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Court Scratches Resale|of Digital Music Files

(CN) - In a blow to the largely untapped market of media resales, a federal judge found copyright infringement in a business model where people who buy music files can upload and resell them online.

Since its 2011 launch in Cambridge, Mass., ReDigi has let users sell their unwanted digital music through an Arizona-based server it calls a "cloud locker."

Under ReDigi's terms, users may sell songs bought from Apple's iTunes store, or purchased from another ReDigi user. Though the price of each track varies, ReDigi reportedly earns up to 15 percent from each transaction.

Capitol Records sued ReDigi in early 2012, seeking $150,000 in damages for each of ReDigi's alleged infringements.

After a federal judge in Manhattan refused to grant Capitol an injunction, the music label moved for partial summary judgment as to the claims that ReDigi infringed on its reproduction and distribution rights. ReDigi meanwhile sought full summary judgment.

U.S. District Judge Richard Sullivan sided with Capitol on both counts, noting that a ruling for ReDigi would essentially amend copyright law.

Congress deserves "sound deference," however, "when major technological innovations alter the market for copyrighted materials," according to the ruling.

"The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine," Sullivan wrote.

ReDigi users could not lawfully sell the music files because of Capitol's exclusive right to reproduce its music, he found.

The "embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act," Sullivan wrote.

"The fact that a file has moved from one material object - the user's computer - to another - the ReDigi server - means that a reproduction has occurred," the 18-page order states. "Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created."

ReDigi did not dispute that it distributed Capitol's music. It argued, however, that the sale of the music tracks meets exemptions to the federal Copyright Act for fair use and the first-sale doctrine.

Sullivan nevertheless concluded that the sale of those tracks likely affected "the primary market for these goods" since ReDigi earned profits through the sale of Capitol's music.

Noting that the first-sale doctrine is "limited to material items," such as records and CDs, the judge said that ReDigi was only "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," Sullivan wrote.

He found it unlikely that the decision excludes all digital works from the first sale doctrine, pointing out that the defense still covers physical objects such as iPods, hard disks and other devices.

ReDigi is liable for infringement on Capitol's copyrights because the digital reseller knew of its customers' infringement on the works, according to the ruling.

"Put simply, ReDigi, by virtue of its design, is incapable of compliance with the law," he wrote. "ReDigi's business is built on the erroneous notion that the first sale defense permits the electronic resale of digital music. As such, ReDigi is built to trade only in copyright protected iTunes files. However, as determined above, ReDigi's legal argument - and therefore business model - is fundamentally flawed."

Sullivan noted that the ruling applies to ReDigi's original technology, not later versions.

"Accordingly, to comply with the law, either the law or ReDigi must change," Sullivan wrote. "While ReDigi 2.0, 3.0, or 4.0 may ultimately be deemed to comply with copyright law - a finding the court need not and does not now make - it is clear that ReDigi 1.0 does not."

Wired reported that Amazon and Apple have patented platforms for digital resales. If Sullivan's March 30 ruling holds, online retailers will likely have to seek permission and licenses from rights holders before reselling digital books, movies, apps and music online, the magazine reported.Last month, the U.S. Supreme Court sided with a foreign student named Supap Kirtsaeng who had imported and sold textbooks in the United States that he bought for lower prices abroad. In that case, the court found that the first-sale doctrine applied to the sale of books lawfully purchased overseas.

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