Court Rules Against ReDigi Efforts to Resell Digital Music

Capitol Records has won a victory in U.S. District Court against ReDigi Inc., a company that sought to build a marketplace for consumers to sell their “used” digital songs.

Many in the music and movie business have watched the case closely, as the outcome had the potential to sway billions of dollars in future sales of digital content. Had the March 30 ruling by Judge Richard J. Sullivan gone the other way, consumers would be able to buy perfect digital copies of “pre-owned” music at a potentially significant discounts from iTunes, Amazon and elsewhere.

ReDigi, for example, priced tracks between 49 cents and 79 cents.

But unlike iTunes sales, where rights holders get 70% of each sale, labels don’t get any of the proceeds from ReDigi sales. (The company claimed it set aside 20% of each sale into an “escrow account” for artists whose works were sold.)

Instead, Sullivan issued a partial summary judgment agreeing with the Universal Music Group label’s arguments that ReDigi infringed on Capitol Records’ copyrights. He dismissed ReDigi’s claims that the “first sale doctrine” that allows consumers to legally resell CDs and DVDs also allowed them to resell digital copies.

The judge concluded that the doctrine did not apply to digital media.

Here “the Court 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,” Sullivan wrote in his 18-page decision denying ReDigi’s motion to dismiss the case.

“A digital recording purchased from iTunes is simply not akin to a used book or a physical CD or vinyl record,” said Lawrence Iser, a copyright attorney with Kinsella Weitzman Iser Kump & Aldisert in Santa Monica, Calif., who has represented Michael Jackson, the Beatles and others.

Iser also noted to that ReDigi's service, which claims to fully delete the digital tracks from the seller's computer, violates an aspect of copyright law that prevents the company from storing a copyrighted file that it did not purchase or have the licenses to hold on its own servers.

“Not only does iTunes take the position that these are rentals, but because the ReDigi transaction creates a new phonorecord of the recording on ReDigi’s server, this is plainly a reproduction, not a resale of the original," Iser said. "As such, the first sale doctrine does not apply, and ReDigi and its users have infringed the copyright holder’s exclusive right of reproduction.”

The judge ordered that Capitol and Boston-based ReDigi submit a joint letter by April 12 outlining “next contemplated steps.”

Neither Universal nor ReDigi immediately responded to a request for comment.

That doesn’t necessarily spell doom for digital resale models. In recent months, and Apple Inc. have filed patent applications with the U.S. Patent and Trademark Office for digital rights management technologies that would allow companies and consumers to “loan” copies of digital media. Such technologies could also be used to bake in an option for consumers to resell their digital downloads. Until now, however, it was unclear whether the sellers and services facilitating the re-sales would also need to get permission from the original copyright holders to do so. Sullivan’s answer was a clear “Yes.”