Resale of digital music may infringe copyright

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Buying and selling used music records, such as vinyl and compact discs, is something many people are familiar with.

However, the era of downloadable digital music has raised new issues about how users can deal with digital music files they have bought.

Even false tales of celebrities being restricted from dealing with their digital music collections are hitting the news.

For anyone planning on reselling their downloaded digital music, the Capitol Records LLC v ReDigi Inc decision in the US may leave a ringing in your ears.

In this case, the US District Court recently found that copyright was infringed where downloaded digital music files were transferred online for the purpose of resale.

Capitol Records v ReDigi
ReDigi provided an online facility for users to upload their "used" digital music files bought from iTunes and to resell them to other users.

The uploading process involved "migrating" users' music files from their computers to ReDigi's Cloud Locker, a server located in Arizona.

If the files were resold, the buyers would be given access to the files in the Cloud Locker, with the option of downloading the files to their own computers. Capitol Records issued proceedings against ReDigi, alleging various copyright infringements relating to the company's digital music reselling service.

ReDigi responded by claiming the music files were transferred "packet by packet" from users' computers to the Cloud Locker, so that only one set of data existed at a time and no copying had occurred. ReDigi drew analogy to the online transfer of data with the movement of a train.

The court found that, by transferring the music files from users' computers to the Cloud Locker, and from the Cloud Locker to buyers' computers, the music files had been copied.

This was because embodying music files in the new device that they were transferred to reproduced the music files.

The court rejected ReDigi's defences based on the US doctrines of fair use and first sale.

In finding that there had been no fair use, the court noted that the copyright works had been reproduced in their entirety, the reproductions were for commercial use, and sales of the reproductions were detrimental to the primary market for the goods.

The court held that the first sale (exhaustion) doctrine did not apply to the sale of unlawfully reproduced copyright works.

Can pople here resell downloaded digital music files?

There is no clear authority on this point, and the answer will depend on the facts of the situation. But the answer, in most cases, will be: unlikely.

It is widely accepted that transferring files across the internet, such as by a peer-to-peer system, necessitates copying those files.

This principle was accepted by the US District Court in Capitol Records v ReDigi: "This understanding is, of course, confirmed by the laws of physics. It is simply impossible that the same "material object" can be transferred over the internet."

The main issue for determination in New Zealand would likely be whether such copying is permitted.

Copyright infringement and breach of contract are two key legal risks that will affect whether parties in New Zealand can resell downloaded digital music files.

Copyright Infringement
Generally, copying sound recordings (which are contained in digital music files) that are protected by copyright would amount to copyright infringement under New Zealand's Copyright Act. So it is conceivable that uploading digital music files online (and therefore reproducing those files) in New Zealand for the purposes of resale could amount to copyright infringement. 

There is also a risk that resale service providers, such as ReDigi, could be liable for authorising or being a party to the infringement or providing means for making infringing copies.

Unlike the US, there are no general fair use or first sale doctrine defences in New Zealand in relation to copyright works.

However, there are some permitted acts under New Zealand's Copyright Act that relate to sound recordings. These include incidental copying, fair dealings with sound recordings for the purpose of criticism, review and news reporting, and copying of sound recordings for various other purposes such as education.

These permitted uses only apply in certain circumstances, and will not usually apply where the files are copied for commercial purposes, such as reselling digital music files.

New Zealand's Copyright Act also contains a provision allowing the copying of sound recordings for personal use. However, this provision requires (among other things) that the copy is made by the owner of the sound recording (ie, the person who purchased the digital music file) and that the copy is used for the owner's personal use.

A resale service provider would not fit within this provision.

Copyright infringement can be avoided if the copyright owner(s) permits the sound recordings (and the underlying works) to be copied and resold after they are downloaded.

Contractual restraints and digital rights management
How a buyer of a downloaded digital music file can use that file will often be set out in a contract of some sort. This is the case with purchases of digital music downloads from vendors such as the Apple iTunes Store, which requires purchasers to agree to certain terms and conditions.

Those terms and conditions will often restrict whether purchasers can copy or resell their downloaded digital music files.

If purchasers copy or resell their downloaded digital music files, when those buyers have agreed that they would not, then they risk breaching their contractual obligations.

Resale service providers could also risk liability for inducing buyers to breach those contracts.

Digital rights management (DRM) include forms of technological restriction that inhibit how a buyer can use their downloaded digital music files.

DRM restrictions can be incorporated into music files, software or hardware systems, and make it technically difficult to resell a digital music file.

The Copyright Act protects some rights of issuers of works that are subject to DRM restrictions, although these rights do not prevent permitted copying under the Copyright Act.

Terms and conditions of sale of downloaded digital music files will also often require buyers to adhere to DRM restrictions.

The Copyright Act also protects information attached to a work that identifies details such as the copyright owner and terms and conditions for using the work.

Effect on the secondary music market
While the US legal principles applied in Capitol Records v ReDigi differ to those in New Zealand, there are legal risks for parties wanting to resell downloaded digital music files in New Zealand.

However, this does not necessarily mean the end for the secondary music market.

Owners of lawfully-purchased vinyl music records, compact music discs and music cassettes are generally able to resell those items in New Zealand. It is possible that contractual restrictions could still apply to the resale of such items in some circumstances.

The market is likely, in time, to dictate that this consumer need is met in some way. So, despite the finding in Capitol Records v ReDigi, we are unlikely to have seen "the day the music died" for the resale of non-digital music records.

Earl Gray is a partner at Simpson Grierson and heads the firm's intellectual property team.