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Tuesday, April 16, 2013

Solving the Digital Resale Problem

As Bruce Willis's alleged complaints about not being able to leave his vast music collection to his children upon his death illustrate, modern digital media has created difficulties in secondary and resale markets. (I say alleged because the reports were denied. Side note: if news breaks on Daily Mail, be skeptical. And it's sad that Cracked had to inform Americans of this...).

 This post describes a recent attempt to create such a market, and proposes potential solutions.

In the good old days, when you wanted to sell your old music, books, or movies, you did just that. You sold your CD, your paperback, or your DVD. This was explicitly legalized in the Copyright Act: 17 USC Section 109 says that: “...the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” As we'll see later, a phonorecord is the material object that holds a sound recording, like a CD or MP3 player.

But we don't live in the good old days. In many ways, we live in the better new days. We can buy music, books, and DVDs over the internet, delivered directly to a playback device, and often to multiple playback devices in the same household. While new format and delivery options are great, they create problems for content developers, because new media formats are easily copied. In the bad sort-of-old days, providers used digital rights management (or DRM) to control how content was distributed. DRM was so poorly implemented that it is now a dirty word, so much so that it was largely abandoned by Apple; it is, however, still used by other services, like Amazon Kindle eBooks. Providers also use contracts to limit distribution - much to Bruce Willis's chagrin. Indeed, Section 109(d) is clear that a contract can opt-out of the disposal right: “[Disposal rights] do not, unless authorized by the copyright owner, extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it.”

But DRM is easily avoided if you simply transfer the entire device to the another party. And contracts are not necessarily as broad as people think. For example, I have scoured the iTunes terms of service and I cannot find any limitation on the transfer of a purchased song. There are limitations on apps that make software a license and limit transfers, but the music and video downloads are described as purchases unless they are "rentals," and all of the “use” limitations are actually improvements in that they allow for multiple copies rather than just one. Indeed, the contract makes clear that if Apple kills off cloud storage, you are stuck with your one copy, so you had better not lose it. If someone can point me to a contract term where Apple says you have not “purchased” the music and cannot sell it, I would like to see that.

Enter ReDigi and the lawsuit against it. ReDigi attempted to set up a secondary market for digital works. The plaintiff was Capitol Records, so there was no contract privity, so this is a pure “purchase and disposal” case. A description from the case explains how it worked (in edited form here):

To sell music on ReDigi's website, a user must first download ReDigi's “Media Manager” to his computer. Once installed, Media Manager analyzes the user's computer to build a list of digital music files eligible for sale. A file is eligible only if it was purchased on iTunes or from another ReDigi user; music downloaded from a CD or other file-sharing website is ineligible for sale. After this validation process, Media Manager continually runs on the user's computer and attached devices to ensure that the user has not retained music that has been sold or uploaded for sale. However, Media Manager cannot detect copies stored in other locations. If a copy is detected, Media Manager prompts the user to delete the file. The file is not deleted automatically or involuntarily, though ReDigi's policy is to suspend the accounts of users who refuse to comply.

After the list is built, a user may upload any of his eligible files to ReDigi's “Cloud Locker,” an ethereal moniker for what is, in fact, merely a remote server in Arizona. ReDigi's upload process is a source of contention between the parties. ReDigi asserts that the process involves “migrating” a user's file, packet by packet — “analogous to a train” — from the user's computer to the Cloud Locker so that data does not exist in two places at any one time. Capitol asserts that, semantics aside, ReDigi's upload process “necessarily involves copying” a file from the user's computer to the Cloud Locker. Regardless, at the end of the process, the digital music file is located in the Cloud Locker and not on the user's computer. Moreover, Media Manager deletes any additional copies of the file on the user's computer and connected devices.

Once uploaded, a digital music file undergoes a second analysis to verify eligibility. If ReDigi determines that the file has not been tampered with or offered for sale by another user, the file is stored in the Cloud Locker, and the user is given the option of simply storing and streaming the file for personal use or offering it for sale in ReDigi's marketplace. If a user chooses to sell his digital music file, his access to the file is terminated and transferred to the new owner at the time of purchase. Thereafter, the new owner can store the file in the Cloud Locker, stream it, sell it, or download it to her computer and other devices. No money changes hands in these transactions. Instead, users buy music with credits they either purchased from ReDigi or acquired from other sales. ReDigi credits, once acquired, cannot be exchanged for money. Instead, they can only be used to purchase additional music.

