ReDigi and the Path Forward for Digital Exhaustion

In December—more than a year after hearing oral arguments—the Second Circuit finally issued its opinion in Capitol Records v. ReDigi. The decision, written by Judge Pierre Leval, affirmed the district court’s holding that ReDigi infringed Capitol’s copyrights by operating a secondary market for used digital music files. Undoubtedly, the Second Circuit delivered a serious blow to the notion of digital exhaustion. ReDigi was, after all, the first U.S. test case for extending the exhaustion principle to digital goods. But in this post, I want to push back against a broad reading of ReDigi by first critiquing the Second Circuit’s analysis and second, by outlining a path forward hinted at by the decision’s conspicuously circumscribed reasoning. 

First, a refresher: Capitol Records sued ReDigi more than 5 years ago after ReDigi launched its online secondary market for used iTunes songs. ReDigi built its platform to recreate the mechanics of a traditional analog sale. Under its model, one party starts with a single copy of an iTunes track. At the end of the transaction, ownership of that track is transferred to another party who now owns a single copy. Crucially, the seller is left with no remaining copies. ReDigi designed its system—in its terms— to migrate files from the seller’s computer to its servers. It did this by deleting the original file, packet by packet, as it was uploaded. So at any given time, at most one full copy existed. After the district court granted summary judgment in Capitol’s favor, ReDigi filed for bankruptcy, significantly delaying its appeal to the Second Circuit. 

The Second Circuit’s opinion is an undeniable win for Capitol and other copyright holders concerned with potential competition from resale markets. The opinion is disappointing in a number of entirely predictable respects. But it also reflects an effort to tread lightly, opting to steer clear of some important legal questions and hewing its analysis closely to the facts of this particular dispute. As a result, it preserves a path for future litigants to navigate, even if it is neither wide nor clearly demarcated.

Capitol alleged that ReDigi both reproduced and distributed copies of its sound recordings. On appeal, ReDigi relied on two primary defenses—the first sale doctrine and fair use.

First Sale

Let’s start with first sale. When it came to reproduction, the Second Circuit agreed with the district court that ReDigi was in fact reproducing Capitol’s works, and that those acts of reproduction were not covered by § 109(a)—the statutory first sale doctrine—which is limited on its face to the distribution right.

Despite some caselaw suggesting that the transfer of a work to a new medium that simultaneously destroys the original copy is not a reproduction, the court’s conclusion that the copy stored on ReDigi’s servers is a new copy is consistent with the dominant view of reproduction. But from my perspective, that conclusion underscores the fact that a copyright system built around a careful accounting of copies is poorly positioned to track user experience or the economic value of works. From the user’s perspective, what matters at the end of the day is who has access to the work, not the precise mechanism by which copies are transferred. As the Supreme Court recently indicated in ABC v. Aereo, copyright law should law should be mindful not only of the precise language of the statute, but also the experience of the end users of technology.

Even if reproduction occurred, we argued as amici that the court should focus on the broader common law of exhaustion, not just its more limited statutory component. Both before and after the first sale doctrine was embodied in the Copyright Act of 1909, courts have applied exhaustion to permit reproduction when necessary to facilitate the transfer of a copy. But the Second Circuit viewed the enactment of § 109(a) and its predecessor provisions in 1909 Act as an effort to narrow the common law of exhaustion. Based on the doctrine’s development and the legislative history, we think the Second Circuit is mistaken.

As to distribution, ReDigi argued that the digital files it transferred were phonorecords subject to the first sale doctrine. But since the Second Circuit affirmed the district court’s reproduction analysis, it didn’t reach the distribution argument. The court likely understood its avoidance of this question as an exercise in judicial restraint, preserving the issue for future litigation. 

But avoiding the question has at least two negative consequences here. First, the court had the opportunity to clarify whether the transmission of digital files involves copies or phonorecords that violate the distribution right. London Sire and other cases suggest that such transmissions are copies for infringement purposes. But the ReDigi district court said they weren’t for first sale purposes. The court could have resolved that tension.

Second, the court created significant ambiguity when it comes to the ability of owners of digital copies to exercise their first sale rights. The court plainly stated that the owner of a digital copy is entitled to distribute it, more than hinting at some disagreement with the district court. And in two crucial footnotes, it suggested that making reproductions for space shifting and cloud storage is likely a fair use. The court even outlined what it saw as a lawful resale market for digital goods: “A secondary market can readily be imagined for first purchasers who cost‐effectively place 50 or 100 (or more) songs on an inexpensive device such as a thumb drive and sell it.”

But the Second Circuit doesn’t provide any clear basis for distinguishing the copies stored on this imagined thumb drive from those stored on ReDigi’s servers. Both are reproductions, but the court assumed the thumb drive copies are lawful while the server copies are infringing. Why? Is it the lack of an intermediary that makes the difference? Or perhaps the commercial intent of that intermediary? Is it the scale of the operation? Or the relatively frictionless nature of network-mediated transfer? The court leaves those questions unanswered.

