Judge Refuses to Shut Down Online Market for Used MP3s

A one-of-a-kind website enabling the online sale of pre-owned digital-music files got a legal boost late Monday when a federal judge refused to shutter it at the request of Capitol Records.

It could be short-lived boost, however.

ReDigi, which opened in October, says it’s a modern-day, used-record store that provides account holders with a platform to buy and sell used MP3s that were purchased lawfully through iTunes. The platform’s technology does not support other digital files such as those purchased from Amazon or ripped from a CD.

The brief ruling (.pdf) by U.S. District Judge Richard Sullivan of New York did not clearly outline the reason for the decision. But in a transcript (.pdf) of a court proceeding Monday, he said that Capitol is likely to prevail at trial.

“I think (the) liklihood of success on the merits is something that plaintiffs have demonstrated,” Judge Sullivan said from the bench.

Among others, the legal questions before the judge included the first-sale doctrine, the legal theory that people in lawful possession of copyrighted material have the right to sell it.

Sullivan’s decision means that the case is still headed to trial, where Capitol will attempt to prove its allegations that ReDigi facilitates wanton copyright infringement and is not protected by the first-sale doctrine.

John Ossenmacher, ReDigi’s founder, blasted Capitol in a statement. “We hope Capitol can get back to their business and find a way to catch up to the times instead of trying to stop the innovation process, denying rights to their paying customers along the way,” he said.

Richard Mandel, Capitol’s attorney, said in a telephone interview that “We are confident we will prevail at trial.”

A different federal judge sided with the first-sale principle in 2008, when it debunked UMG Recordings’ claim that it retained perpetual ownership of promotional CDs it releases before an album’s debut. Last year, however, a different court ruled against now-defunct online service Zediva, which streamed movies to customers via DVDs that Zediva had purchased.

In the ReDigi case, Capitol Records sued the Massachusetts-based startup last month in New York federal court. Claiming ReDigi was not the used record store as it said it was, Capitol said ReDigi was liable for contributing to copyright infringement.

The label was demanding U.S. District Judge Richard Sullivan immediately order ReDigi to remove Capitol-owned material, (.pdf) and to also award damages of up to $150,000 per track against the startup. ReDigi would have gone defunct had the judge sided with Capitol.

ReDigi explained to Sullivan in court papers (.pdf) that its undisclosed number of account holders have a right to upload their purchased iTunes files into ReDigi’s cloud. And when a file is sold to another ReDigi account holder, no copy is made. What’s more, because of ReDigi’s technology, the original uploaded file that is sold cannot be accessed by the seller any more through ReDigi or via the seller’s iTunes account.

Prices for songs vary on ReDigi, with some files having asking prices as high as 87 cents — just 12 cents less than what many songs retail for on iTunes. The company, which earns up to 15 percent per sale, also offers cloud-storage music streaming.