Capitol Records, LLC v. Redigi Inc.

• Decision Date: 12 December 2018
• Docket Number: August Term, 2017,Docket No. 16-2321
• Citation: 910 F.3d 649
• Parties: CAPITOL RECORDS, LLC, Capitol Christian Music Group, Inc., Virgin Records IR Holdings, Inc., Plaintiffs-Appellees, v. REDIGI INC., John Ossenmacher, Larry Rudolph, AKA Lawrence S. Rogel, Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

910 F.3d 649

CAPITOL RECORDS, LLC, Capitol Christian Music Group, Inc., Virgin Records IR Holdings, Inc., Plaintiffs-Appellees,

v.REDIGI INC., John Ossenmacher, Larry Rudolph, AKA Lawrence S. Rogel, Defendants-Appellants.

Docket No. 16-2321

August Term, 2017

United States Court of Appeals, Second Circuit.

Argued: August 22, 2017

Decided: December 12, 2018

RICHARD S. MANDEL, New York, N.Y. (Jonathan Z. King, Cowan, Liebowitz & Latman, P.C., New York, N.Y., on the brief), for Plaintiffs-Appellees.

ROBERT C. WELSH, New York, N.Y. (C. Dennis Loomis, Baker & Hostetler LLP, Los Angeles, CA, on the brief) for Defendant-Appellants.

Before: JON O. NEWMAN, PIERRE N. LEVAL, and ROSEMARY S. POOLER, Circuit Judges.

LEVAL, Circuit Judge:

Defendant ReDigi, Inc. and its founders, Defendants Larry Rudolph and John Ossenmacher,¹ appeal from the judgment of the United States District Court for the Southern District of New York (Richard J. Sullivan, J .) in favor of Plaintiffs, Capitol Records, LLC, Capitol Christian Music Group, Inc., and Virgin Records IR Holdings, Inc. ("Plaintiffs"), finding copyright infringement. Defendants had created an Internet platform designed to enable the lawful resale, under the first sale doctrine, of lawfully purchased digital music files, and had hosted resales of such files on the platform. The district court concluded that, notwithstanding the "first sale" doctrine, codified in the Copyright Act of 1976, 17 U.S.C. § 109(a), ReDigi’s Internet system version 1.0 infringed the Plaintiffs’ copyrights by enabling the resale of such digital files containing sound recordings of Plaintiffs’ copyrighted music. We agree with the district court that ReDigi infringed the Plaintiffs’ exclusive rights under 17 U.S.C. § 106(1) to reproduce their copyrighted works. We make no decision whether ReDigi also infringed the Plaintiffs’ exclusive rights under 17 U.S.C. § 106(3) to distribute their works.²

BACKGROUND

I. Facts

Plaintiffs are record companies, which own copyrights or licenses in sound recordings of musical performances. Plaintiffs distribute those sound recordings in numerous forms, of which the most familiar twenty years ago was the compact disc. Today, Plaintiffs also distribute their music in the form of digital files, which are sold to the public by authorized agent services, such as Apple iTunes, under license from Plaintiffs. Purchasers from the Apple iTunes online store download the files onto their personal computers or other devices.

ReDigi was founded by Defendants Ossenmacher and Rudolph in 2009 with the goal of creating enabling technology and providing a marketplace for the lawful resale of lawfully purchased digital music files.³ Ossenmacher served as ReDigi’s Chief Executive Officer and Rudolph, who spent twelve years as a Principal Research Scientist at the Massachusetts Institute of Technology, served as ReDigi’s Chief Technical Officer. During the period addressed by the operative complaint, ReDigi, through its system version 1.0, hosted resales of digital music files containing the Plaintiffs’ music by persons who had lawfully purchased the files from iTunes.

Considering the evidence in the light most favorable to ReDigi, ReDigi’s system version 1.0 operates as follows.

1. Music Manager: A person who owns a digital music file lawfully purchased from iTunes and intends to employ ReDigi’s system to resell it (the "user") must first download and install onto her computer ReDigi’s "Music Manager" software program ("Music Manager"). Once Music Manager has been installed, it analyzes the digital file intended for resale, verifies that the file was originally lawfully purchased from iTunes, and scans it for indications of tampering. If the file was lawfully purchased, Music Manager deems it an "Eligible File" that may be resold.⁴

2. Data Migration: The ReDigi user must then cause the file to be transferred to ReDigi’s remote server, known as the "Cloud Locker." To effectuate this transfer, ReDigi developed a new method that functions differently from the conventional file transfer. The conventional process is to reproduce the digital file at the receiving destination so that, upon completion of the transfer, the file exists simultaneously on both the receiving device and on the device from which it was transferred. If connectivity is disrupted during such a standard transfer, the process can be repeated because the file remains intact on the sender’s device.

