Case 16-2321, Document 188-1, 12/12/2018, 2453405, Pagel of 36
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`16-2321
`Capitol Records, LLC et. al. v. ReDigi Inc., et. al.
`UNITED STATES COURT OF APPEALS
`FOR THE SECOND CIRCUIT
`
`August Term, 2017
`
`(Argued: August 22, 2017
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`Decided: December 12, 2018)
`
`Docket No. 16-2321
`
`Plaintiffs-Appellees,
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`V.
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`2
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`4
`5
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`7
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`11 Capitol Records, LLC, Capitol Christian Music Group, Inc., Virgin Records IR
`Holdings, Inc.,
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`20
`21
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`23 Before:
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`25
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`Defendants, ReDigi Inc. and related persons, appeal from the grant of
`28
`29 partial summary judgment and stipulated final judgment by the United States
`30 District Court for the Southern District of New York (Richard J. Sullivan, J.) in
`favor of Plaintiffs, record companies whose copyrighted sound recordings
`31
`32 were resold through the ReDigi platform. The district court found copyright
`infringement. AFFIRMED.
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`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.
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`ReDigi Inc., John Ossenmacher, Larry Rudolph, AKA Lawrence S. Rogel,
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`Defendants-Appellants.
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`JON 0. NEWMAN, PIERRE N. LEVAL, and ROSEMARY S. POOLER,
`Circuit Judges.
`
`
`
`16-2321
`Capitol Records, LLC et. al. v. ReDigi Inc., et. al.
`UNITED STATES COURT OF APPEALS
`FOR THE SECOND CIRCUIT
`
`August Term, 2017
`
`(Argued: August 22, 2017
`
`Decided: December 12, 2018)
`
`Docket No. 16-2321
`
`Plaintiffs-Appellees,
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`V.
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`2
`3
`4
`5
`6
`7
`8
`9
`10
`11 Capitol Records, LLC, Capitol Christian Music Group, Inc., Virgin Records IR
`Holdings, Inc.,
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`14
`15
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`17
`18
`19
`20
`21
`22
`23 Before:
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`25
`26
`27
`Defendants, ReDigi Inc. and related persons, appeal from the grant of
`28
`29 partial summary judgment and stipulated final judgment by the United States
`30 District Court for the Southern District of New York (Richard J. Sullivan, J.) in
`favor of Plaintiffs, record companies whose copyrighted sound recordings
`31
`32 were resold through the ReDigi platform. The district court found copyright
`infringement. AFFIRMED.
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`39
`
`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.
`
`ReDigi Inc., John Ossenmacher, Larry Rudolph, AKA Lawrence S. Rogel,
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`Defendants-Appellants.
`
`JON 0. NEWMAN, PIERRE N. LEVAL, and ROSEMARY S. POOLER,
`Circuit Judges.
`
`
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`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page2 of 36
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`1
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`6 LEVAL, Circuit Judge:
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`ROBERT C. WELSH, New York, N.Y.
`(C. Dennis Loomis, Baker & Hostetler
`LLP, Los Angeles, CA, on the brief)for
`Defendant-Appellants.
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`7
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`8
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`Defendant ReDigi, Inc. and its founders, Defendants Larry Rudolph
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`and John Ossenmacher,1 appeal from the judgment of the United States
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`9 District Court for the Southern District of New York (Richard J. Sullivan, I.) in
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`favor of Plaintiffs, Capitol Records, LLC, Capitol Christian Music Group, Inc.,
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`and Virgin Records IR Holdings, Inc. ("Plaintiffs"), finding copyright
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`infringement. Defendants had created an Internet platform designed to enable
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`the lawful resale, under the first sale doctrine, of lawfully purchased digital
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`14 music files, and had hosted resales of such files on the platform. The district
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`15
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`court concluded that, notwithstanding the "first sale" doctrine, codified in the
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`16 Copyright Act of 1976,17 U.S.C. § 109(a), ReDigi's Internet system version 1.0
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`infringed the Plaintiffs' copyrights by enabling the resale of such digital files
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`containing sound recordings of Plaintiffs' copyrighted music. We agree with
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`the district court that ReDigi infringed the Plaintiffs' exclusive rights under 17
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`I Hereinafter "ReDigi" is used to designate all three Defendants, except where the context makes
`clear it refers solely to the company.
