And Other Loose Ends.

This is going to be (I hope) the last post about the ReDigi situation, at least for a while. I’ll admit I got distracted by the RIAA’s little missive to ReDigi. I want to sum up and wrap up. First, the summing:

The Three Legal Obstacles to a Digital First-Sale Right

Looking over the five (!) previous posts about ReDigi, we see three obstacles to its legality:

  1. Do the consumers who wish to sell their digital singles actually own, or merely license, the music files? That’s what Vernor helps us answer, as discussed here.
  2. Is the First-Sale Doctrine limited to the same physical item that was the subject of the “first sale”? I discuss this question here and here.
  3. By what right can ReDigi make the temporary, intermediate copies necessary to transfer the song file? I discuss this issue here and here.

So. There. Now, let’s tie up a few loose ends.

What About Amazon?

When I first discussed whether ReDigi’s system could comply with Vernor (to answer the question of whether the potential sellers “own” the digital downloads), I focused exclusively on the iTunes Store license agreement. I did so because (1) iTunes by far the most popular source of legal digital downloads, and (2) Apple’s licenses are notoriously thorough. I figured if anyone would create a license that would divest purchasers of “ownership” of their digital downloads, it would be Apple.

Well, I was wrong. To my great surprise, the iTunes Store agreement does not even call the sale a “license.”* See for yourself. As I read Vernor, that right there is enough to confer ownership on the purchasers of digital downloads from the iTunes Store. In addition, there is also no restriction on transfer, which is equally significant under Vernor.* There are only minor use restrictions (and even if the use restrictions were major, under Vernor, that wouldn’t be enough.)*

* Note that this does not apply to anything other than music files. Software, movies, music videos (and other audiovisual content), and rentals–totally different story. (Yes, this note applies to all three asterisks in the preceding paragraph. I want it clear.)

If Apple had wanted purchases of audio files to be mere licenses, Apple would have made it 100% clear. It’s almost as though Apple is purposely doing what it can to permit the re-transfer and re-sale of audio files it sells.

I’m going to speculate a bit here, but here’s what I think happened. At first, the rights holders forced Apple to include language in the Apple sub-licenses (i.e., the agreement between Apple and the customer) that would impede the re-sale of the digital downloads. But in 2009, when Apple struck a deal with the rights holders to raise prices in exchange for removal of DRM (which Apple had hated), Apple also won the right to let its customers actually own the audio files they purchased. This would explain why so many readers swore up and down that the iTunes Store license prohibited transfer of purchase audio files, but no one could point to the relevant language. They were thinking of an older license (2009 isn’t that long ago).

You might ask why Apple would do this? Doesn’t Apple benefit by making audio files hard to transfer and re-sell? Isn’t Apple undercutting its own iTunes store? Well, maybe, and maybe not. Perhaps Apple isn’t convinced that a secondary digital market will hurt the primary market, for reasons I gave here. More likely, Apple figured making its music more desirable will increase sales of its MP3 players, enough to offset any losses at the iTunes Store.

Anyway, do you want to know how to draft a license for the sale of digital content to make sure the purchased content is “merely licensed” and not “owned” by the customer? Read Amazon’s license. In fact, just read this bit:

[Y]ou 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.

This is glue. Strong stuff.” Yup, the content you buy on Amazon will stick to you as surely as the accelerator pedal sticks to the floor in the Blues Brothers.* Amazon isn’t being namby-pamby about this. Joking aside, let’s take the Vernor factors in order:

*  It is hoped that it will not cause you crash your RV, though!

  1. Does the Amazon Terms of Use specify a license? Yes. It doesn’t actually use the term license, but it’s unmistakably granting a license: “[W]e grant you a non-exclusive, non-transferable right to use the Digital content for your personal, non-commercial, entertainment use, subject to an in accordance with the Terms of Use.” One down, two to go.
  2. Does the Amazon Terms of Use “significantly restrict[] the user’s ability to transfer” the content? I’d say so. First of all, we have the “non-transferable” language above, plus the part that prohibits you from “redistribut[ing], transmit[ting], assign[ing],” etc., etc. the content. Two down, one to go.
  3. Does the Amazon Terms of Use “impose[] notable use restrictions”? A closer call, but I think yes. First of all, your use is limited to “your personal, non-commercial, entertainment use,” which isn’t that restrictive (not much more than Apple’s restrictions). But you are also prohibited from even lending or sharing the music (what, you can’t hand your MP3 player to a friend and say, “here, listen to this!”?), or modify or edit the music (so you can’t, say, alter the format or even compress it for back-up purposes, though you are allowed to back it up).

This all begs the question of how ReDigi is dealing with Amazon-purchased music. As far as I can tell, ReDigi will re-sell it. If that’s the case, how in the world does ReDigi get around Vernor? It would have been easy for ReDigi to exclude Amazon-purchased content. It wouldn’t have hurt ReDigi’s sales too much, since the iTunes Store is still far more popular than Amazon. Yet, ReDigi appears not to be taking this option–it must be very confident in its legal strategy with respect to Amazon. If so, I can’t tell what that legal strategy would be.

Anybody have any ideas? ReDigi isn’t revealing its legal strategy, ever since it received the RIAA’s demand letter.

