A US court has ruled against a website allowing trading in “used” digital music tracks on the grounds of copyright infringement.
US District Judge Richard Sullivan in Manhattan said ReDigi was not authorized to allow listeners to use its platform to buy and sell "used" digital music tracks originally bought from Apple's iTunes website, in a case brought by record label Capitol Records.
The decision made public yesterday is a blow to early efforts to create online marketplaces for used digital goods, akin to how used books, for example, might be sold in stores.
It is also a victory for Capitol that had sued ReDigi in January 2012 to protect its copyrights on works by artists like Beastie Boys, Coldplay, Norah Jones, Lady Antebellum and Katy Perry.
"This will profoundly affect the economics of any digital re-sale marketplace," by limiting what can be sold as "used" or forcing sellers to obtain copyright holders' approval before transacting business, said Bill Rosenblatt, president of consulting firm GiantSteps Media Technology Strategies.
According to Nielsen SoundScan, which tracks sales of recorded music, digital music sales accounted for 55.9 per cent of U.S. music sales in 2012, after surpassing physical purchases for the first time in the prior year.
ReDigi did not immediately respond to a request for comment. Lawyers for both companies did not immediately respond to similar requests.
Sullivan said some open issues remain over Capitol's performance and display rights, as well as damages and injunctive relief that could result in ReDigi being shut down. He directed both companies to advise in writing by April 12 on the next steps in the case.
Created by technology entrepreneur John Ossenmacher and Massachusetts Institute of Technology Professor Larry Rudolph, ReDigi was launched in October 2011, and calls itself "the world's first pre-owned digital marketplace."
The platform allows listeners to swap music tracks at a fraction of the cost of buying them on iTunes with ReDigi making money from fees on each transaction.
Capitol complained that the platform allowed the unauthorized reproduction and distribution of its music, including through the streaming of 30-second clips and sought damages of $150,000 per infringement.
In February 2012, Sullivan denied Capitol a preliminary injunction to shut down the service, saying the label failed to show irreparable harm.
But in his new decision, which is dated March 30, Sullivan said ReDigi's service "infringes Capitol's reproduction rights under any description of the technology," and does not deserve protection under the theory of fair use.
"ReDigi facilitates and profits from the sale of copyrighted commercial recordings, transferred in their entirety, with a likely detrimental impact on the primary market for these goods," Sullivan wrote. "It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created."
E-books, MP3 songs and digital videos bought from iTunes or Amazon.com are effectively rentals, which means they cannot be re-sold once used.
Earlier this year, Amazon was awarded a patent for an online mechanism to allow customers to sell or transfer digital goods while Apple has applied for a patent covering a similar system.
Joe Wikert, general manager and publisher at O'Reilly Media, describes the Capitol Records ruling as "not a good first step" in the development of marketplaces for used digital goods.
"Both Amazon and Apple have been working on patents, which are insurance policies for both of them in my view," Wikert says. "They have been sitting on the sidelines watching the ReDigi case."
Asking all copyright holders for permission to re-sell digital content would be "impractical for all intents and purposes," he says.
The ruling was disappointing because ReDigi planned to give a cut of proceeds from re-sales to copyright holders and the firm was escrowing money for record labels from digital music transactions that had already happened on its nascent service, Wikert explained.