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Can I Sell My iTunes Library? The Implications of Expanding the First Sale Doctrine to Digital Goods

Constance Boutsikaris

©2015. Published in Landslide, Vol. 8, No. 2, November/December 2015, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Most people do not realize the important role that the first sale doctrine plays in our nation’s commerce. For over a century, the doctrine has allowed owners of physical copies of books, movies, or compact discs (CDs) to sell or otherwise transfer ownership to others without the permission of the copyright owner.1 While the doctrine has served us well in the age of physical formats, we are now in an era where consumer need for digital content such as e-books and streaming services for music, television shows, and movies has far surpassed consumer need for physical formats.

In 2014, digital downloads and streaming services accounted for 64 percent of the $4.86 billion in recorded music industry revenue, surpassing the sale of physical formats, which lagged behind at 32 percent.2 Revenue generated from e-books is projected to increase at a rate of 17.6 percent through 2018 and is set to surpass physical book revenue in 2017 in the United States.3 In light of this dramatic change, some believe that the first sale doctrine should extend to digital goods.

A digital first sale doctrine would bring copyright law in line with our advanced digital environment. Consumers would be permitted to resell downloaded songs from their iTunes® libraries or Kindle® books, which in turn would create a booming digital secondary marketplace. Congress enacted the U.S. Copyright Act of 19764 during a time when the marketplace was saturated with physical books and records, when the digital age as it is today could not have been contemplated. As a result, copyright law has struggled to keep up with rapidly evolving digital technologies. Indeed, the influx of digital transmission of content during the last five years has created a demonstrated need for a digital first sale doctrine, and the advantages of such a revision appear to outweigh any potential harm to the market.

Some History of the First Sale Doctrine

The first sale doctrine has deep roots in judicial precedent. The 1908 Supreme Court decision Bobbs-Merrill Co. v. Straus5 held that, after the initial sale, or “first sale,” the copyright owner does not retain the exclusive right to control all future sales of the copyrighted work. In reaching that conclusion, the Court noted that a copyright owner’s right to control future sales of a work, or to “vend,” exists only to give effect to the owner’s exclusive reproduction right, which is the main purpose of copyright law.6 One year later, Congress codified the doctrine in the Copyright Act of 19097 and later carried over the principle into § 109 of the 1976 Copyright Act,8 which now reads as follows:

Notwithstanding the provisions of section 106(3), 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.9

Section 109 has been interpreted to apply to digital content only to the extent that a lawfully made tangible copy of a “digitally downloaded work,” such as a CD or DVD, is physically transferred or otherwise disposed of.10 For example, the owner of a lawfully made copy of a movie in DVD format is permitted to resell that copy on Amazon or eBay.

In drafting § 109, Congress did not explicitly delineate the outer limits of the first sale doctrine, specifically, whether it applies to the digital transmission of digital works. Courts have filled the gap by consistently holding that the digital transfer of an electronic file, without the permission of the copyright owner, falls outside the scope of the first sale doctrine.11 In London-Sire Records, Inc. v. Doe 1, the court considered whether users of peer-to-peer file-sharing systems violated the exclusive reproduction and distribution rights of copyright owners. The court held that because digital music files are embodied in a “new material object” when they are transferred over the Internet, the digital transmission of these works necessarily involves a violation of the reproduction right.12 The court also concluded that such electronic file transfers plainly violate a copyright owner’s exclusive right to distribution of those copyrighted works.13 Recently, the court in Capitol Records, discussed below, relied on London-Sire Records’ analysis to further limit the expansion of the first sale doctrine to a digital secondary marketplace for music.14

The Impact of the Digital Age: Congress Revisits the First Sale Doctrine

While Congress has made minor adjustments to the U.S. Copyright Act since its enactment,15 it is now focusing on a major transformation that will bring the act into the advanced digital climate of today.16 The last continued period of copyright reform was during the enactment of the Digital Millennium Copyright Act (DMCA) in 1998,17 where Congress requested that the U.S. Copyright Office submit a report evaluating the effect of the development of electronic commerce on the operation of § 109 of the Copyright Act.18

