Are Artists Cheated out of Royalties From Secondhand MP3 Sales?
A LEGAL FIGHT IS BREWING IN THE DIGITAL RESALE MARKETPLACE. The question at the heart of the battle is whether it’s legal to resell a digital copy of music purchased lawfully online. It is the newest topic to emerge in an ever-changing music industry landscape and, once again, the major record labels lead the battle charge against it. Here’s what you should know about the developments to date:
FIRST SALE DOCTRINE
Resale of music, of course, is not a new concept – used record shops have legally peddled used CDs, tapes, and vinyl for years. While a copyright holder retains the right to initially sell his/her music, the “First Sale Doctrine” under the copyright code allows those who have purchased a copy lawfully to sell that copy to someone else. Simply put, once you buy a CD, it’s 100% legal to resell that CD to another without violating copyrights. The First Sale Doctrine is important: without it there would be no free market for used records and – more importantly – the copyright owner’s right of distribution could overreach, extending past the first sale all the way down the stream of commerce.
DIGITAL RESALE
The First Sale Doctrine is clear when it comes to physical copies of records. Digital downloads, however, are a bit more complicated. In the past, there were essentially two options for online downloads: first sale purchases through authorized sources such as iTunes; or unauthorized downloads via file sharing networks. However, a third option recently appeared online, sparking a legal battle within the industry. A Massachusetts-based company called ReDigi created a “used” record shop by offering previously owned digital music for resale online at a discounted rate. ReDigi’s website states:
“The thing that sets ReDigi apart from any company that has attempted to do what we are doing is our revolutionary patent-pending technology that facilitates the “verification” and “hand off” of a digital music file from the seller to the buyer, ensuring both that the file is from a legitimate source and eligible for resale on ReDigi, and that any additional copies of a sold file that may have been made by the seller (e.g., for use on multiple devices in accordance with “fair use” limitations on copying for personal use), are also deleted. In this way, ReDigi brings the familiar process of selling a physical good into the digital age.”
THE MAJOR LABEL LAWSUIT
Sounds good, right? Lawyers for the record companies think not and argue that ReDigi’s business model is unverifiable and illegal, and denies artists the royalties they would have been due from lawful digital sales. A lawsuit filed by Capitol Records against ReDigi in United States District Court (S.D.N.Y, 12CV0095) in February claims the company is liable for vicarious and contributory copyright infringement. The suit claims that ReDigi is not a used record store, stating that “used record stores do not make copies to fill their shelves,” and that ReDigi’s model is built on widespread unauthorized copying of Capitol’s sound recordings.
The First Sale Doctrine is central to the case. Under the Copyright Act, a copyright holder (i.e. Capitol) has the exclusive rights, among other things, to reproduce the copyrighted works, distribute copies to the public, and perform the works publicly by means of digital audio transmissions, as well as to authorize or license others to engage in such activities. This right to sell and distribute, however, is limited to the “first sale” of any one particular copy. And while the First Sale Doctrine allows a legal purchaser to resell, Capitol argues that the doctrine does not apply, as ReDigi is not an “owner” of the lawfully made copy and they are not disposing of an actual “particular copy” purchased by a user. Capitol claims that in order to buy/transfer/sell the music, ReDigi has to “copy” the file, which is illegal under the copyright law. The Copyright act defines “copy” as a material object in which a work is fixed. Capitol argues that the work sold by ReDigi is not a “material object” under the code and the First Sale Doctrine does not apply.
Further, Capitol argues that there is no way to ensure that a seller doesn’t retain the original copy of the song following the sale. While the judge in this case ruled against a preliminary injunction preventing ReDigi from operating, he stated that Capitol had a likelihood of success upon the merits of the case. No trial date has yet been scheduled.
ADDITIONAL THREATS
Aside from the ReDigi case, there are other threats to the First Sale Doctrine in the digital era. A key question regarding the First Sale Doctrine in recent software cases asked whether the copyright was actually “sold” to the user, or simply “licensed,” which would give the user fewer rights (see Vernor v. Autodesk, 555 F. Supp. 2d 1164, 2010). Under the Vernor decision, if it were a sale, then the First Sale Doctrine could apply, while if it were a license, then the First Sale Doctrine would not apply. Others say that the First Sale Doctrine can be repealed by the copyright owner. Based on the Vernor decisions, some legal commentators have theorized that all a copyright owner has to do to effectively repeal the statutory First Sale Doctrine is draft a user license that (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions. This could prevent a user’s ability to “sell” their digital copy to ReDigi.
When it comes to digital resale, only the test of time and technological advances (with some guidance from the courts) will determine the legitimacy of the purported threats to a continually evolving industry.
Adam Barnosky is a Boston-based attorney and writer. For music industry news, entertainment law updates, or to suggest an upcoming Legal Pad topic, find him on Twitter @adambarnosky.
Disclaimer: The information contained in this column is general legal information only. Consult your attorney for all specific considerations.
photo by Brian Teutsch