The Eminem Decision

A few readers had asked whether the “Eminem Decision” (F.B.T. Productions, LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010)) would control the ReDigi situation. In that case, Eminem’s music label sold its rights to Eminem’s music to the defendant music label, called Aftermath, in exchange for (1) a small-ish percentage of revenues for “records sold” but (2) half the revenues for “masters licensed by” Aftermath “to others for their manufacture and sale of records.” Aftermath subsequently entered into a licensing agreement with Apple to sell its music (including Eminem’s) through iTunes as digital downloads. Eminem’s music label discovered, however, that Aftermath was paying royalties on iTunes sales based on the lower “records sold” rate, rather than the 50% masters rate.

The court had to decide whether a sale through iTunes was the equivalent of a sale of song on CD, or a license of a master. Given the spread in the rates and Eminem’s popularity, a lot of money rode on that answer. The agreement between Eminem’s label and Aftermath didn’t define “records sold” except to limit it to records sold in the U.S. through “normal retail channels.” The agreement defined “master” as “recording of sound, without or with visual images, which is used or useful in the recording, production or manufacture of records.”

At trial, a jury found for Aftermath, but on appeal, the Ninth Circuit reversed–a nearly complete victory for Eminem’s label. The Ninth Circuit interpreted the contractual term license very broadly, to mean any permission to mean “an authorization by the copyright owner to enable another party to engage in behavior that would otherwise be the exclusive right of the copyright owner, but without transferring title in those rights.” Under this definition, the master audio files that Aftermath gave to Apple were clearly licenses, not sales.

On this holding, the Eminem decision is plainly irrelevant to the ReDigi situation because the focus is on Apple’s relationship with the label, not on Apple’s relationship with its customers. Apple might well be a “mere licensee” with respect to the labels, while its customers are “owners” of copies made from those masters. (If this weren’t possible, it’d be impossible for customers to “own” music CDs, which, after all, are copies produced from masters.)

The Eminem court invoked the first-sale doctrine to support its holding*, citing the leading Supreme Court decision on the subject: “a sale of a work may either be a transfer in title of an individual copy of a work, or a sale of all exclusive intellectual property rights in a work.” (Citing Quality King Distribs. v. L’anza Research Int’l, 523 U.S. 135, 145 (1998)). But that just begs the question of what it means to “transfer title in title of an individual copy of a work.” Vernor might be viewed as answering that question.

* I don’t think the court should have looked to copyright law to define the contractual term license, unless there was some evidence that the parties were looking to copyright law for that. The issue is what the parties meant by license, not what copyright law means–the two don’t have to be coextensive. Just my opinion.

Curiously, though, Vernor and the Eminem case were heard by the Ninth Circuit at almost exactly the same time, and they were heard by entirely different panels of judges. This means that neither decision was available to the other panel for consideration. It’s not surprising, then, that they had rather different views about the license-sale dichotomy (but, again, I think the two decisions are completely reconcilable). I get the sense that the Eminem panel would have taken a harder line on the first-sale doctrine than the Vernor panel, but so it goes.

The Licensee of my Licensee Is…Well, Nobody To Me

A few readers had pointed out that Apple is not, in fact, the rights holder, which is true. Apple is itself a licensee. Does that make a difference?

It doesn’t. In licensing their songs to Apple, the rights holders had the opportunity to limit Apple’s ability to sublicense the songs. Obviously, there has to be some degree of sub-licensing, or else the deal makes no sense. But the rights holders could have insisted that any sub-license by Apple include strict limitations on, for example, transferability of the song file or on the sublicensee’s (i.e., customer’s) ability to use the song file.

It’s safe to assume that the rights-holders’ agreements with Apple did not include any such limitations. How do we know that? Because, otherwise, Apple would be in massive breach of those agreements and, worse, be a massive copyright infringer. As you already know, when someone other than the right holder to a certain work exercises one of the exclusive rights with respect to that work, that person infringes copyright. But if the rights holder licenses (whether voluntarily or by operation of law) rights to the work to the other party, the other party is not an infringer so long as the other party stays within the scope of the license. If the other party strays from that scope, then it is just an infringer. This makes breaching a copyright license* a much riskier proposition than breaching most other contracts because a claim for copyright infringement is usually much worse than a claim for breach of the license agreement.

* As a general rule, this applies to all forms of intellectual property.

Thus, if Apple’s license with the right holders to, say, “If I Die Young,” had insisted  that Apple put transfer restrictions and more stringent use restrictions into its sublicenses, and Apple failed to do so, Apple would not only be materially breaching the license agreement, but infringing the distribution right in “If I Die Young.” You can bet that Apple is very, very careful to comply with the license agreements it strikes with the rights-holders to the music it sells through iTunes.

Some Lingering Questions

  1. Is there anything to my speculation about why Apple may have removed all language restricting transfer of copies of audio files purchased through the iTunes Store?
  2. If there is, why do you think Apple did that?
  3. Do you see any way ReDigi gets around the Amazon license under Vernor (putting aside all the other obstacles)?
  4. If the Emimem decision had come out far enough before Vernor, would Vernor have crafted a different rule for ownership of digital content?
  5. As a consumer, does it make any difference to you that Apple’s license terms are looser for re-transfers than Amazon’s (i.e., is that a selling point for you)?

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.