Legal View: Applying copyright law to new technologies still challenging

Lee T. Gesmer, The Daily Record Newswire

Innovative and powerful computing technologies have generated challenging issues under U.S. copyright law in 2013. Two cases illustrate the efforts of traditional content providers to use copyright law to attempt to block disruptive technologies.

Thus far one case has succeeded, and one has failed.

Capitol Records v. ReDigi

Capitol Records, LLC v. ReDigi, Inc., 2013 WL 1286134 (S.D.N.Y. March 30, 2013), addressed the novel question of whether a digital music file, lawfully purchased, may be resold by its owner under the “first-sale” doctrine.

ReDigi, a startup, devised a technical method to allow the resale of iTunes music files and attempted to ensure that no more than one copy existed at a time.

ReDigi verified that the file on the seller’s computer had been purchased from Apple’s iTunes store, copied it to a ReDigi server (a.k.a. “the cloud”), and simultaneously deleted the copy on the seller’s computer. The seller could stream the file until it was sold, but upon sale ownership was transferred to the buyer and the seller’s access terminated.

That technology ensured (unless the seller went to extremes to evade it) that the seller didn’t sell a copy and keep a copy.

ReDigi intended its system to fit within the copyright statute’s traditional “first-sale” doctrine, which allows “the owner of a particular copy or phonorecord” lawfully made to “sell or otherwise dispose” of “that copy or phonorecord.” (17 U.S.C. §109). This rule of copyright law allows the purchasers of copyright-protected works (books, records, tapes, CDs, DVDs, paintings) to resell physical copies of the works without violating the rights of the copyright owner.

Indeed, without “first-sale” there would be no market for second-hand books.

Capitol Records, however, challenged the premise underlying ReDigi’s reliance on the first-sale doctrine. It argued that the law is limited to copyrighted works embodied in physical objects (e.g., a book or CD), not electronic files.

The sale of a digital file, Capitol argued, does not involve the transfer of a “particular copy,” but rather a “reproduction” of the file that is an exclusive right of the copyright holder.

ReDigi is based in Boston, but Capitol filed suit in the Southern District of New York. The trial court denied Capitol’s motion for a preliminary injunction, and the parties filed cross-motions for summary judgment.
The summary judgment motion required the District Court to squarely face the question whether the first-sale doctrine applies to digital recordings — that is, to evaluate Capitol’s assertion that the first-sale
doctrine does not apply to the resale of a digital file unless it is embodied in a material object.

The court’s summary judgment ruling, issued March 30, concurred with the recording industries’ view of the first-sale doctrine. The court held that the first-sale doctrine “is limited to material items, like records, that the copyright owner puts into the stream of commerce.” The doctrine does not apply to “reproductions of the copyrighted code embedded in new material objects” — in this case, the ReDigi server.

Central to the court’s conclusion was its finding that, when a user moved a music file to the ReDigi server, an unauthorized reproduction occurred. The court did not find (and Capitol did not claim) that the use of ReDigi as a cloud-based personal storage locker alone constituted the creation of an unauthorized copy, reflecting the broad consensus that such “space shifting” is protected by the copyright doctrine of fair use.

The court did not enter final judgment or a preliminary injunction, and it denied ReDigi’s request for an interlocutory appeal. Therefore, a trial on damages will be conducted before ReDigi can appeal from a final judgment.

Whether ReDigi will be able to withstand a potentially substantial damages verdict and post an appeal bond remains to be seen. If it cannot, this novel issue of law may not reach the 2nd U.S. Circuit Court of Appeals.

The absence of a federal circuit court decision will leave a significant degree of uncertainty as to whether the first-sale doctrine applies to digital works.

WNET v. Aereo

The second case is WNET, Thirteen v. Aereo, Inc., 712 F. 3d 676 (2d Cir. 2013).

Although the case was decided for Aereo by the 2nd Circuit, Aereo has been sued on the same grounds in federal court in Boston, requiring that the same legal issues be decided by the District Court and, likely, the 1st Circuit.

