Is ReDigi a Marketplace or a Music Locker?

I am compelled to blog about ReDigi one more time because, at long last, we actually know how ReDigi operates. And it’s not *quite* how ReDigi says it works on its FAQ. It’s actually far more clever and elegant–at least, legally speaking. This means, among other things, that parts of my previous posts about ReDigi are no longer completely accurate* (because they were based on the ReDigi FAQ and some other public statements by ReDigi). At a minimum, I need to clear that up. But also, ReDigi’s legal theory is worth an additional blog post.

*Among other things, the whole “Do Star Trek replicators infringe copyright” thing was unnecessary, as it turns out. As you’ll see, ReDigi does not destroy the original at the same time it creates the copy–a technological feat that would be remarkable but not impossible. Still, it’s an interesting thought experiment into the nature of the reproduction right, no?

ReDigi ReCap

To recap a bit about ReDigi: it provides an online marketplace for the re-sale of used audio files. It has one very important limitation: only songs you purchased online were eligible–thus, you can’t sell songs you ripped off your CDs, for reasons that should become apparent. To use ReDigi, you have to download and install special software (apparently called “Music Manager”), which, among other things, vets your song files to determine which ones are eligible for re-sale. (Technologically speaking, this isn’t hard.) Once you sell a song through ReDigi’s marketplace, all copies on your computer and synced devices are wiped.

All this raises a number of legal questions. First, can you even legally re-sell digital content? Under the First-Sale Doctrine, as it is commonly understood, an owner of a particular physical embodiment of a copyrighted work (e.g., a book or an audio CD) can re-sell it without infringing on the distribution right (and maybe some other rights, too).

But this leads to two other difficult questions. (1) If you only have a license to the song file, do you “own” it? It turns out, under an important decision called Vernor, the answer is “yes” for files purchased through iTunes, but “no” for most other vendors, most notably Amazon (as we discussed here and here). (2) If you can only re-sell a physical embodiment of the audio file, how can you re-sell a single song file resident on your hard-drive without selling the whole hard drive? (We discussed this issue here.) It turns out that ReDigi has a surprising answer to that question, which we’ll get to.

Second, what about intermediate copying? It seems inconceivable that ReDigi’s marketplace can function without making at least two additional copies of your song file: one to upload it to ReDigi’s servers, and a second when the buyer downloads it from ReDigi’s servers. (We discussed this issue here.) ReDigi also has a surprising answer to this question.

Meanwhile, Back at the Lawsuit

When we left ReDigi back in November, it had just received a cease-and-desist letter from the RIAA (which you can read about here and here), making these arguments. Earlier this month, Capitol Records sued ReDigi for copyright infringement. (You can read the Complaint here, and ReDigi’s Answer here.) During the course of responding to Capitol’s arguments, ReDigi explained how it really worked in a letter to the presiding judge (which you can read here).

Hitherto, we have been focused on the First-Sale Doctrine because it seems obvious that a case about re-selling copyrighted works implicates that doctrine. But ReDigi says that it’s not so obvious that it does. In fact, under ReDigi’s legal theory, it doesn’t need the First-Sale Doctrine (much).

Is ReDigi Just a Music Locker with Super Powers?

You see, although ReDigi advertises itself as an online digital marketplace for used audio files, it actually structures itself as a music locker (and not the “sharing” variety) that happens to sell, not audio files per se, but the title to audio files. (It’s more like buying a house than a car.) Here’s how it works (according to the letter):

1. First, you and your potential buyer must be subscribers to ReDigi’s service.
2. You download and install on your computer ReDigi’s “Music Manager” software.
3. If you want to re-sell an audio file, you select it for re-sale through Music Manager.
4. ReDigi’s software vets the file for eligibility. As far as one can tell, only audio files purchased through iTunes are eligible (probably for reasons I explained here).
5. If the file is eligible, a copy of the audio file is uploaded to your personal “music locker” on ReDigi’s servers, which is part of a big relational database.
6. As with any database, the file is associated with several items of information, such as song title, artist, size, and so forth. One of those items of information is the “owner” of the file, which is initially set as “you.” If the “owner” field wasn’t set to “you,” you wouldn’t be able to access the file. In fact, ReDigi wouldn’t even know that you are the “owner.”
7. Once the upload is complete, the “Music Manager” wipes (doesn’t just delete) the file from your computer. As you sync devices (such as an MP3 player), the file will be wiped from those devices as well.
8. While the song is in the locker (and pending re-sale), you can still listen to it by streaming it from your locker. If you download the file, it is wiped from the ReDigi server.
9. A buyer, who must be another ReDigi subscriber, can search for and find your audio file, using ReDigi’s marketplace, through the buyer’s copy of “Music Manager.”
10. When your song file is purchased, no additional copy of the file is made at that time. All that happens is that the “owner” field in the database is changed from “you” to “whoever just bought it.” The effect is that the file appears “transferred” from your locker to the buyer’s locker: it no longer shows up in your locker but appears in the buyer’s. But there’s no actual transfer, just a change in the database.
11. The buyer may now listen the file via streaming. Alternatively, if she so chooses, she can download the file to her computer, in which case, the copy on ReDigi’s servers is wiped.