Under ReDigi’s method—which it calls "data migration"—ReDigi’s software "begins by breaking the [digital] music file into small ‘blocks’ [of data] of roughly four thousand bytes in length." Appellants Br. 24. Once the file has been broken into blocks of data ("packets"), ReDigi’s system creates a "transitory copy" of each packet in the initial purchaser’s computer buffer. Id . Upon copying (or "reading") a packet into the initial purchaser’s computer buffer, ReDigi’s software sends a command to delete that packet of the digital file from permanent storage on the initial purchaser’s device. Rogel Decl. App’x 690-91. ReDigi’s software then sends the packet to the ReDigi software to be copied into the buffer and deleted from the user’s device. Rogel Decl. App’x 691. During the data migration process, the digital file cannot be accessed, played, or perceived. If connectivity is disrupted during the data migration process, the remnants of the digital file on the user’s device are unusable, and the transfer cannot be re-initiated. In such circumstances, ReDigi (according to its brief) bears the cost of the user’s loss. Appellants Br. 25.⁵

Once all the packets of the source file have been transferred to ReDigi’s server, the Eligible File has been entirely removed from the user’s device. The packets are then re-assembled into a complete, accessible, and playable file on ReDigi’s server.

ReDigi describes its primary technological innovation using the metaphor of a train (the digital file) leaving from one station (the original purchaser’s device) and arriving at its destination (in the first instance, ReDigi’s server). Under either the typical method or ReDigi’s method, packets are sent sequentially, such that, conceptually, "each packet is a car" moving from the source to the destination device. App’x 657. Once all the packets arrive at the destination device, they are reassembled into a usable file. Id. At that moment, in a typical transfer, the entire digital file in usable form exists on both devices. Id. ReDigi’s system differs in that it effectuates a deletion of each packet from the user’s device immediately after the "transitory copy" of that packet arrives in the computer’s buffer (before the packet is forwarded to ReDigi’s server). In other words, as each packet "leaves the station," ReDigi deletes it from the original purchaser’s device such that it "no longer exists" on that device. Id. As a result, the entire file never exists in two places at once. Id.

After the file has reached ReDigi’s server but before it has been resold, the user may continue to listen to it by streaming audio from the user’s Cloud Locker on ReDigi’s server. If the user later re-downloads the file from her Cloud Locker to her computer, ReDigi will delete the file from its own server.

3. Resale: Once an Eligible File has "migrated" to ReDigi’s server, it can be resold by the user utilizing ReDigi’s market function. If it is resold, ReDigi gives the new purchaser exclusive access to the file. ReDigi will (at the new purchaser’s option) either download the file to the new purchaser’s computer or other device (simultaneously deleting the file from its own server) or will retain the file in the new purchaser’s Cloud Locker on ReDigi’s server, from which the new purchaser can stream the music. ReDigi’s terms of service state that digital media purchases may be streamed or downloaded only for personal use.

4. Duplicates: ReDigi purports to guard against a user’s retention of duplicates of her digital music files after she sells the files through ReDigi. To that end, Music Manager continuously monitors the user’s computer hard drive and connected devices to detect duplicates. When a user attempts to upload an Eligible File to ReDigi’s server, ReDigi "prompt[s]" her to delete any pre-existing duplicates that Music Manager has detected. If ReDigi detects that the user has not deleted the duplicates, ReDigi blocks the upload of the Eligible File. After an upload is complete, Music Manager continues to search the user’s connected devices for duplicates. If it detects a duplicate of a previously uploaded Eligible File, ReDigi will prompt the user to authorize ReDigi to delete that duplicate from her personal device and, if authorization is not granted, it will suspend her account.

Plaintiffs point out, and ReDigi does not dispute, that these precautions do not prevent the retention of duplicates after resale through ReDigi. Suspension of the original purchaser’s ReDigi account does not negate the fact that the original purchaser has both sold and retained the digital music file after she sold it. So long as the user retains previously-made duplicates on devices not linked to the computer that hosts Music Manager, Music Manager will not detect them. This means that a user could, prior to resale through ReDigi, store a duplicate on a compact disc, thumb drive, or third-party cloud service unconnected to the computer that hosts Music Manager and access that duplicate post-resale.⁶ While ReDigi’s suspension of the original purchaser’s ReDigi account may be a disincentive to the retention of sold files, it does not prevent the user from retaining sold files.

II. Proceedings Below

On January 6, 2012, Plaintiffs brought this action, originally solely against ReDigi, Inc., alleging inter alia , that in the operation of ReDigi’s system version 1.0, it infringed Plaintiffs’ copyrights by unauthorized reproduction and distribution of Plaintiffs’ copyrighted works. The parties cross-moved for summary...