Fair use

Turning to fair use, even under Judge Leval’s expansive view, the acts of reproduction here were not transformative. They don’t change the expressive content of the underlying works, and they don’t use those works for any new purpose. Perhaps not surprisingly for an opinion by Judge Leval, the court’s analysis is single-mindedly focused on transformation. 

But the proper inquiry into the purpose and character of the use does not begin and end with transformation. ReDigi’s acts of reproduction serve a different purpose; they are intended to facilitate otherwise lawful transfers of copies that consumers own. The court tells us you can sell your thumb drive, even though that entails making a copy. Once we’ve agreed, as the court seems to do, that making copies for transfer is fair, how do we distinguish the copies made here? The court’s reasoning is murky at best and self-contradictory at worst.

On the question of market harm under the fourth factor, the court tells us that ReDigi made reproductions for the purpose of competing with plaintiffs in the resale of their sound recordings. That is absolutely true. And it sounds like a damning fact, until you remember that is precisely the form of market competition that first sale has traditionally embraced. First sale is designed to create competition between new copies and used ones. In doing so, it increases access to valuable works, puts downward price pressure on new copies, and increases market efficiency. The court’s analysis under factor four is perhaps the weakest and most cursory of its arguments. It could have argued that the difference between physical and digital copies justifies a rule restricting digital transfers. Such an argument would overlook the impact of shifting file formats and degradation of digital data, but the court didn’t even bother to make it. Or the court may have suggested that the speed and efficiency of digital file transfer alters the economics of resale in some fundamental respect. Given the practical hurdles imposed by a resale market like ReDigi’s, that argument would be difficult to support as a factual matter. But the court didn’t even bother. But the perfunctory nature of the analysis may help to distinguish ReDigi in future cases.

What’s next?

Despite what may have been its effort to tread lightly, the Second Circuit has seemingly foreclosed on many of the most promising arguments for digital exhaustion. So where does this leave us? Is digital exhaustion dead?

In the Spotify era, the idea of reselling digital music may seem quaint, if not antiquated. But the music distribution market is likely to continue to undergo major changes in the coming decades, and the viability of digital resale will help shape those developments. Putting music aside, digital exhaustion is likely to have important implications in a range of markets for a variety works. So the ReDigi decision will have potentially widespread reverberations.

Although not a legally binding holding, the ReDigi opinion strongly suggests that resale, lending, or giving away digital goods is lawful at the individual level. If you want to sell your digital music collection to a neighbor by handing over your external hard drive, you are free to do so. Even assuming that’s true—and given the low likelihood of litigation over hand-to-hand resale, assumption will likely have to suffice—can lawful digital exhaustion operate at scale?

One strategy is to distinguish future platforms from ReDigi’s. The Second Circuit held open the possibility that other technologies, perhaps even ReDigi’s own version 2.0 software, might avoid the pitfalls of reproduction. If so, the first sale doctrine may yet apply to digital distribution. 

But even if reproduction is unavoidable, defendants could still distinguish themselves and their activities as a matter of fair use. What might the ideal defendant look like in a fair use case testing the bounds of digital transfer? A non-profit actor enabling non-commercial transactions defined by clear and enforceable practical limits would seem to be in the best position to take advantage of fair-use-enabled digital transfer at scale. The commercial nature of ReDigi’s activities seemed to color the Second Circuit’s view of its platform. And concerns about the impact of frictionless transfer of digital goods would inform a more thorough analysis under factor four.

Controlled digital lending platforms—like the one the Internet Archive operates and those UC Berkeley and other institutions are exploring—are distinguishable from ReDigi in precisely these respects. Under these programs, libraries scan their paper collections and offer the resulting digital copies for lending on the same terms as physical books, and in the same quantity. Unlike ReDigi, these non-profit institutions do not stand to profit from the digital books they lend. And by restricting the number of books borrowed and the terms of lending to those otherwise permitted by the libraries physical holdings, these programs impose meaningful limits on the speed and scope of digital transactions that guard against unforeseen disruption of the copyright holder’s market.

Beyond distinguishing ReDigi in future cases, the Second Circuit’s opinion suggests digital exhaustion is a question best-suited for Congress, given its ability to consider the impact of such a policy on a range of stakeholders. That may be true, but digital exhaustion is unlikely to be a priority for a Congress mired in shutdown negotiations and various Trump-related investigations for the foreseeable future. Somewhat more promisingly, Judge Leval opined at the ReDigi oral argument that the Supreme Court would likely decide ReDigi’s ultimate fate. Whether ReDigi is eager to continue this fight—and whether the Court would take the case—remains to be determined. But it is worth noting that the Court has heard an outsized number of exhaustion cases in recent years: Quanta v. LG, Costco v. Omega, Kirtsaeng v. John Wiley & Sons, Bowman v. Monsanto, and Impression Products v. Lexmark.

Finally, outside of the United States, the question of digital exhaustion is making its way through various European courts. Of particular note, the European Court of Justice will determine whether the resale of ebooks is permitted under the Copyright Directive in the Tom Kabinet case. Which, if any, of these paths to digital exhaustion is viable remains to be seen. But the fight over digital exhaustion is unlikely to be resolved anytime soon.

This post is part of Copyright Week