PART II: The Chilling Effects of the ReDigi Decision on Consumer Rights in their Digital Property

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By: Emily Donohue

As suggested in Part One of my two-part series on the application of the first sale doctrine to digital sales, the legislature should make clarifications and updates to The Copyright Act to apply the first sale doctrine to digital property, and end the chilling effects of uncertainty on innovation in the secondary sales market.

 The First Sale Doctrine Should Be Applied to Digital Property

 As a result of the first sale doctrine, generally, copyright holders may not control or benefit from a secondary sale of most copyrighted materials. However, when it comes to digital property, a copyright holder has the power to control the first sale and restrict secondary sales. This isn’t the case for other intellectual property rights, like patents, where the exhaustion doctrine prohibits the patentee from extending his or her right to control the patent after an authorized sale. For example, United States v. Univis Lens Co. held that “[a] patentee is free to set the price and negotiate contracts with purchasers, but may not, ‘by virtue of his patent, control the use or disposition’ of the product after ownership passes to the purchaser.” Additionally, Impression Products Inc. v. Lexmark International Inc. held that a legal sale exhausted the patentee’s rights in that item. A license may require the licensee to impose a restriction on purchasers, but the only recourse for the licensee is through contract law.

As discussed in Part One, the court in Capitol Records, LLC v. ReDigi Inc. found that the first sale doctrine did not apply to the resale of digital music files, and that the Defendant’s method of transferring files constituted an illegal reproduction under the Copyright Act. Important to coming to this decision was the theory that a digital copy doesn’t deteriorate in the same way a physical copy does. Essentially, a “used” digital file is identical to the original, while a “used” printed book or physical record would deteriorate with use, thus lowering its value.  This claim, while true, does not justify expanding restrictions of downstream sales of legally purchased digital files at the expense of consumers.

The legal sale of a copyrighted work benefits both the copyright holder (who is compensated for the sale of the copyrighted work) and the consumer (who has a property right in that copy, and may use the item, sell it, or will it to a loved one). In the case of physical forms of media, like a CD or book, the copyright owner has the right to control the first sale but cannot control any legal subsequent sales. This same principle should apply to digital sales, where the copyright holder is compensated for the original sale, and the consumer then has the right to use or sell the property as he or she sees fit.

The ReDigi decision also finds a fatal flaw in the fact that the defendant could not completely prevent the user from retaining illegal copies of digital files. However, this argument fails to acknowledge that piracy issues exist in any secondary sale market. For example, a person selling a used book could have made a photocopy before selling the original book, or a person selling a CD could have duplicated it before selling the original. Yet, despite the possibility of piracy, these markets still thrive. It would be wiser to allow a legal secondary market for digital media, even if it is not perfect. Under the ReDigi business method, the consumer could not sell an illegal copy of the digital file, and ReDigi made great efforts to ensure that illegal copies did not exist on the seller’s computer. Ultimately, regardless of how many precautions a secondary market business takes, there will always be a chance that a seller made an illegal copy of a digital file prior to sale. Just as a used bookstore cannot be positive a customer didn’t make an illegal photocopy of the book they are offering for resale, but the perfect should not be the enemy of the good when it comes to innovation.

Conclusion

 The lack of uniformity in the application of the first sale doctrine is a hinderance to innovation derived from predictable and equal application of the law. When courts intervene in unpredictable ways, businesses are less likely to innovate for fear of decisions like ReDigi, where a company with a novel idea was forced out of business and into bankruptcy because of an unexpected application of statutory language. The court in ReDigi implied that a legal secondary sale market for digital files may exist in the future but failed to elaborate on how it could be done. With uncertainty in the application of the first sale doctrine to digital files and the negative outcome for the defendants in ReDigi, it is unlikely any company would be willing to take the risk of finding out exactly how to satisfy the vague requirements of the court without facing a similarly undesirable outcome. Therefore, it is incumbent upon the legislature to make necessary clarifications and updates to The Copyright Act to ensure uniform application of the first sale doctrine and end the chilling effects of uncertainty on innovation in the music business.

Of course, with consumer trends in digital media shifting toward streaming and subscription services, the fight for consumer rights in digital property may be moot. Nevertheless, Congress and the judiciary should continue to strive for uniformity in the law, and updating the Copyright Act to apply the first sale doctrine to digital property is a simple way to do so.

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