UK: After Redigi: Contrasting The EU And US Approaches To The Re-Sale Of Second-Hand Digital Assets

Last Updated: 23 April 2013
Article by David Naylor

In a decision earlier this month, a US district court in New York has ruled that ReDigi, the operator of an online marketplace for pre-owned music downloads, is liable for copyright infringement.  Significantly, the ruling did not go so far as to say that uploading and downloading music files from the US into the cloud for personal use was infringing; but uploading and downloading for the purpose of re-sale was. 

The outcome of the US ruling (Capitol Records LLC v ReDigi Inc) has been keenly awaited in Europe, where the legal position on the re-sale of downloaded digital content is not certain.  Without a ruling from the Court of Justice of the European Union (CJEU) on this issue, EU rights-holders and re-sellers have been grappling with the possible implications of last year's CJEU ruling in a case concerning the sale of pre-owned software downloads (UsedSoft v Oracle (C128/11)).  Many argue that the UsedSoft decision paves the way for the development of marketplaces for used digital items in Europe, at least in respect of software, and, potentially, more widely.  In the meantime, the US judgment in ReDigi will certainly have a chilling effect in the US on the creation and development of marketplaces for second-hand digital assets. 

This article provides an overview of the ReDigi and UsedSoft decisions and contrasts what appear to be increasingly divergent approaches in the EU and the US.

ReDigi: the US position

ReDigi operates a cloud-based marketplace for second hand iTunes downloads.  Users who wish to sell their iTunes purchases can upload them to ReDigi's server ready for re-sale.  Until another user buys the second hand music file, the original owner can continue to stream the file from ReDigi's server; but after re-sale, his or her access is terminated.  Buyers can choose to keep their second-hand purchases on ReDigi's server and stream them, or they can download them. 

Capitol Records brought a claim for copyright infringement against ReDigi on the basis of unauthorised copying and distribution, and the Court ruled in favour of Capitol Records.  It found that:

  • the process of uploading a music file to ReDigi's server resulted in an unauthorised copy on the server.  It was irrelevant that the user's original copy was always deleted as part of the uploading process.  The court rejected ReDigi's argument that the music file had been "migrated" rather than copied.  The copy on the server was a new copy, and unless a defence applied, the new copy was infringing;
  • an infringing copy was also created whenever a buyer downloaded a music file from ReDigi's server;
  • the sale of digital music files via ReDigi's website was unauthorised and amounted to a "distribution".  Unless a defence applied, that distribution was an infringement.

The Court also rejected ReDigi's arguments that it was protected by defences under the US doctrines of "fair use" and "first sale". 

Under US law, "fair use" is a principles-based defence that the courts can adapt to particular situations on a case-by-case basis.  There is no fixed definition of what is "fair use" but there are specific factors that the courts must take into account.  The effect of the defence is to exempt what would otherwise be infringing use of copyright work.  Capital Records did not contest ReDigi's argument that acts of uploading to and downloading from the server for personal use were protected as fair use; but acts of uploading and downloading incident to sale (i.e. in this context, in anticipation of resale to another buyer) were not fair use.  The court took account of the fact that ReDigi's use was commercial; that whole creative works were copied and distributed; and that ReDigi's sales were likely to undercut the market value of the work. 

The Court also ruled that ReDigi was not protected by the US "first sale" doctrine.  Broadly, a copyright owner has the exclusive right to distribute copies of his or her work (and so can prevent others from doing so); but once the copyright owner sells a copy of that work, that right falls away in respect of that copy.  Anybody who owns a lawful copy of a work is therefore free to sell it without the copyright owner's consent.  It is because of this doctrine, for example, that a purchaser of a book or a DVD may give it away or sell it if they no longer wish to keep it.  In the ReDigi case, it was accepted that the lawful copy was the one that was created on the original purchaser's device when he or she bought the music download from iTunes (for example, the copy made on the purchaser's iPod or hard drive).  If the original purchaser chose to sell their iPod containing the original music download, the transfer of the download that took place as part of the sale of the iPod would be protected by the first sale doctrine.  However, the copies sold on ReDigi's website were not lawful copies.  These were new, unlawful, infringing copies and were not covered by the "first sale" doctrine.

The Court's judgment is concerning for digital rights activists, however, because it goes further than simply stating that the ReDigi model was not protected under US copyright law.  In his ruling, Judge Richard Sullivan specifically affirmed that the first sale doctrine applies only to physical assets, not digital assets: "Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users' hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era."

The EU position: the first sale doctrine, software and other digital downloads

In Europe last year, the CJEU had to consider the first sale doctrine under EU law in the context of software downloads.  In the UsedSoft case, the Court ruled that the first sale doctrine in the EU applies equally whether software is first sold in tangible form, such as on a CD, or intangible form, for example via download, provided that, in the online context, the customer buys their copy on a "download-to-own" basis, in a way that is analogous to purchasing software on CD-ROM in a shop (i.e. the customer gets a perpetual licence in return for payment of a fee "designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy").  Moreover – and this is where the EU position takes a different path from the US ruling in ReDigi - a person who lawfully buys a pre-owned software licence can download a new copy of the software from the software proprietor's website, in order to use the software, and this will not infringe copyright.  The application of the first sale doctrine to software downloads in the EU is therefore clear. 