Based on market conditions in 2001, the U.S. Copyright Office (Office) strongly advised against a digital first sale doctrine for a few reasons. First, the Office expressed concern that the ease of digital distribution of goods will seriously harm the primary market for these goods.19 Unlike physical copies of works, which deteriorate over time, “used” digital works are indistinguishable from new digital copies, making them just as desirable to consumers as works available in the primary digital market. Also, unlike physical copies of goods, where “[t]ime, space, effort and cost . . . act as barriers” to their transfer from the seller to the buyer, digital copies can be transmitted instantaneously with just the click of a button.20 Without these barriers acting as a natural brake on the resale of digital copies, the Office feared that “used” copies of digital goods would overtake the primary market.21

The Office also expressed concern that a perceived increased risk of piracy would weigh heavily against a decision to expand the doctrine.22 The Office feared two scenarios, each involving infringement of the reproduction right: that users would mistakenly keep digital copies of a work after that work was transmitted to another user, or that users would assert the doctrine as a defense in an infringement lawsuit.23 The Office noted that this increased risk for infringement (e.g., where an infringer felt safe hiding under a digital first sale defense) coupled with the potential harm to the primary market for goods would reduce the incentive to create.24

Finally, the Office noted that digital transmissions necessarily involve reproductions of the goods involved, and therefore, they violate the copyright owner’s exclusive right to reproduction and distribution.25 Unlike with physical formats, where the recipient receives the original physical copy of the good, the recipient of a digital transfer ultimately receives a new copy.26 In an effort to eliminate reproductions during the transfer process, early proponents of a digital first sale doctrine proposed a requirement of an automatic “forward-and-delete” technology that deletes the original file immediately upon its transfer.27 However, because such technology did not exist at the time of the report, the Office declined to recommend an expansion.28 Significantly, the Office did suggest that the creation of an automatic “forward-and-delete” technology that does not result in the creation of two copies of a digital work would not implicate the copyright owner’s exclusive reproduction right, leaving open the possibility such technology could fall within the perimeter of the first sale doctrine.29

Post-DMCA Market Changes

The drastic transformation of the digital landscape since the 2001 DMCA report has now created a demonstrated need for a digital first sale doctrine. Simply put: the concerns expressed by the U.S. Copyright Office do not exist today.

Digital controls that restrict the number of times a digital file can be transferred have now been developed, and these controls should minimize harm to the primary digital market. In 2009, Amazon filed a patent application for a “secondary market for digital objects” that allows users to transfer “e-books, audio, video, computer applications” to other users in exchange for payment.30 Amazon’s patent describes a system that limits the total number of transfers that each digital object may undergo.31 By controlling the total number of “used” digital copies that exist in the secondary market at one time, this system acts as a natural brake on the resale market.

A digital first sale doctrine would reduce piracy by increasing legal avenues for obtaining digital content.32 Currently, consumers can only digitally transfer their Amazon or Apple purchases to others by illegal means.33 Introducing a digital secondary marketplace would reduce the need to seek illegal avenues for transferring used digital copies, therefore allaying the concerns expressed by the U.S. Copyright Office in 2001.

Digital controls that allow the copyright owner to recoup a percentage of the proceeds of the resale are currently in place, and these controls ensure that the incentive to create also remains intact. In fact, in 2012, Apple filed a patent application for a digital secondary marketplace that allows a portion of the proceeds of the resale to be recouped by the original content creator.34 ReDigi 1.0 and 2.0 also allocate a percentage of the sale of a used digital file for the copyright owner.