ReDigi claimed that it was protected by 17 USC 109. After all, according to the description, it was transferring the work (the song) from the owner to ReDigi, and then to the new owner. Not so, said the court. As the court notes, Section 109 protects only the disposition of particular copies (phonorecords, really) of the work. And uploading a file and deleting the original is not transferring a phonorecord, because the statute defines a “phonorecord” as the physical medium in which the work exists. Transfer from one phonorecord to another is not the same as transfering a particular phonorecord. So, ReDigi could be a secondary market for iPods filled with songs, but not the songs disembodied from the storage media.

As much as I want the court to be wrong, I think it is right here, at least on the narrow, literal statutory interpretation. The words say what they say. Even the court notes that this is an uncomfortable ruling: “[W]hile technological change may have rendered Section 109(a) unsatisfactory to many contemporary observers and consumers, it has not rendered it ambiguous.”

Once the court finds that transferring the song to ReDigi is an infringing reproduction, it's all downhill, and not in a good way. The court notably finds that there is no fair use. I think it is here that the court gets it wrong. Unlike the analysis of Section 109, the fair use analysis is short, unsophisticated, and devoid of any real factual analysis. I think this is ReDigi's best bet on appeal.

Even despite my misgivings, ReDigi's position is not a slam dunk. After all, how can it truly know that a backup copy has not been made? Or that the file has not been copied to other devices? Or that the file won't simply be downloaded from cloud storage or even iTunes after it has been uploaded to ReDigi. 

If ReDigi, which seemed to try to do a good job ensuring no residual copies, cannot form a secondary market, then what hope do we have? We certainly aren't going to get there with the statute we have, unless courts are much more willing to read a fair use into transfers. The real problem is that the statute works fine when the digital work (software, music, whatever) is stored in a single use digital product. When we start separating the “work” from the container, so that containers can hold many different works and one work might be shared on several containers all used by the same owner, all of the historical rules break down.

So, what do we do if we can't get the statute amended? I suspect people will hate my answer: a return to the dreaded DRM. A kinder, gentler, DRM. I think that DRM that allows content providers to recall content at will (or upon business closure) must go -- whether legislatively or regulatorily. It is possible, of course, for sophisticated parties to negtotiate for such use restrictions (for example, access to databases), and to set pricing for differing levels of use based on those negotiations. That's what iTunes does with its "rentals."

But companies should not be allowed to offer content "for sale" if delivery and use is tied to a contract or DRM that renders that content licensed and not in control of buyers. This is simply false advertising that takes advantage of settled expectations of users, and well within the powers of the FTC, I believe.

But DRM can and should be used to limit copying and transferrability. If transferability is allowed, then the DRM can ensure that the old user does not maintain copies. Indeed, if content outlets embraced this model, they might even create their own secondary markets to increase competition in the secondary market. In short, the solution to the problem, I believe, is going to be a technical one, and that might be a good thing for users who can no credibly show that they won't copy.

And DRM is what we are seeing right now. Apparently, ReDigi has reimplemented its service so that iTunes purchases are directly copied to a central location where they stay forever. From there, copies are downloaded to particular user devices pursuant to the iTunes agreement. This way, ReDigi acts as the digital rights manager. When a user sells a song, it ReDigi cuts off access to the song for the selling user, and allows the buying user access without making a new copy of the song on its server. I presume that its media manager also attempts to delete all copies from the sellers devices.

Of course, this might mean that content, or at least transferring it, is a little more expensive than before. But let's not kid ourselves - the good old days weren't that good. You had to buy the whole CD, or maybe a single if one was available, but you could not pick and choose any song on any album. Books are heavy and bulky; you couldn't carry thousands of them around. And DVDs require a DVD player, which has several limitations compared to video files.

DRM may just be the price we pay for convenience and choice. We don't have to pay that price. Indeed, I buy most of my music on CD. And I get to put the songs where I want, and I suppose sell the CD if I want, though I never do. As singles start costing $1.50, it may make sense to buy the whole CD. Alas, these pricing issues are incredibly complex, which may take another post in the future.