The key here is that the file isn’t uploaded (copied) in direct connection with the sale, but as a prelude to the sale. Until then, it’s being held by ReDigi in the same way Amazon holds its subscribers’ audio files.* It’s not clear from the letter, but for ReDigi’s argument to really fly, ReDigi must be offering a regular Amazon-style music locker service at the same time it’s offering to re-sell your music. In other words, it’d be better off as a music-locker service that happens to re-sell files than as a re-selling service that happens to hold your music files pending re-sale.

* How much does anyone want to bet that Capitol’s response will characterize ReDigi’s legal theory as “sleight of hand”? We’ll find out very soon.

The big advantage of this legal theory is that ReDigi gets to rely on a much stronger fair-use argument than it otherwise would. Recall from one our earlier discussions, we constructed a fairly novel fair-use theory of how ReDigi may be permitted to make the intermediate copies of audio files necessary to effect re-sale. Our theory was to expand the holding of Sega v. Accolade to cover any intermediate copies necessary to take advantage of an affirmative right (the First-Sale Doctrine, in this case).

But under ReDigi’s theory, it relies on exactly the same fair-use theory that Amazon is relying on–space (or format) shifting. As we’ve discussed, space shifting is by no means legally established, not even by the Diamond Rio decision. It is, however, a much stronger and intuitive theory: if you own (or license) a copyrighted work, you have the right to place a copy of that work in a place and in a format that is more convenient for you (e.g., placing a copy on your MP3 player, so you can listen to it on the go).*

* I recently spoke with a law student whose thesis was that rights holders ought to have the right to monetize this convenience, i.e., they should be allowed to charge extra to let you put a copy of a song on your MP3 player or in a music locker. As a legal matter, this may be correct. As a practical matter, I shudder to think how rights holders would screw this up. I’ll add that Apple, at least, has obtained licenses for the audio files its sells to be space and format shifted.

The First-Sale Doctrine doesn’t go away completely. The fact is, regardless of the First-Sale Doctrine, Amazon still restricts the transfer of files through contract (but iTunes doesn’t), so ReDigi is wise to avoid non-iTunes files. Otherwise, ReDigi would turn its customers into breachers of contract, and ReDigi could have liability for “tortious interference” with the contractual relationship between its subscriber and Amazon.

Another advantage to ReDigi’s legal theory is that, suddenly, it’s the operator of a system on which users store copyrighted content. And you know what that means: DMCA safe-harbor protection!*

* But this is only a temporary solution to ReDigi’s legal problems. True, Capitol has not sent any DMCA take-down notices, but what if the rights holders become subscribers and using ReDigi’s built-in search feature to find their copyrighted works? There’s no way ReDigi could stay in business if half its sales were fizzling out because the song got taken down.

As an additional backup, ReDigi may rely on the Essential Step Defense, in pretty much exactly the same way we discussed way back here. So, hey, we at least correctly predicted one of ReDigi’s legal theories!*

* Thanks to another law student, Ira Hoffman, for that idea! 

It doesn’t solve all of the problems, of course. There’s still the “phonorecord” problem, which we discussed here. We’ll discuss ReDigi’s astonishing solution to that problem, and whether its legal theory really will fly, next time.

Thanks for reading!

Rick Sanders

Rick is an intellectual-property litigator. He handles lawsuits, arbitrations, emergency injunctions and temporary restraining orders, opposition and cancellation proceedings, uniform dispute resolution proceedings (UDRPs), pre-litigation counseling, litigation avoidance, and other disputes, relating to copyrights, trademarks, trade secrets, domain names, technology and intellectual-property licenses, and various privacy rights. He has taught Copyright Law at Vanderbilt University Law School. He co-founded Aaron | Sanders with Tara Aaron-Stelluto in 2011.