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`2
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`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page3 of 36
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`U.S.C. § 106(1) to reproduce their copyrighted works. We make no decision
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`2 whether ReDigi also infringed the Plaintiffs' exclusive rights under 17 U.S.C.
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`3 § 106(3) to distribute their works.2
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`4
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`BACKGROUND
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`I.
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`Facts
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`Plaintiffs are record companies, which own copyrights or licenses in
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`sound recordings of musical performances. Plaintiffs distribute those sound
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`recordings in numerous forms, of which the most familiar twenty years ago
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`9 was the compact disc. Today, Plaintiffs also distribute their music in the form.
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`10 of digital files, which are sold to the public by authorized agent services, such
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`12
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`as Apple iTunes, under license from Plaintiffs. Purchasers from the Apple
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`iTunes online store download the files onto their personal computers or other
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`13 devices.
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`14
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`ReDigi was founded by Defendants Ossenmacher and Rudolph in 2009
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`15 with the goal of creating enabling technology and providing a marketplace
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`2 W do not adjudicate whether ReDigi's system version 2.0 infringed any of the Plaintiffs' rights as
`this question (although stipulated in the final judgment) was not litigated in the district court.
`Defendants stipulated that a judgment in Plaintiffs' favor would enjoin the Defendants, as well as all
`persons in specified relationships with the Defendants, such as their "officers, agents, servants,
`representatives.. . and licensees," from implementing version 2.0. Stipulated Final Judgment ¶5,
`Capitol Records, LLC. V. ReDigi, Inc., No. 12-CV-95 (RJS), ECF No. 222 (S.D.N.Y. June 3, 2015).
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`3
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`for the lawful resale of lawfully purchased digital music ffles.3 Ossenmacher
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`served as ReDigi's Chief Executive Officer and Rudolph, who spent twelve
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`years as a Principal Research Scientist at the Massachusetts Institute of
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`2
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`3
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`4 Technology, served as ReDigi's Chief Technical Officer. During the period
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`5
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`addressed by the operative complaint, ReDigi, through its system version 1.0,
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`6 hosted resales of digital music files containing the Plaintiffs' music by persons
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`7 who had lawfully purchased the files from iTunes.
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`8
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`Considering the evidence in the light most favorable to ReDigi,
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`9 ReDigi's system version 1.0 operates as follows.
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`1. Music Manager: A person who owns a digital music file lawfully
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`purchased from iTunes and intends to employ ReDigi's system to resell it (the
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`"user") must first download and install onto her computer ReDigi's "Music
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`13 Manager" software program ("Music Manager"). Once Music Manager has
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`14 been installed, it analyzes the digital file intended for resale, verifies that the
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`15
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`file was originally lawfully purchased from iTunes, and scans it for
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`3 ReDigi was not making efforts in the shadows to infringe on copyrights. To the contrary, it invented
`a system designed in good faith to achieve a goal generally favored by the law of copyright,
`reasonably hoping the system would secure court approval as conforming to the demands of the
`Copyright Act.
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`4
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`indications of tampering. If the file was lawfully purchased, Music Manager
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`2 deems it an "Eligible File" that may be resold.4
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`3
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`2.
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`Data Migration: The ReDigi user must then cause the ifie to be
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`transferred to ReDigi's remote server, known as the "Cloud Locker." To
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`effectuate this transfer, ReDigi developed a new method that functions
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`differently from the conventional file transfer. The conventional process is to
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`reproduce the digital file at the receiving destination so that, upon completion
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`8 of the transfer, the ifie exists simultaneously on both the receiving device and
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`9 on the device from which it was transferred. If connectivity is disrupted
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`10 during such a standard transfer, the process can be repeated because the file
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`remains intact on the sender's device.
