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Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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Speaker 1: day we bring you insight and analysis into the most

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Speaker 1: important legal news of the day. You can find more

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Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

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Speaker 1: and on Bloomberg dot com slash podcasts. The Second Circuit

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Speaker 1: Court of Appeals has ruled on a case that has

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Speaker 1: implications for everyone who purchases digital music and wants to

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Speaker 1: share it or resell it. The court ruled that ray digg,

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Speaker 1: an online marketplace that brokered sales of digital music files,

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Speaker 1: was infringing the exclusive rights of copyright holders joining me

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Speaker 1: as intellectual property. Attorney Terence Frost, a partner at caton

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Speaker 1: Uchun Rosamond Terry, a federal judge, once compared ray Diggi

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Speaker 1: to a clearinghouse for copyright infringement. Tell us how it

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Speaker 1: worked and what the issue was. Yes, ray Diggi came

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Speaker 1: up with the technology which they called music Manager, and

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Speaker 1: you downloaded it onto your computer or other device, and

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Speaker 1: it then checked the music files you had and it

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Speaker 1: made sure it verified that the music files you had

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Speaker 1: on that computer or device had been lawfully purchased by you.

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Speaker 1: It then migrated any files you wanted to resell to

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Speaker 1: what they called their cloud locker, and as it migrated

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Speaker 1: the music file to the cloud locker, it deleted the

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Speaker 1: music file from the seller's computer or device, so that

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Speaker 1: there was only this one file and it wasn't being

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Speaker 1: um resold and then retained at the same time. And

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Speaker 1: then once it was on the cloud locker, another person

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Speaker 1: could buy it. They would download it from the cloud

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Speaker 1: locker and it would be deleted from the cloud locker.

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Speaker 1: And so that was the process that Capitol Records and

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Speaker 1: several other plaintiffs complained about by filing a copyright infringement

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Speaker 1: lawsuit in the United States Districcord for the Southern District,

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Speaker 1: New York a couple of years ago. So if a

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Speaker 1: record store can say a secondhand album, and a bookstore

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Speaker 1: can sell a secondhand book, why can't an online store

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Speaker 1: sell a secondhand digital file. Well, that's exactly what ray

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Speaker 1: Diggi was trying to do. They had actually set up

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Speaker 1: this technology to allow for the resale of digital music

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Speaker 1: someone had become tired of or wanted to share with

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Speaker 1: a friend. And the court here said that the first

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Speaker 1: sale doctrine, which is what allows for the sale of

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Speaker 1: use books, use phono records. It even allows for libraries

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Speaker 1: to lend out books. That the first sale doctrine does

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Speaker 1: not apply to ray diggi because ray diggi was actually

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Speaker 1: making a copy of the music file as it moved

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Speaker 1: it from the first owner to the cloud locker and

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Speaker 1: onto the new owner, and that the first sale doctrine

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Speaker 1: did not protect against this copying process. So what does

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Speaker 1: this mean for people who want to share digital music

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Speaker 1: they've purchased or want to sell it. So what the

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Speaker 1: court suggests here is that if you wanted to sell

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Speaker 1: the music you had lawfully purchased down on your computer,

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Speaker 1: your iPod, your phone, you could still do it by

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Speaker 1: transferring the hard drive off of the computer containing the music,

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Speaker 1: or transferring the iPod itself or whatever device your music

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Speaker 1: was stored on. That that would still be a lawful

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Speaker 1: transfer and would be able to claim protection under the

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Speaker 1: first sale doctrine. But of course that possible scenario is

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Speaker 1: so economically irrational that for all practical purposes, the Second

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Speaker 1: Circuit has said that with respect to digital music, you're

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Speaker 1: unable to resell it. What about the fair use defense?

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Speaker 1: Did that come into play here? So? Ray, did you

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Speaker 1: also made as a backup argument a defense that this

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Speaker 1: was fair use? And fair use has often been used

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Speaker 1: by courts, most recently in the Google book decision as

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Speaker 1: sort of a safety valve, so that when a situation

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Speaker 1: develops under the copyright laws that the court thinks society

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Speaker 1: will not accept, they call it fair use. So it

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Speaker 1: works a sort of safety valve to get pressure off

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Speaker 1: the copyright system. The court here rejected any fair use defense. Uh.

