The Court was faced with the question of whether the unauthorized transfer of a digital music file over the Internet – where only one file exists before and after the transfer – constitutes reproduction within the meaning of the Copyright Act. The Court holds that it does. "Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act." Continuing, "the fact that a file has moved from one material object – the user’s computer – to another – the ReDigi server – means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is
created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created."
The Court also concluded that absent the existence of an affirmative defense, the sale of digital music files on ReDigi’s website infringes Capitol’s exclusive right of distribution.
The Court then considered ReDigi's affirmative defenses: fair use, and first sale. With respect to fair use, "On the record before it, the Court has little difficulty concluding that ReDigi’s reproduction and distribution of Capitol’s copyrighted works falls well outside the fair use defense". In sum, "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. Accordingly, the Court concludes that the fair use defense does not permit ReDigi’s users to upload and download files to and from the Cloud Locker incident to sale."
Turning to the first sale defense, the Court also disagreed. First, the court found that "first sale" does not apply to the reproduction right, but only to the distribution right. Second, the Court found that the music files were not lawfully made (they were unlawful reproductions) under the Copyright Act, and therefore not entitled to the first sale defense.
Third, the Court found that the first sale doctrine is limited to physical items. "Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her “particular” phonorecord on ReDigi, the first sale statute cannot provide a defense. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users’ hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era". The Court did note, however, that digital music on an iPod, computer or CD would be protected by the first sale doctrine ("Section 109(a) still protects a lawful owner’s sale of her “particular” phonorecord, be it a computer hard disk, iPod, or other memory device onto which the file was originally downloaded. While this limitation clearly presents obstacles to resale that are different from, and perhaps even more onerous than, those involved in the resale of CDs and cassettes, the limitation is hardly absurd – the first sale doctrine was enacted in a world where the ease and speed of data transfer could not have been imagined.")
Having made those determinations, the Court then found ReDigi directly and secondarily liable for copyright infringement of Plaintiff's reproduction and distribution rights. Summary judgment was granted in Plaintiff's favor, except on its claims relating to Plaintiff's performance and display rights and common law infringement.