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`Under ReDigi's method—which it calls "data migration" —ReDigi's
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`software "begins by breaking the [digital] music ifie into small 'blocks' [of
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`data] of roughly four thousand bytes in length." Appellants Br. 24. Once the
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`file has been broken into blocks of data ("packets"), ReDigi's system creates a
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`"transitory copy" of each packet in the initial purchaser's computer buffer. Id.
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`4 Music Manager will deem a file "Eligible" if it was purchased by the user from iTunes or it was
`purchased by the user through ReDigi, having been originally purchased lawfully by another from
`iTunes.
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`5
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`Upon copying (or "reading") a packet into the initial purchaser's computer
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`2 buffer, ReDigi's software sends a command to delete that packet of the digital
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`3
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`file from permanent storage on the initial purchaser's device. Rogel Decl.
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`4 App'x 690-91. ReDigi's software then sends the packet to the ReDigi software
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`5
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`to be copied into the buffer and deleted from the user's device. Rogel Deci.
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`6 App'x 691. During the data migration process, the digital file cannot be
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`7
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`accessed, played, or perceived. If connectivity is disrupted during the data
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`migration process, the remnants of the digital ifie on the user's device are
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`9 unusable, and the transfer cannot be re-initiated. In such circumstances,
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`10 ReDigi (according to its brief) bears the cost of the user's loss. Appellants Br.
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`11
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`25.
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`Once all the packets of the source file have been transferred to ReDigi's
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`server, the Eligible File has been entirely removed from the user's device. The
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`packets are then re-assembled into a complete, accessible, and playable file on
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`15 ReDigi's server.
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`51t is unclear from the evidence cited in ReDigi's Rule 56.1 statement whether ReDigi purchases a
`new file from iTunes to effectuate resale, pays the user to offset the loss of her file, or otherwise bears
`the cost of the loss. See App'x 1489 at ¶ 35. These alternatives do not affect our decision.
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`ReDigi describes its primary technological innovation using the
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`2 metaphor of a train (the digital file) leaving from one station (the original
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`3 purchaser's device) and arriving at its destination (in the first instance,
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`4 ReDigi's server). Under either the typical method or ReDigi's method, packets
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`are sent sequentially, such that, conceptually, "each packet is a car" moving
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`from the source to the destination device. App'x 657. Once all the packets
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`arrive at the destination device, they are reassembled into a usable file. Id. At
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`that moment, in a typical transfer, the entire digital file in usable form exists
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`9 on both devices. Id. ReDigi's system differs in that it effectuates a deletion of
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`10
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`each packet from the user's device immediately after the "transitory copy" of
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`that packet arrives in the computer's buffer (before the packet is forwarded to
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`12 ReDigi's server). In other words, as each packet "leaves the station," ReDigi
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`deletes it from the original purchaser's device such that it "no longer exists"
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`on that device. Id. As a result, the entire file never exists in two places at once.
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`Id.
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`After the file has reached ReDigi's server but before it has been resold,
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`the user may continue to listen to it by streaming audio from the user's Cloud
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`Locker on ReDigi's server. If the user later re-downloads the ifie from her
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`2 Cloud Locker to her computer, ReDigi will delete the ifie from its own server.
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`3.
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`Resale: Once an Eligible File has "migrated" to ReDigi's server, it
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`4
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`can be resold by the user utilizing ReDigi's market function. If it is resold,
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`ReDigi gives the new purchaser exclusive access to the file. ReDigi will (at the
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`6 new purchaser's option) either download the ifie to the new purchaser's
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`computer or other device (simultaneously deleting the file from its own
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`server) or will retain the file in the new purchaser's Cloud Locker on ReDigi's
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`server, from which the new purchaser can stream the music. ReDigi's terms of
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`service state that digital media purchases may be streamed or downloaded
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`only for personal use.
