910 F.3d 649 (2d Cir. 2018)
Plaintiffs Capitol Records, LLC, Capitol Christian Music Group, Inc., and Virgin Records IR Holdings, Inc. are record companies that own copyrights or licenses in sound recordings of musical performances.1 They distribute those sound recordings in digital files sold to the public through authorized services such as Apple iTunes.2
Defendants ReDigi, Inc., Larry Rudolph, and John Ossenmacher created an internet platform to enable resale of lawfully purchased digital music files.3 ReDigi was founded in 2009 by Ossenmacher, who served as Chief Executive Officer, and Rudolph, who served as Chief Technical Officer after spending twelve years as a Principal Research Scientist at the Massachusetts Institute of Technology.4 During the period addressed by the operative complaint, ReDigi's system version 1.0 hosted resales of digital music files containing plaintiffs' music by persons who had lawfully purchased the files from iTunes.5
A user who owns a digital music file purchased from iTunes must first download and install ReDigi's Music Manager software.6 Music Manager analyzes the file, verifies that it was originally lawfully purchased from iTunes, and scans it for indications of tampering.7 The user then causes the file to be transferred to ReDigi's remote server known as the Cloud Locker through a data migration process that breaks the file into small packets of roughly four thousand bytes in length.8 ReDigi's software creates a transitory copy of each packet in the user's computer buffer, sends a command to delete that packet from permanent storage on the user's device, and forwards the packet to the server where the packets are reassembled into a complete file.9
Once the file has migrated to ReDigi's server, it can be resold through ReDigi's market function.10 ReDigi gives the new purchaser exclusive access to the file, which the purchaser may either download to a personal device or retain in the Cloud Locker for streaming.11 Music Manager continuously monitors the user's computer and connected devices to detect duplicates and prompts the user to delete them, though it cannot detect duplicates stored on unconnected devices such as thumb drives or third-party cloud services.12
On January 6, 2012, plaintiffs brought this action against ReDigi, Inc. alleging copyright infringement.13 The parties cross-moved for summary judgment, and on March 30, 2013 the district court granted partial summary judgment in plaintiffs' favor.14 Plaintiffs filed a first amended complaint adding Ossenmacher and Rudolph as defendants.15 On November 2, 2015 the individual defendants waived their right to contest liability independent of ReDigi, Inc.16 On June 6, 2016 the district court entered a stipulated final judgment awarding plaintiffs $3,500,000 in damages and permanently enjoining defendants from operating the ReDigi system.17 Defendants filed notice of appeal on July 1, 2016.18 The appeal was stayed during bankruptcy proceedings and the stay was lifted on December 12, 2016.19
Whether ReDigi's system version 1.0 infringed the plaintiffs' copyrights by reproducing their sound recordings?20
The Copyright Act grants copyright owners the exclusive right to reproduce their works in copies or phonorecords under 17 U.S.C. § 106(1).21 A phonorecord is defined as a material object in which sounds are fixed by any method now known or later developed and from which the sounds can be perceived, reproduced, or otherwise communicated.22 A reproduction occurs whenever the copyrighted work is fixed in a new material object for a period of more than transitory duration.23
Yes. ReDigi's data migration process in system version 1.0 transfers digital music files containing plaintiffs' sound recordings by breaking them into packets of roughly four thousand bytes, creating transitory copies in the user's computer buffer, deleting each packet from the user's permanent storage, and reassembling the packets into complete files on ReDigi's Cloud Locker server. This process fixes the digital files in new material objects on the server and potentially on new purchasers' devices for periods of more than transitory duration, thereby creating new phonorecords that constitute unauthorized reproductions.24 The established facts confirm that the entire file is removed from the original user's device and recreated on the server, with the new purchaser then gaining exclusive access either by download or streaming from the server.25
ReDigi's system version 1.0 infringed the plaintiffs' exclusive rights to reproduce their copyrighted sound recordings.26
Whether the first sale doctrine protected resales of digital music files through ReDigi's platform?27
Under 17 U.S.C. § 109(a), the owner of a particular phonorecord lawfully made under the Copyright Act is entitled without the authority of the copyright owner to sell or otherwise dispose of the possession of that phonorecord.28 The first sale doctrine limits only the distribution right under 17 U.S.C. § 106(3) and provides no protection or authorization for violations of the reproduction right under 17 U.S.C. § 106(1).29
No. Although users who purchased digital music files from iTunes qualify as owners of particular phonorecords lawfully made, the resales facilitated by ReDigi's platform require the creation of new phonorecords through the data migration process that breaks files into packets, deletes them from users' devices, and reassembles them on ReDigi's server and new purchasers' devices.30 The established facts establish that this migration results in new fixations of the sound recordings in different material objects.31 Because section 109(a) addresses only distribution and does not extend to or excuse unauthorized reproductions, the first sale doctrine affords no protection to ReDigi's activities.32
The first sale doctrine did not protect resales of digital music files through ReDigi's platform.33
Whether ReDigi's activities in operating its resale system qualified as fair use?34
Fair use under 17 U.S.C. § 107 is determined by weighing four factors: the purpose and character of the use including its commercial nature, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the work as a whole, and the effect of the use upon the potential market for or value of the copyrighted work.35 All four factors must be weighed together to decide whether a particular use qualifies as fair use.36
No. ReDigi's operation of the resale platform serves a commercial purpose by hosting a remunerative marketplace that enables resales competing directly with plaintiffs' primary market for sound recordings sold through authorized services such as iTunes.37 The use is not transformative because ReDigi makes identical copies of the entire works without adding new expression, meaning, or purpose, and the fourth factor weighs powerfully against fair use given the direct market substitution at lower prices without the deterioration that affects physical copies.38 Weighing the factors together, particularly the commercial character, lack of transformation, copying of the whole work, and substantial harm to the rights holders' market, ReDigi's activities do not qualify as fair use.39
ReDigi's activities in operating its resale system did not qualify as fair use.40