The automatic “forward-and-delete” technology deemed unworkable in 2001 now exists in the form of a startup company called ReDigi. Launched on October 13, 2011, ReDigi touts itself as “the world’s first and only online marketplace for digital used music.”35 ReDigi operates as the digital equivalent of a used record store, allowing users to buy and sell legally purchased digital music files for a portion of the price available on iTunes.36

Here is how it works: a user begins by downloading ReDigi’s “Media Manager” to the user’s computer, which employs a validation process that builds a list from the user’s computer of lawfully purchased iTunes music files eligible for sale. Once the list is complete, the user may upload the eligible music files to ReDigi’s “Cloud Locker” server. The upload process involves the “migration” of the music file from the user’s computer to the server, whereby the music file is automatically deleted from the user’s computer and exists only on the server. After the file is uploaded, the file is further analyzed to confirm its lawful purchase. Once the file is verified, it is stored in the “Cloud Locker” and the user has the option to either stream or sell the file on ReDigi’s marketplace. A user who sells a music file in the marketplace loses access to that file at the time of purchase, and access is transferred to the new user. Finally, ReDigi allocates 20 percent of the sale price for each digital music file into an “escrow” fund for the artist.37

Capitol Records, LLC v. ReDigi Inc.

On January 6, 2012, three months after ReDigi’s launch, Capitol Records brought suit in the U.S. District Court for the Southern District of New York seeking a preliminary injunction against ReDigi’s service. After the court denied its motion, Capitol Records moved for partial summary judgment on its claims that ReDigi directly and secondarily infringed Capitol Records’ exclusive rights to reproduction and distribution of its sound recordings sold through ReDigi’s service. The court held that the sale of digital music files on ReDigi’s website infringed Capitol Records’ exclusive rights of reproduction and distribution, making it the only post-DMCA case to address this specific issue.38

The court concluded that the digital transfer of a music file—through either an upload to or a download from the Cloud Locker—implicates the reproduction right because it results in “a [new] material object being created elsewhere at its finish.”39 ReDigi maintained that the original file no longer exists on the seller’s computer after that file “migrates” to the Cloud Locker. Despite the U.S. Copyright Office’s suggestion in its 2001 report that such an automatic “forward-and-delete” technology would not implicate the reproduction right, the court declined to deem ReDigi’s service noninfringing, noting that “the [c]ourt cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step.”40

The court also rejected ReDigi’s argument that its distribution of the digital music files was protected by the first sale doctrine, noting that the doctrine only protects distribution by “the owner of a particular copy or phonorecord . . . of that copy or phonorecord.41 The court in effect limited the reach of the first sale doctrine to the “particular” phonorecord on which the sound recording is fixed (i.e., the hard drive), rather than the copy of the digital music file.42 Because ReDigi only resells a copy of the digital music file, and not the “particular” phonorecord on ReDigi, the court declined to accept the first sale doctrine as a defense to infringement of Capitol Records’ distribution right.43

Capitol Records makes clear that an effective automatic “forward-and-delete” technology—where the original digital music file is deleted after it is transferred to another user—is not enough to bring such a system into compliance with the first sale doctrine.44 However, the court leaves open the possibility that a system that completely eliminates the creation of a digital copy may not violate the copyright owner’s rights of reproduction and distribution.

ReDigi 2.0

Enter ReDigi version 2.0. On June 11, 2012, ReDigi launched its new and improved system with an important update: rather than directing users to upload their iTunes music files from their computers to ReDigi’s Cloud Locker, the new software uploads the user’s music files directly from iTunes to the Cloud Locker.45 ReDigi 2.0 ensures that once the music file is in the Cloud Locker, it does not need to be copied to be transferred to another user. Instead, ReDigi transfers the license to access the music file from the seller to the buyer, permitting the buyer to access the file directly from the Cloud Locker. By eliminating the creation of a “new material object” during the transfer of the iTunes music files, ReDigi 2.0 hopes to avoid the concerns addressed by the district court in Capitol Records.46