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`4.
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`Duplicates: ReDigi purports to guard against a user's retention of
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`duplicates of her digital music files after she sells the files through ReDigi. To
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`that end, Music Manager continuously monitors the user's computer hard
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`drive and connected devices to detect duplicates. When a user attempts to
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`upload an Eligible File to ReDigi's server, ReDigi "prompt[s]" her to delete
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`any pre-existing duplicates that Music Manager has detected. If ReDigi
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`detects that the user has not deleted the duplicates, ReDigi blocks the upload
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`F;]
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`of the Eligible File. After an upload is complete, Music Manager continues to
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`2
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`search the user's connected devices for duplicates. If it detects a duplicate of a
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`3 previously uploaded Eligible File, ReDigi will prompt the user to authorize
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`4 ReDigi to delete that duplicate from her personal device and, if authorization
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`5
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`is not granted, it will suspend her account.
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`Plaintiffs point out, and ReDigi does not dispute, that these precautions
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`do not prevent the retention of duplicates after resale through ReDigi.
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`Suspension of the original purchaser's ReDigi account does not negate the
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`fact that the original purchaser has both sold and retained the digital music
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`10
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`file after she sold it. So long as the user retains previously-made duplicates on
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`11 devices not linked to the computer that hosts Music Manager, Music Manager
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`12 will not detect them. This means that a user could, prior to resale through
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`13 ReDigi, store a duplicate on a compact disc, thumb drive, or third-party cloud
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`14
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`15
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`service unconnected to the computer that hosts Music Manager and access
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`that duplicate post-resale.6 While ReDigi's suspension of the original
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`6 Defendants do not dispute that, under Apple iCloud's present arrangements, a user could sell her
`digital music files on ReDigi, delete Music Manager, and then redownload the same files to her
`computer for free from the Apple iCloud. Apple's iCloud service allows one who has purchased a ifie
`from iTunes tore-download it without making a new purchase. App'x 1292 at 11 62.
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`purchaser's ReDigi account may be a disincentive to the retention of sold files,
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`it does not prevent the user from retaining sold files.
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`II.
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`Proceedings Below
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`On January 6, 2012, Plaintiffs brought this action, originally solely
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`against ReDigi, Inc., alleging inter alia, that in the operation of ReDigi's system
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`version 1.0, it infringed Plaintiffs' copyrights by unauthorized reproduction
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`and distribution of Plaintiffs' copyrighted works. The parties cross-moved for
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`summary judgment. On March 30, 2013, the district court granted partial
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`summary judgment in Plaintiffs' favor finding infringement. Plaintiffs
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`subsequently filed a first amended complaint, adding Ossenmacher and
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`12 Rudolph as individual defendants. On November 2, 2015, the parties
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`13 proposed a joint stipulation in which Ossenmacher and Rudolph waived their
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`15
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`right to contest liability independent of ReDigi, Inc. On June 6, 2016, the
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`district court entered a stipulated final judgment awarding damages to
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`16 Plaintiffs in the amount of three million five hundred thousand dollars
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`($3,500,000) and permanently enjoining Defendants from operating the
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`ReDigi system.7 In the stipulation, Defendants reserved the right to appeal
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`2
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`solely from the district court's finding of liability for reproduction and
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`3 distribution as set forth in the summary judgment order. Defendants timely
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`4
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`5
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`filed notice of this appeal on July 1, 2016. On August 11, 2016, the appeal was
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`stayed as a result of the Defendants' bankruptcy proceedings in the United
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`6 States Bankruptcy Court for the Southern District of Florida. The stay was
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`lifted on December 12, 2016.
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`DISCUSSION
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`I.
