THE FUTURE OF RESELLING DIGITAL VIDEO GAMES

The decision in ReDigi v. Capitol Records probably means that can't resell your digitally downloaded video games—but for reasons that may surprise you. 

CAPITOL v. REDIGI

Marketing itself as the world’s first and only online marketplace for digital used music, ReDigi, Inc. launched an on-line business in October 2011 that allowed users to resell legally acquired iTunes music. To facilitate the transaction, users downloaded a software utility that verified the music files on their local computer, and then transferred them to ReDigi’s centralized cloud locker, where others could purchase the songs for less than the original sale price. ReDigi asserted the digital music only resided in one location at any time, so there was no copyright infringement.

Capitol Records didn’t agree, and they filed a lawsuit in July 2012, complaining that the owner of a work retains the exclusive right of reproduction and distribution under U.S. copyright law. [2] ReDigi’s act of transferring iTunes music to their cloud locker created an unauthorized  “copy” in violation of Capitol’s rights.

The New York Southern District Court agreed with Capitol, even though the original music file was deleted from a user’s computer. The court reasoned that reproduction of a copyrighted work occurs when it is fixed in a new material object, stating 

“It is beside the point that the original phonorecord no longer exists.  It matters only that a new phonorecord has been created.” [3] 

REDIGI'S FAILED DEFENSE

ReDigi argued that its service was protected under the First Sale Doctrine, a 105 year old law that allows purchasers of books, audio records, and other copyrighted material to resell them. [4]

The ReDigi court didn't agree. They held that the First Sale Doctrine wasn’t applicable, and differentiated between reselling physical and digital goods, saying that ReDigi’s process was similar to the illegal copying of music via P2P services such as Napster and Grokster, despite the fact that only a single copy of a digital good was accessible. 

The court reasoned that “…it is the creation of a new material object and not an additional material object that defines the reproduction right [of the rights holder].”

In other words, the First Sale Doctrine didn’t apply because ReDigi’s service created an unauthorized second copy, whereas in reselling a physical good—such as a vinyl record or book—the physical good is transferred between owners without a second copy ever being made. 

AS APPLIED TO VIDEO GAMES

The ReDigi decision has implications for all digital media, including video games. In 2012, 40% of all video games sold in the United States were done so digitally, totaling over $5.9 billion dollars, according to the NPD Group.  Reselling used video games generated 27% of Gamestop's 2012 business, or approximately $1.8 billion dollars in revenue. Consumers have become accustomed to reselling their games as a means to buy new ones.  So while the defendant in ReDigi was reselling digital music, the similarities in content and law are enough that those in the video game industry should take notice.

In 1908, in the First Sale Doctrine case discussed above, Bobbs-Merrill Co. v. Straus, the Supreme Court was asked whether the purchaser of a book, in this case one entitled The Castaway, had the right to resell it. The question at bar was this:

"Does the sole right to vend... secure to the owner of the copyright the right, after a sale of the book to a purchaser, to restrict future sales of the book at retail, to the right to sell it at a certain price per copy, because of a notice in the book that a sale at a different price will be treated as an infringement, which notice has been brought home to one undertaking to sell for less than the named sum?"

The Supreme Court answered that while a copyright owner has the right to multiply and sell his production, this does "not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract."

In other words, the re-selling of books was and still is a lawful activity. 

Assuming you have the right to re-sell a digital good you've purchased, if you make a copy of it in the process of facilitating an exchange, under ReDigi  you've infringed the owner's copyright. Practically speaking, this prevents re-selling all digital goods--unless you sell the computer or iPhone holding the work along with it.

But chances are good that you don't own the digital good anyway.

DIGITAL LICENSES OFTEN PREVENT THE TRANSFER OF OWNERSHIP

The ReDigi decision was based on the physical act of copying bits from one device to another, which is a right reserved to copyright owners. But few realize that publishers rarely sell you a digital good. They license it to you.  And under the terms of use that you have agreed, you probably don’t have the right to resell it. 

From a legal perspective, licensing terms are terms of contract, and as applied to Bobbs-Merrill Co. v. Straus, there is privity of contract. So licensing, at least for the time being, allows digital goods copyright owners a way to avoid the First Sale Doctrine entirely.

Consider Apple’s iTunes End User Licensing agreement term:

“The Products transacted through the Service are licensed, not sold, to You for use only under the terms of this license….” [5]

Apple then lets you know that you are not allowed to transfer your license to someone else:

This license granted to you… is limited to a nontransferable license to use…” [6]

Activision’s End User License Agreement provides similar language:

“LIMITED USE LICENSE.  Activision grants you the non-exclusive, non-transferable, limited right and license to use one copy of this Program solely and exclusively for your personal use.” [7]

And they too do control your ability to transfer the license to someone else.”

“You Shall Not: … Sell, rent, lease, license, distribute or otherwise transfer this Program, or any copies of this Program, without the express prior written consent of Activision.” [8]

So what’s the difference between licensing and owning a game? 

LICENSE VERSUS OWNERSHIP EXPLAINED

Consider the difference between purchasing a home and leasing one.  A home owner can resell their property, but a lessee can’t. A lessee agrees in a signed contract to follow rules, which can be more restrictive than what the owner themselves must ascribe to. 

In the same way, a digital license agreement is limited to the terms you agree to by clicking yes at the end of a multi-page, complex on-line agreement. [9] In that agreement, you almost always agree that you do not have the right to transfer your rights to someone else. 

BUT IS IT FAIR?

Digital goods are different than physical goods, in that physical goods are subject to wear and use, whereas a digital good can be reproduced identically and in perpetuity. Those who favor limiting the rights of digital goods owners view Capitol v. ReDigi as a significant win. But with the rapid shift of copyrighted works from physical form to stored digital media, whether in the form of Amazon purchased movies and television shows to iTunes music to digitally downloaded video games, there seems to be something fundamentally unfair in a license-only transaction, especially considering a widespread perception that consumers actually own the the digital goods they purchase.

Follow dan on Twitter @rogersdanlee

[1] Capitol Records, LLC. v. ReDigi, Inc., Dist. Court, SD New York , N. 12 Civ. 95 (RJS), March 30, 2013.

[2] 17 U.S.C. §§ 106(1), (3)-(5).

[3] Capitol Records, LLC. v. ReDigi, Inc.

[4] Articulated in Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350 (1908) and now codified at Section 109(a) of the Copyright Act, the owner of a particular copy or phonorecord lawfully is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that work.

[5] Emphasis added. Apple iTunes End User Licensing Terms and Conditions: https://www.apple.com/legal/internet-services/itunes/us/terms.html

[6] Emphasis added. Id. 

[7] Emphasis added. Activision Black Ops licensing agreement: http://store.activision.com/store/atvi/en_US/Content/pbPage.eula_black_ops?resid=UgE9agoBAlUAACOICZEAAAAa&rests=1375812969748

[8] Emphasis added. Id.

[9] Click wrap licensing agreements have generally been held enforceable. See  Burcham v. Expedia, Inc., WL 586513 (E.D. Mo. Mar. 6, 2009;  Hotmail Corporation v. Van Money Pie Inc., et al., C98-20064 (N.D. Ca., April 20, 1998)); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)); and  Specht v. Netscape Communications Corp., 150 F.Supp.2d 585 (S.D.N.Y. 2001).