Aereo’s service allows subscribers to watch network TV on Internet-enabled devices, such as laptop and tablet computers, while paying no fees to the networks. Because the networks (such as CBS and NBC) receive billions of dollars in “retransmission fees” from the cable companies, this has the potential to reduce carrier fees and accelerate the trend toward Internet-based TV.

Aereo’s system takes advantage of a copyright loophole created by the 2nd Circuit decision in Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008) (“Cablevision”).

Aereo uses thousands of mini-antennas arranged on antenna boards to receive over-the-air TV broadcast signals, which it re-transmits to its subscribers at low cost over the Internet. A subscriber who is watching a show has one antenna assigned to him. If the user wants to watch a show without saving it, the show is converted to an Internet-friendly format, saved to an Aereo hard drive, transmitted to the subscriber, and almost immediately deleted from the Aereo drive. If the user chooses to save the show, it is received on the second mini-antenna and saved on an Aereo hard drive in a directory assigned to that user alone.

For example, if 50,000 Aereo subscribers are watching and recording the Super Bowl, each would have an assigned antenna for the near real-time rebroadcast and a second assigned antenna to receive and save a unique copy for replay.

In the 2nd Circuit case, the networks argued that Aereo violated their public performance right under copyright law.

In its defense, Aereo relied on Cablevision. In that case, Cablevision created a centralized DVR that allowed subscribers to save programming by storing a unique copy for each subscriber. The 2nd Circuit held (in relevant part) that the confusingly complex “transmit clause” (which is part of the definition of a “public performance” in the copyright statute, 17 U.S.C. §101), requires the courts to examine “who, precisely is capable of receiving a particular transmission of a performance.” Id. at 135.

The court refused to read the transmit clause to require that it aggregate transmissions of the individual copies, which would have led to the conclusion that Cablevision’s transmission of multiple copies was a “public performance.”

Aereo took advantage of the decision when it designed its system to create individual copies, whether as a step in streaming near-live TV (in which case the file would be saved for only a few seconds and then deleted after it was streamed), or saved as a unique copy for later viewing.

For example, if 500,000 Aereo subscribers choose to watch the Super Bowl using Aereo, Aereo will be saving and almost instantaneously transmitting 500,000 copies of the game. If each of the users chooses to also save the broadcast, Aereo will save 500,000 individual copies of the game, and each copy will be accessible only by the subscriber to whom it is assigned.

A group of broadcasters sued Aereo for copyright infringement in the Southern District of New York, but the District Court denied the broadcasters’ motion for a preliminary injunction, focusing (under Cablevision) on the individualized audience for each transmission. Am. Broad. Cos. v. Aereo, Inc., 874 F. Supp. 2d 373 (S.D. N.Y. 2012).

The 2nd Circuit upheld the decision. WNET v. Aereo, Inc., 712 F.3d 676 (2nd Cir. 2013). Over a vigorous dissent by Judge Denny Chin (who also wrote a lengthy dissent to the 2nd Circuit’s later refusal to rehear the case en banc), two judges on the three-judge panel affirmed the District Court, noting that “just as in Cablevision, the potential audience of each Aereo transmission is the single user who requested that [a unique copy of] a program be recorded.” Id. at 690.

Although New York City was the first area in which Aereo released its service, it has since done so in Boston and Atlanta, and it has announced plans to release its service in many other U.S. cities.

Hearst Stations has sued Aereo in federal court in Boston, mirroring the same issues that were decided by the 2nd Circuit. Unless Aereo’s pending motion to transfer the case to New York is allowed (which seems unlikely), the U.S. District Court in Massachusetts will have to decide whether to apply the reasoning of Cablevision and Aereo in the absence of any direct guidance from the 1st Circuit.

The possibility of an eventual split between the 1st and 2nd Circuits over the interpretation of the public performance right (or a split involving the 9th Circuit, which is also considering an appeal involving a similar technology and legal issue) suggests that the legality of this technology under copyright law may be headed for the U.S. Supreme Court.


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