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`The First Sale Doctrine
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`The primary issue on appeal is whether ReDigi's system version 1.0
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`lawfully enables resales of its users' digital files. Sections 106(1) and (3) of the
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`13 Copyright Act respectively grant the owner of a copyright the exclusive right
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`7 Notwithstanding that the operative complaint addressed only ReDigi's system version 1.0 (making
`no mention of version 2.0, which ReDigi launched on June 11, 2012), and the record before the district
`court did not address version 2.0, the stipulated judgment is binding as to version 2.0 against
`defendants and persons in specified relationships with ReDigi, as explained supra in footnote 2.
`Because neither we, nor the district court, have decided whether version 2.0 would infringe, this
`opinion does not decide on the lawfulness of the use—by persons who are independent of the
`Defendants—of systems functioning like version 2.0, at least to the extent that their systems differ
`from the aspects of version 1.0 that are adjudicated in this opinion.
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`to control the reproduction and the distribution of the copyrighted work.8 17
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`2 U.S.C. § 106(1) & (3). Under the first sale doctrine, codified in § 109(a), the
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`3
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`rights holder's control over the distribution of any particular copy or
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`4 phonorecord that was lawfully made effectively terminates when that copy or
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`phonorecord is distributed to its first recipient. Section 109(a) provides:
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`"Notwithstanding the provisions of section 106(3), 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."
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`17 U.S.C. § 109(a).
`Under this provision, it is well established that the lawful purchaser of
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`a copy of a book is free to resell, lend, give, or otherwise transfer that copy
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`15 without violating the copyright holder's exclusive right of distribution. The
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`16
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`copy so resold or re-transferred may be re-transferred again and again
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`17 without violating the exclusive distribution right. See Kirtsaeng v. John Wiley &
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`18 Sons, Inc., 568 U.S. 519, 530 (2013); Quality King Distribs. v. L'Anza Research
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`19
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`Int'l, Inc., 523 U.S. 135,152 (1998); Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 351
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`8 "Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights
`to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or
`phonorecords . .. [and] (3) to distribute copies or phonorecords of the copyrighted work to the public
`by sale or other transfer of ownership, or by rental, lease, or lending. . . ." 17 U.S.C. § 106(1), (3).
`12
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`1
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`2
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`(1908); see also 4 Patry on Copyright § 13:15 ("Placing a lawful copy of a work
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`in commerce exhausts the distribution and display rights with respect to that
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`3 particular copy.. . ."). It is undisputed that one who owns a digital ifie from
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`4
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`ilunes of music that is fixed in a material object qualifies as "the owner of a
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`5 particular.. . phonorecord lawfully made," 17 U.S.C. § 109(a), and is thus
`entitled- under § 109(a) "to sell or otherwise dispose of the possession of
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`that. . . phonorecord," id. (emphasis added), without violating § 106(3). On
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`the other hand, § 109(a) says nothing about the rights holder's control under §
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`106(1) over reproduction of a copy or phonorecord.
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`The district court found that resales through ReDigi were infringing for
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`two reasons. The first reason was that, in the course of ReDigi's transfer, the
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`12 phonorecord has been reproduced in a manner that violates the Plaintiffs'
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`exclusive control of reproduction under § 106(1); the second was that the
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`14 digital files sold through ReDigi, being unlawful reproductions, are not
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`subject to the resale right established by § 109(a), which applies solely to a
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`"particular. . . phonorecord. . . lawfully made." 17 U.S.C. § 109(a). We agree
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`17 with the first reason underlying the district court's finding of infringement.
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`As that is a sufficient reason for affirmance of the judgment, we make no
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`ruling on the district court's second reason.
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`ReDigi argues on appeal that its system effectuates transfer of the
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`particular digital file that the user lawfully purchased from iTunes, that it
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`should not be deemed to have reproduced that file, and that it should
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`therefore come within the protection of 17 U.S.C. § 109(a). ReDigi makes two
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`7 primary contentions in support of these arguments.
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`First, ReDigi asserts -as it must for its first sale argument to succeed -
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`that the digital files should be considered "material objects" and therefore,
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`under 17 U.S.C. § 101's definition of "phonorecords" as "material objects,"
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`should qualify as "phonorecords" eligible for the protection of § 109(a).