Posted by Michael Risch on April 16, 2013 at 07:00 AM in Information and Technology, Intellectual Property, Web/Tech | Permalink


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I have often wondered how this works, this article is really useful thanks

Posted by: Jennifer | Apr 20, 2013 3:03:44 PM

A couple quick responses:

First, I take your point about Quanta, and I do worry about that interpretation. But I invoke patent law only to suggest that the principle of exhaustion is independent of any statutory text and can evolve over time to address new technology.

Second, I'd say the law regarding ownership is very much up for grabs. One need only compare the Ninth Circuit's opinions in Augusto and Vernor to understand how confused courts are in those cases - same panel, same day, inconsistent results. While it may not be a particularly safe bet, I don't think we should give up all hope of courts coming to sensible conclusions about ownership.

Posted by: Aaron Perzanowski | Apr 16, 2013 2:45:15 PM

Hi Aaron -

Thanks for reading (and writing!). I agree that fair use doesn't fit very well, but I'm still not convinced that Bobbs Merrill does either, notwithstanding your persuasive arguments to the contrary. Indeed, many (me included) do not read Quanta nearly as broadly as your comment asserts - dicta in the case, at the very least, implies that the exhaustion issue could have been avoided if the contract had been drafted (and imposed upon downstream buyers) in a better way. I realize that's hotly contested.

But it's not like we are writing on a blank slate. Scholars have been tilting at windmills for years arguing that there are aspects of software ownership that should transcend "do not sell" and "do not reverse engineer" restrictions in contracts. Despite the merits of the arguments, courts are just not buying it. Not that that's a good thing - it just makes me skeptical here. If the Supreme Court wants to reaffirm that Bobbs Merrill transcends the statute and trumps agreements to the contrary, then so be it, but I'm not betting on it.

Posted by: Michael Risch | Apr 16, 2013 10:01:02 AM


I think you are dead on when it comes to the false advertising issue. "Buy," "own," and "purchase" are words with settled meanings. And they don't apply to transactions where consumers are permitted conditional access to data. Jason Schultz and I are in the process of writing our third paper on questions of digital content ownership and copyright exhaustion, and this is one of the issues we discuss there.

But I wanted to push back on your suggestion that fair use rather than first sale is ReDigi's best argument on appeal. First, as you note, things don't look good for ReDigi under section 109 if you buy into the court's take on reproduction. But as we argued in our first paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1669562) copyright exhaustion is not primarily a creature of statute, but of the common law. It was created by courts, decades before the Supreme Court's decision in Bobbs-Merrill, in fact. And several of those early cases held that the copyright owner's right to control not only distribution, but also certain acts of reproduction and the creation of derivative works, had to yield to the consumer's personal property interest in their copy. Just as they are in the patent context, see Quanta v. LG, courts in copyright cases already have the authority to apply the exhaustion principle in ways that go beyond the literal language of section 109. And they need to be encouraged to do so.

While I'd be happy to see ReDigi win any way it can, I'm afraid I don't see fair use as a particularly good fit. We wrote at length in our second paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1925059) about the reasons the fair use analysis is ill-equipped to handle these sorts of cases. I won't summarize the whole paper, but the key shortcoming is that fair use can't account for the special claim to copying that lawful owners of copies have - whether it's used to make backup copies or to enable resale.

Posted by: Aaron Perzanowski | Apr 16, 2013 9:53:02 AM

A thought experiment: How about a public library that purchases 20 Kindle ereaders, loads them up with purchased ebooks, and then loans the ereaders out to its patrons? Amazon's boilerplate characterizes the transaction whereby one pays Amazon money and receives a Kindle in return as a "sale" and even offers a warranty. It characterizes the transaction whereby one pays it money and a digital file of an ebook appears on one's Kindle as more-or-less a license (there is some ambiguity). Section 109, though, applies to the "owner of a particular copy ... lawfully made under this title..." If that copy is the material object in which a work is fixed, that would be the Kindle, which the public library purchased and therefore owns, and the download of the ebooks was clearly lawful under the copyright law.

Posted by: Jessica Litman | Apr 16, 2013 9:25:01 AM

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