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!

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.