What is less clear is how the doctrine would apply to other types of pre-owned digital content.  This is because the application of the first sale doctrine to software is dealt with in one piece of legislation - the EC Software Directive - and its application to other forms of digital content is dealt with in another - the Information Society Directive. The two Directives use different language.  In UsedSoft, the Court was able to rule that the first sale doctrine applies equally whether software is distributed in hard or soft copy form, because the language of the Software Directive allows for this.  (The Directive refers to software "in any form".)  However, the Information Society Directive refers to "tangible articles".  Does this mean that, in the EU, the first sale doctrine for non-software digital content applies solely to hard copies?  In UsedSoft, the Advocate General thought not.  The Court didn't reach a conclusion either way, but it did say that the copyright owner's exclusive distribution right should be limited to "what is necessary to safeguard the specific subject matter of the IPRs concerned."  If the first sale doctrine applied solely to tangible copies of software, this would "allow the copyright holder to control the resale of copies downloaded from the internet and to demand further remuneration on the occasion of each new sale, even though the first sale of the copy had already enabled the rightholder to obtain an appropriate remuneration. Such a restriction of the resale of copies of computer programs downloaded from the internet would go beyond what is necessary to safeguard the specific subject-matter of the intellectual property concerned."

Although the above comment was made in the context of software downloads, it is possible that the Court would apply the same reasoning to other types of digital downloads where the customer pays a one-off fee and receives an unlimited/perpetual licence to keep and use the download.

If the first sale doctrine in the EU applies to digitally delivered non-software assets, then there is another legal hurdle that the courts must overcome for its application to be meaningful in the online context.  This is because, just as the US court noted in ReDigi, the first sale doctrine exhausts the copyright owner's distribution right, but not the reproduction right.  Applying the first sale doctrine in relation to any resale would be effectively meaningless in the online context if the copying necessary to enable the transaction to take place was itself still found to be an infringement of the reproduction right.  This was the main problem faced by ReDigi (i.e. the copies on its servers were infringing), although of course the Court in that case also went on to state that the first sale doctrine would not have applied in the online context to protect ReDigi in any case.

In Europe, so far as software is concerned, the CJEU got around this problem in the UsedSoft decision by ruling that when the original acquirer sells his or her user licence for the downloaded software, this equates to selling the original downloaded copy, even if that copy isn't physically handed over to the buyer.  The Court then ruled that the buyer of that user licence is a "lawful user" of the software.  Under the Software Directive, lawful users can copy software in order to use it for its intended purpose without the copyright owner's permission.   The buyer of the used licence was therefore entitled to download a copy of the software from the software proprietor's website in order to use it.  This lawful user exemption is set out in the Software Directive and so applies to software but not to other forms of digital content. 

So the question remains whether, if faced with similar facts to those that applied in the ReDigi case, an EU court would take a similar approach with digitally delivered music or other non-software content.  Given the CJEU's strong statements of principle in UsedSoft, it is possible that another court would find that the resale of any other form of digital asset which had been purchased on a "download to own" basis for appropriate remuneration, carried with it an implied right to copy the work in order to use it.  While no one can predict with certainty whether an EU court would feel able to follow this approach, it would certainly be the one to take if the Court wished to give full effect to the first sale doctrine in the digital context and ensure consistent and equivalent treatment for the resale of digital and physical assets.    

Added impetus to moving to the Cloud and Digital Rights Management (DRM)?

Of course, in the digital world, just as in the physical, one man's meat is another man's poison, and so, although the UsedSoft decision may be encouraging for operators of market places for second-hand digital assets, it has been deeply concerning for many rights owners.  We therefore expect that rights owners will increasingly adopt different distribution models (for example, providing access to digital content through a cloud-based service) in order to avoid the application of the decision in UsedSoft to their business.  We note that this seems to be the direction of travel in any event in respect of some of the more successful online music platforms, which provide access to a subscription-based streaming service.

Equally, as a practical step, and in the interim until the legal position in the EU is clarified, rights holders that provide on demand download services may choose to take a robust view and consider relying on (or re-implementing) DRM specifically to restrict the re-sale of software and other content that is delivered digitally.  Rights holders would need to bear in mind that the use of DRM to restrict acts which are not within the copyright owner's control and which run counter to what the courts have said should be legally permissible could be challenged, particularly, say, if it could be argued to give rise to a competition concern where the person applying the DRM is in a dominant position or where an anti-competitive "agreement between undertakings" could be found to have taken place.  And, of course, there may also be brand and reputational risks for businesses that apply DRM where there is no legally justifiable reason to do so.  However, in the short term at least, we anticipate that many rights owners will continue to rely on DRM at least as an interim solution in Europe to the challenges they face by the creation of market places for pre-owned digital content.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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