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`Second, ReDigi argues that from a technical standpoint, its process
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`should not be seen as making a reproduction. ReDigi emphasizes that its
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`system simultaneously "causes [packets] to be removed from the. . . file
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`remaining in the consumer's computer" as those packets are copied into the
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`computer buffer and then transferred to the ReDigi server, Appellants Br. 24,
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`so that the complete file never exists in more than one place at the same time,
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`and the "file on the user's machine continually shrinks in size while the file
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`on the server grows in size." App'x 691.9 ReDigi points out that the "sum of
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`2
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`the size of the data" stored in the original purchaser's computer and in
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`3 ReDigi's server never exceeds the "size of the original file," which, according
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`4
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`to ReDigi, "confirms that no reproductions are made during the transfer
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`5 process." Appellants Br. 25.
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`6
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`As for ReDigi's first argument, that the digital file it transfers is a
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`7 phonorecord protected by § 109(a), we do not decide this issue because we
`
`find that ReDigi effectuates an unlawful reproduction even if the digital ifie
`
`9
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`itself qualifies as a phonorecord.10
`
`10
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`As for ReDigi's second argument, we reject it for the following reasons.
`
`11 The Copyright Act defines phonorecords as "material objects in which sounds
`
`12
`
`13
`
`14
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`. . .are fixed by any method now known or later developed, and from which
`
`the sounds can be perceived, reproduced, or otherwise communicated, either
`
`directly or with the aid of a machine or device." 17 U.S.C. § 101. Accordingly,
`
`15 when the purchaser of a digital music ifie from iTunes possesses that file,
`
`9 From October 13, 2011 until March 2012, ReDigi's system sometimes made temporary archival
`copies that were deleted as soon as the migration process was complete. Those backup files have not
`been put at issue in this appeal.
`10 A conclusion that a digital file cannot be a phonorecord would have decisive implications for a
`system functioning like ReDigi's version 2.0, as well as its version 1.0. Because our understanding of
`the technology is limited, as is our ability to appreciate the economic implications, we find it
`preferable to rule more narrowly.
`
`15
`
`
`
`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page16 of 36
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`embodied "for a period of more than transitory duration" in a computer or
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`2 other physical storage device, Cartoon Network LP v. CSC Holdings, Inc., 536
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`3 F.3d 121, 127 (2d Cir. 2008) (quoting 17 U.S.C. § 101), that device—or at least
`
`4
`
`the portion of it in which the digital music file is fixed (e.g., the location on the
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`5 hard drive) —becomes a phonorecord. See London-Sire Records, Inc. v. Doe, 542
`
`6 F. Supp. 2d 153, 171 (D. Mass. 2008) (holding that the segment of a hard disc
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`7 on which an electronic music file is encoded is a "phonorecord" under the
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`8 Copyright Act). In the course of transferring a digital music file from an
`
`9 original purchaser's computer, through ReDigi, to a new purchaser, the
`
`10 digital file is first received and stored on ReDigi's server and then, at the new
`
`11
`
`purchaser's option, may also be subsequently received and stored on the new
`
`12 purchaser's device.11 At each of these steps, the digital file is fixed in a new
`
`13 material object "for a period of more than transitory duration." Cartoon
`
`14 Network, 536 F.3d at 127. The fixing of the digital ifie in ReDigi's server, as
`
`15 well as in the new purchaser's device, creates a new phonorecord, which is a
`
`16
`
`17
`
`reproduction. ReDigi version 1.0's process for enabling the resale of digital
`
`files thus inevitably involves the creation of new phonorecords by
`
`11 The new purchaser at his option may alternatively choose to leave the digital file in the new
`purchaser's storage locker on ReDigi's server and stream it for access.
`16
`
`
`
`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page17 of 36
`
`reproduction, even if the standalone digital file is deemed to be a
`
`2 phonorecord.