Digital Licensing Agreements

The use of streaming services for music, movies, and television shows is now at an all-time high. Unknown to most consumers, a majority of this streamed digital content is licensed, rather than sold, to them. Online marketplaces perpetuate this confusion by including the option to “buy now,” and the license terms typically appear in the fine print, inconspicuous to the consumer. Opponents of a digital first sale doctrine point out that because a majority of digital content is not actually owned by consumers, the first sale doctrine does not apply.47

Register of Copyrights Maria Pallante expressed in a 2013 lecture, “Congress may not want a copyright law where everything is licensed and nothing is owned.”48 Taking Register Pallante’s cue, deeming the transfer of a digital good a transfer of ownership rather than a license would serve the public interest and align with consumer expectations. A recent decision by the Court of Justice of the European Union in UsedSoft GmbH v. Oracle International Corp. held that copyright owners who license software to consumers “without a time limit” are deemed to “sell” it, leaving consumers free to resell the software.49 The Supreme Court and Congress should follow the lead of European courts and work toward an ownership model that will lead to a booming secondary marketplace for digital goods.50

A Digital First Sale Doctrine: Impractical or Viable?

Register Pallante also stated that the “next great copyright act must be forward thinking but flexible, and, no matter what, it must serve the public interest.”51 A digital first sale doctrine would do just that—it would be forward thinking, and it would serve the public interest.

The advantages of expanding the doctrine far outweigh the potential market harms. The launch of ReDigi 2.0 and its automatic “forward-and-delete” technology, which eliminates the creation of two copies of a digital work, brings us one step closer to the next great copyright act. Post-DMCA market changes—including digital controls that limit the total number of digital file transfers and ensure that copyright owners are compensated in a resale, and the reduced risk of piracy—demonstrate that our environment is now equipped for a digital first sale doctrine. A secondary digital marketplace would serve the public interest by increasing consumer access to copyrighted works while effectively balancing the rights of copyright owners and consumers.

Endnotes

1. See 17 U.S.C. § 109 (2012).

2. Joshua P. Friedlander, Recording Indus. Ass’n of Am., News and Notes on 2014 RIAA Music Industry Shipment and Revenue Statistics 1 (2014).

3. See PricewaterhouseCoopers, Global Entertainment and Media Outlook 2014–2018: Book Publishing 1 (2014); Laura Hazard Owen, PwC: The U.S. consumer eBook Market Will Be Bigger Than the Print Book Market by 2017, Gigaom (June 4, 2013), https://gigaom.com/2013/06/04/pwc-the-u-s-consumer-ebook-market-will-be-bigger-than-the-print-book-market-by-2017/.

4. H.R. Rep. No. 94-1476 (1976).

5. 210 U.S. 339, 341 (1908).

6. Id. at 350–51.

7. 17 U.S.C. § 41 (1909).

8. 17 U.S.C. § 109 (2012).

9. Id.; see H.R. Rep. No. 94-1476, at 79 (1976).

10. See U.S. Copyright Office, DMCA Section 104 Report 78–79 (2001) [hereinafter DMCA Report], available at http://www.copyright.gov/reports/studies/dmca/sec-104-report-vol-1.pdf; John Villasenor, Rethinking a Digital First Sale Doctrine in a Post-Kirtsaeng World: The Case for Caution, 2 Competition Pol’y Int’l Antitrust Chron., May 2013, at 2.

11. See Capitol Records, LLC v. ReDigi Inc., 934 F. Supp. 2d 640 (S.D.N.Y. 2013); London-Sire Records, Inc. v. Doe 1, 542 F. Supp. 2d 153 (D. Mass. 2008).

12. London-Sire Records, 542 F. Supp. 2d at 171.

13. Id. at 173–74.

14. See infra note 38.

15. For instance, the Copyright Cleanup, Clarification, and Corrections Act of 2010, Pub. L. No. 111-295, 124 Stat. 3180 (2010); the Satellite Television Extension and Localism Act of 2010, Pub. L. No. 111-175, 124 Stat. 1218 (2010); and the Temporary Extension Act of 2010, Pub. L. No. 111-144, 124 Stat. 42 (2010). Maria A. Pallante, The Next Great Copyright Act, 36 Colum. J.L. & Arts 315, 319–20 (2013).

