audio files.

    Do you think ReDigi is a scam simply because you think it’s illegal or for some other reason? (Pete Townsend recently called iTunes something less flattering than a scam, but no one thinks it’s illegal–he just thinks it’s a very bad deal for artists.)

    Why do we need the E-PARASITES Act (f/k/a the PROTECT IP Act) to stop ReDigi? If it’s illegal, the labels ought to be able to take it down right now. Do you think the labels are waiting for the E-PARASITES Act to pass, so they can use some of the additional tools it might provide? (If so, they might be waiting for a long time.)

    Comment by Rick Sanders — November 2, 2011 @ 10:37 am

  21. You do understand that Apple is not the copyright owner of all the content available on the iTunes store, don’t you?

    And you do realize that it is the copyright owners who grant commercial licenses, no?

    It is very easy, really.

    Comment by John — November 2, 2011 @ 3:07 pm

  22. Yes, I understand that very clearly. This is getting into my follow-up blog post but here goes: The copyright holder(s) are the ones who may license their works, and Apple does not own the copyright. Obviously, Apple’s customers do not have a direct contractual relationship with the rights holders. Conclusion: Apple is a licensee of the rights holders, with a further right to sublicense to its customers. If that weren’t the case, Apple would be a massive copyright infringer. Now, Apple cannot legally sublicense more than what the rights holders permit Apple to sublicense. Because there hasn’t been any significant successful litigation against Apple brought by a rights holder on this issue, I assume that Apple complies with these restrictions. If that’s the case, Apple’s licensing terms to its customers are no broader than what the rights holders permit Apple to license. In sum, it is safe to assume that whatever Apple permits its customers to do with the purchased audio files, the owner of the copyright in the underlying music and sound recordings have also permitted. Specifically, if the rights holders insisted that Apple’s sublicenses to its customers be non-transferrable, then I would expect the iTunes Store EULA to so state. For a further explanation, check out the recent Eminem decision, which goes into some detail about how this all works.

    You bring up the fact that the iTunes Store EULA on permits “personal noncommercial use” of the audio files, and I think I might be prepared to believe that a court might read that restriction to be sufficient to render the purchaser a mere licensee under Vernor, which would in turn put the purchased copy of the audio file outside of the First Sale Doctrine. We really don’t know how much a restriction on use is enough to meet the Vernor test. My point is that a restriction against transfer would be much stronger evidence. Amazon clearly has one (and so I wonder what ReDigi would do with Amazon-purchased audio files–or if ReDigi has some other argument I haven’t considered); I can’t find a similar provision with Apple, but I haven’t given up yet.

    Comment by Rick Sanders — November 2, 2011 @ 3:35 pm

  23. I enjoyed reading your analysis and have a couple of comments.

    Regarding a computer making copies in order to use software, music CDs and DVDs are actually the same in this regard. Any moving around of digital content in a computer or media player involves copying the file and then deleting the original. I think the justices need to adopt a sane viewpoint here and not treat this “essential” copying as infringement. At the end of the process, there is only one file which is identical to the original. It shouldn’t matter that for a microsecond two files existed. You said that in the case of software, this makes a license a requirement. I thought that 17 USC 117 allows making of these essential copies without permission from the copyright holder? I think the wording is that this only applies to software however I think digital music files can fit the definition of software.

    I continue to believe that Vernor was wrongly decided. Mostly that the we’re deciding whether a license exists…by reading the license! Each part of the test involves checking the contents of the license. This implies that whether or not a license exists is completely in the hands of the copyright holder and doesn’t consider the conditions of sale. Not to mention that it contradicts several earlier opinions.

    Comment by Chris — January 27, 2012 @ 7:36 am

  24. That’s a great point. Alas, it’s not very clear whether Section 117 applies. The statute is limited to the “owner” of the software, but the original CONTU report recommended “rightful possessor.” Some courts have read this change to mean that “owner” excludes mere licensees. For further details, see my blog post on ReDigi’s Essential Step Defense: http://www.aaronsanderslaw.com/blog/redigi-redux-essentials-of-the-essential-step-defense-part-16-of-our-online-music-services-series

    Comment by Rick Sanders — January 30, 2012 @ 11:41 am

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Rick and Tara are experienced lawyers who have set out to serve clients in a new way. Rick's roots reach back to his Silicon Valley home, where he first developed his litigation-oriented practice before moving to Nashville in 2004. Tara got her start in the music publishing business in Nashville in 1998 and has used that experience to form the basis of her transactional law practice since graduating from law school in 2004.
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