`
`3
`
`4
`
`5
`
`6
`
`7
`
`As for the argument that, as ReDigi copies a packet of data, it deletes
`
`the equivalent packet in the user's device so that the amount of data extant in
`
`the transfer process remains constant, this does not rebut or nullify the fact
`
`that the eventual receipt and storage of that file in ReDigi's server, as well as
`
`in the new purchaser's device (at his option), does involve the making of new
`
`8 phonorecords. Unless the creation of those new phonorecords is justified by
`
`9
`
`the doctrine of fair use, which we discuss and reject in a later portion of this
`
`10 opinion, the creation of such new phonorecords involves unauthorized
`
`11
`
`12
`
`13
`
`14
`
`reproduction, which is not protected, or even addressed, by § 109(a).
`
`ReDigi makes several additional arguments designed to characterize its
`
`process as involving the transfer of its users' lawfully made phonorecords,
`
`rather than the creation of new phonorecords. None of these arguments
`
`15 negates the crucial fact that each transfer of a digital music file to ReDigi's
`
`16
`
`17
`
`18
`
`server and each new purchaser's download of a digital music file to his device
`
`creates new phonorecords. ReDigi argues, for example, that during a transfer
`
`through ReDigi's data migration technology, each packet of data from the
`
`17
`
`
`
`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page18 of 36
`
`original source ifie resides in a buffer "for less than a second" before being
`
`2 overwritten, Appellants Br. 27, and thus fails to satisfy the requirement that a
`
`3
`
`4
`
`sound recording must be embodied "for a period of more than transitory
`
`duration" to qualify as a phonorecord, 17 U.S.C. § 101; Cartoon Network, 536
`
`5 F.3d at 127. Even if, during transfer, ReDigi's system retains each digital file in
`
`6
`
`7
`
`8
`
`a computer buffer for a period of no more than transitory duration, those files
`
`subsequently become embodied in ReDigi's server and in the new purchaser's
`
`device, where they remain for periods "of more than transitory duration."
`
`9 Cartoon Network, 536 F.3d at 127. ReDigi's server and the resale purchaser's
`
`10
`
`11
`
`12
`
`device on which the digital music files are fixed constitute or contain new
`
`phonorecords under the statute.
`
`ReDigi next argues that, in the course of transferring a user's ifie to
`
`13 ReDigi's own server, and to the resale purchaser's device, ReDigi sees to it
`
`14
`
`15
`
`16
`
`that all of the original purchaser's preexisting duplicates are destroyed. As an
`
`initial matter, as noted above, ReDigi here overclaims. It does not ensure
`
`against retention of duplicate phonorecords created by the original owner.
`
`17 ReDigi's assertion that "there is never an instance when [an] Eligible File
`
`18
`
`could exist in more than one place or be accessed by more than one user" is
`
`iEI
`
`
`
`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page19 of 36
`
`simply not supported by ReDigi's own evidence. Def. 56.1 Statement, App'x
`
`2
`
`1490. In addition, even if ReDigi effectively compensated (by offsetting
`
`deletions) for the making of unauthorized reproductions in violation of the
`
`4
`
`rights holder's exclusive reproduction right under § 106(1), nonetheless
`
`ReDigi's process itself involves the making of unauthorized reproductions
`
`6
`
`that infringe the exclusive reproduction right unless justified under fair use. 12
`
`7 We are not free to disregard the terms of the statute merely because the entity
`
`performing an unauthorized reproduction makes efforts to nullify its
`
`9
`
`consequences by the counterbalancing destruction of the preexisting
`
`10 phonorecords.