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Speaker 1: And it's very interesting in that the judge who wrote

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Speaker 1: the decision, and Second Circuit Judge Level, has been in

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Speaker 1: the past a big proponent of fair use defenses and

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Speaker 1: is credited with creating the transformative use defense, which has

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Speaker 1: been rollied upon by many um reusers of copyrighted works.

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Speaker 1: We're talking to intellectual property attorney Terrence Ross about a

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Speaker 1: decision by the Second Circuit Court of Appeals. So did

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Speaker 1: it give you any hints about what had on on

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Speaker 1: behind the scenes? So at the very end of Judge

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Speaker 1: Ales decision, there is um several pages that I can

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Speaker 1: only refer to as an apologia essentially says we know

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Speaker 1: the result sounds harsh here because in effect, we're saying

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Speaker 1: that owners of digital music, unlike owners of books or

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Speaker 1: owners or phonal records, cannot resell that digital music. But

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Speaker 1: the Court goes on to say that result is dictated

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Speaker 1: by the Copyright Act, by the words of the statute,

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Speaker 1: and we cannot deviate from the statute. And the Court

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Speaker 1: then goes on to say, if the public is upset

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Speaker 1: by this result and they want to see it changed,

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Speaker 1: they need to go to Congress and convince Congress to

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Speaker 1: rewrite certain portions of the Copyright Act to allow for

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Speaker 1: the controlled resale of digital music. And that's a somewhat

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Speaker 1: unusual statement by the court, and I think flags to

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Speaker 1: everyone who reads it that they are perceiving this decision

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Speaker 1: as being very unpopular, both in the media and with

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Speaker 1: respect to UM the general population at large. This was

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Speaker 1: closely watched in the intellectual property field. How much was

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Speaker 1: at stake here economically and for the rule of law.

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Speaker 1: So the decision itself from the lower court was only

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Speaker 1: a three point five million dollar damages assessment against Ray Digi,

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Speaker 1: so not a lot in that respect. However, I think

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Speaker 1: the recording companies viewed this as undercutting their deals with um,

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Speaker 1: Apple and other online music sellers, and therefore there was

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Speaker 1: potentially UM hundreds of millions of dollars at stake UM,

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Speaker 1: and that's why this was pursued so aggressively by the

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Speaker 1: copyright owners. Mike, this reached the Supreme Court, I would think,

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Speaker 1: Ray DIGGI file a petition um to the Supreme Court.

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Speaker 1: The Supreme Court does not have to take this case,

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Speaker 1: and I think, quite quite frankly, the Supreme Court will

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Speaker 1: be um reluctant to take it, even though it would

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Speaker 1: be nice to have some guidance in this area. UM.

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Speaker 1: The Supreme Court currently is very divided um on copyright issues,

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Speaker 1: and I think when you have that sort of lack

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Speaker 1: of consensus amongst the justices, they are somewhat reluctant to

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Speaker 1: take a case that would only result in a five

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Speaker 1: to four decision because that doesn't give great clarity. So

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Speaker 1: I think we're likely to see a petition in the

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Speaker 1: Supreme Court. I think it's not going to be granted.

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Speaker 1: All right, Um, we only have about forty five seconds here.

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Speaker 1: Might another circuit like the Ninth Circuit have reached a

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Speaker 1: different conclusion here. Well, it's a great question, June, because

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Speaker 1: the Ninth Circuit has at times been more open to

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Speaker 1: this sort of technology, technological innovation, and has has striven

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Speaker 1: to find ways, particularly under the fair use doctrine, to

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Speaker 1: allow the technology to take place um whereas the second

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Speaker 1: circuit has been a little bit reluctant. So I think, yes,

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Speaker 1: there might have been a different result in the ninth Circuit,

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Speaker 1: and we might yet see that circuit sport. Then it

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Speaker 1: would have to go to the Supreme Court. It's great

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Speaker 1: to have you back on Terry. That's Terence Ross, an

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Speaker 1: intellectual property attorney at Caton Uchen Rosenman. Intellectual property my

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Speaker 1: favorite area of law. Thanks for listening to the Bloomberg

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Speaker 1: Law Podcast. You can subscribe and listen to the show

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Speaker 1: on Apple podcast, SoundCloud, and on Bloomberg dot com slash podcast.

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Speaker 1: I'm June Brosso. This is Bloomberg