16. The Register’s Perspective on Copyright Review: Hearing Before the Subcomm. on Courts, Intellectual Prop., and the Internet of the H. Comm. on the Judiciary, 114th Cong. 6 (2015) (statement of Maria A. Pallante, Register of Copyrights).

17. Pallante, supra note 15, at 320. During this period, Congress enacted not only the DMCA, but also the Copyright Term Extension Act, Pub. L. No. 105-298, 112 Stat. 2827 (1998). Id.

18. See Digital Millennium Copyright Act, Pub. L. No. 104, 112 Stat. 2860 (1998); DMCA Report, supra note 10, at v.

19. DMCA Report, supra note 10, at 83.

20. Id. at 82.

21. Id. at 83.

22. Id. at 99.

23. Id.

24. Id. at 88.

25. Id. at 79.

26. Id.

27. Id. at 82.

28. Id. at 98–99.

29. Id. at 97.

30. U.S. Patent No. 8,364,595 (filed May 5, 2009); Lauren Indvik, Apple and Amazon Lay Foundations for “Used” Digital Goods Stores, Mashable (Mar. 8, 2013), http://mashable.com/2013/03/08/apple-amazon-used-goods-marketplaces/.

31. ’595 Patent.

32. Clark D. Asay, Kirtsaeng and the First-Sale Doctrine’s Digital Problem, 66 Stan. L. Rev. Online 17, 22 (2013).

33. Sarah Reis, Note, Toward a “Digital Transfer Doctrine”? The First Sale Doctrine in the Digital Era, 109 Nw. U. L. Rev. 173, 189 (2014).

34. U.S. Patent No. 13,531,280 (filed June 22, 2012).

35. Capitol Records, LLC v. ReDigi, Inc., 934 F. Supp. 2d 640, 645 (S.D.N.Y. 2013).

36. Id.

37. Id. at 645–46.

38. Id. at 651 (citing London-Sire Records, Inc. v. Doe 1, 542 F. Supp. 2d 153, 171, 173 (D. Mass. 2008)).

39. Id. at 649 (internal quotation marks omitted).

40. Id. at 660.

41. Id. at 655 (quoting 17 U.S.C. § 109(a)). Courts have consistently held that file-sharing or electronic transmission of copyrighted works violates the copyright owner’s exclusive right of distribution. Id.; see N.Y. Times Co. v. Tasini, 533 U.S. 483, 498 (2001); Arista Records LLC v. Greubel, 453 F. Supp. 2d 961, 968 (N.D. Tex. 2006).

42. Capitol Records, 934 F. Supp. 2d at 655 (noting that the first sale doctrine does not apply to the sale of digital music files “any more than it covered the sale of cassette recordings of vinyl records in a bygone era”).

43. Id.

44. Villasenor, supra note 10, at 5.

45. Capitol Records, 934 F. Supp. 2d at 646 n.3.

46. John T. Soma & Michael K. Kugler, Why Rent When You Can Own? How ReDigi, Apple, and Amazon Will Use the Cloud and the Digital First Sale Doctrine to Resell Music, E-Books, Games, and Movies, 15 N.C. J.L. & Tech. 425, 446 (2014).

47. First Sale under Title 17: Hearing Before the Subcomm. on Courts, Intellectual Prop., and the Internet of the H. Comm. on the Judiciary, 113th Cong. 1 (2014) (statement of John Villasenor, Professor of Electrical Engineering & Public Policy, University of California, Los Angeles).

48. Pallante, supra note 15, at 332.

49. Case C-128/11, 2012 E.C.R. I-0000.

50. Asay, supra note 32, at 15.

51. Pallante, supra note 15, at 323.

Constance Boutsikaris

Constance (“Connie”) Boutsikaris is an associate attorney at Dunner Law PLLC in Washington, D.C., specializing in copyright and trademark law.