`
`11
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`12
`
`ReDigi further argues, citing ABKCO Music, Inc. v. Stellar Records, Inc.,
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`96 F.3d 60 (2d Cir. 1996), that the computer hard drive into which the original
`
`13 purchaser's digital file is embedded cannot be her lawfully made
`
`14
`
`phonorecord. A computer hard drive, ReDigi argues, cannot qualify as a
`
`12 We recognize that the use of computers with digital files of protected matter will often result in the
`creation of innocuous copies which we would be loath to consider infringements because doing so
`would effectively bar society from using invaluable computer technology in relation to protected
`works. We believe this precedent will not have that undesirable effect for reasons discussed below in
`the section on fair use. What we consider here is that the making of unauthorized reproductions in
`pursuit of an objective to distribute protected matter in competition with the rights holder. The production of
`innocuous, unauthorized reproductions through the unavoidable function of a computer, when done
`for purposes that do not involve competing with the rights holder in its exclusive market, is outside
`the scope of this dispute.
`
`19
`
`
`
`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page20 of 36
`
`phonorecord under § 101 because it contains more than a sound recording.
`
`2 This argument misinterprets ABKCO. We held in ABKCO that a license to
`
`3 publish a phonorecord did not authorize the publication of compact discs for
`
`4
`
`5
`
`use in karaoke that contained both sound recordings and visual depictions of
`
`song lyrics. 96 F.3d at 64. The ABKCO opinion undertook to construe the
`
`6 breadth of a compulsory license. The opinion does not support the conclusion
`
`7
`
`that a compact disc that stores visual depictions of words as well as recorded
`
`8 music does not contain a phonorecord. To be sure, a license to distribute
`
`9 phonorecords of a particular song would not by its terms authorize the
`
`10
`
`distribution of whatever other copyrighted content is contained in a computer
`
`11 hard drive that also contains the recording of the song. But it does not follow
`
`12
`
`13
`
`14
`
`15
`
`that a device or other "material object[] in which sounds.. . are fixed. . . and
`
`from which the sounds can be perceived, reproduced, or otherwise
`
`communicated," 17 U.S.C. § 101, is not a phonorecord, merely because it
`
`contains other matter as well. We reject ReDigi's argument.13
`
`13 ReDigi also draws our attention to the Ninth Circuit's decision in Recording Industry Association of
`America v. Diamond Multimedia Systems, Inc., 180 F.3d 1072 (9th Cir. 1999). In Diamond, the Ninth
`Circuit held that "a hard drive is excluded from the definition of digital music recordings" under the
`Audio Home Recording Act ("AHRA") because § 1001(5)(B) expressly provides that a "digital music
`recording" does not include material objects "in which one or more computer programs are fixed,"
`and "a hard drive is a material object in which one or more [computer] programs are fixed." Id. at
`
`20
`
`
`
`Case 16-2321, Document 188-1, 12/12/2018, 2453405, Page21 of 36
`
`Finally, ReDigi argues that the district court's conclusion makes no
`
`2
`
`sense because it would "require a customer to sell her [valuable] computer in
`
`3 order to be able to sell a[n] . . . iTunes music file" that was lawfully purchased
`
`4
`
`5
`
`6
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`for under $1.00. Appellants Br. 28. Of course it would make no economic
`
`sense for a customer to sell her computer or even a $5.00 thumb drive in order
`
`to sell "a[n] . . . iTunes music file" purchased for $1.00. But ReDigi far
`
`7 overstates its economic argument when it asserts that the "district court's
`
`8
`
`9
`
`10
`
`11
`
`12
`
`13
`
`ruling. . . eliminat[es] any meaningful competition from resellers" as "no
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`secondary market. . . can ever develop if consumers are required to give
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`away their computer hard disks as part of any resale." Appellants Br. 35. A
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`secondary market can readily be imagined for first purchasers who cost-
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`effectively place 50 or 100 (or more) songs on an inexpensive device such as a
`
`thumb drive and sell it. See U.S. Copyright Office, Library of Cong., Digital
`
`14 Millennium Copyright Act § 104 Report 78 (2001) ("DMCA Report 2001")
`
`15
`
`16
`
`("Physical copies of works in a digital format, such as CDs or DVDs, are
`
`subject to section 109 in the same way as physic
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