Transcript: Digital ‘No Sale’

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Interview with Devereux Chatillon

For podcast release Monday, July 1, 2013

KENNEALLY: When Internet startups are sued for copyright infringement, the complaints focus on piracy and services that make copyrighted books, music, and videos available for free. Not so in Capitol Records v. ReDigi, Incorporated. The defendant, ReDigi, offered a service that allowed consumers to resell unwanted digital files.

Welcome to Copyright Clearance Center’s podcast series. I’m Christopher Kenneally for Beyond the Book.

In March a Federal Court judge in New York ruled in Capitol’s favor and against ReDigi, even while news appeared that online retail giant Amazon has received a patent for a digital resale marketplace, with Apple filing a similar application. Clearly there is growing interest in the question of digital resale.

But here’s the catch: When it comes to digital, a first sale may not even be a sale. Joining me from her New York City office to tell us why is Devereux Chatillon. Dev, welcome to Beyond the Book.

CHATILLON: Thank you, Chris, delighted to be here.

KENNEALLY: Well, it’s nice to have you join us. Indeed, it’s the second time for you. We’ve had you on the program before from a live program at the Publishing Business Conference and Expo. We’ll tell people briefly about your background. Devereux Chatillon is a transactional and IP attorney. During her career, she’s worked in all facets of the media and entertainment industry, most recently as an executive with Callaway Digital Arts, a Kleiner Perkins-backed startup, making best-selling award-winning apps directed at children. Dev has practiced extensively in copyright, beginning with serving as part of the representation in the U.S. Supreme Court for The Nation in the landmark Harper and Row case, and continuing with ABC, the New Yorker, Miramax and Scholastic. Dev Chatillon currently heads a solo legal practice focusing on the intersection of content and technology.

And Dev, while you and I may qualify as old hands when it comes to copyright, we need to help set the stage for our audience, who may not be as familiar. And I think the place to start is with Section 109 and how that particular aspect of copyright law applies to the resale of physical goods and that’ll give us an idea of what we’re facing when speaking about digital resale or resale of digital goods. So tell us about that. Section 109, what’s it say?

CHATILLON: Thank you, Chris, and thank you for the very nice introduction. Section 109 became part of copyright law in 1978, when Congress did a new – I’m using air quotes – made the new copyright law. And what it says is something I think most people are familiar with, with experience, which is that if I buy a physical good that embodies copyrighted content – an example, I go to Barnes & Nobles (sic) and buy a copy of Dan Brown’s Inferno, or current best-seller put out by Random House. I own the copy of the book I bought. Barnes & Noble pays Random House, Random House pays Dan Brown for that first sale. But after that, I’m free to dispose of that physical copy in any lawful way I care to. I can give it to my daughter, I can sell it to my next door neighbor, I can put it up on e-Bay and resell it, and there’s no further copyright toll, if you will, there’s no further fees that go to the copyright owners or distributors for that because they get their cut – the publisher, in this case, Random House, and the author, in this case Dan Brown – from that first sale, which is why it’s called the first sale doctrine. Then after that, I’m free to use that physical copy in almost any way. I can’t reproduce it, so I can’t then go into the business of selling Dan Brown’s Inferno to other people. But I can dispose of that particular physical copy in any way I want, and that’s what’s called the first sale doctrine.

KENNEALLY: Right, and we make a point here at Copyright Clearance Center to emphasize, as you did, that the transfer is of the physical object itself, whether it be a book, in this case, of your example, or a CD or anything like that. But it is not the transfer of the copyright.

CHATILLON: Exactly, exactly.

KENNEALLY: Now, when it comes to digital goods, if we’re going to get into the resale, we have to talk about the sale of a digital good. But it’s important to point out that for most of the transactions when we actually acquire something on iTunes or download a book on Kindle, that’s not precisely a sale. If it’s not, what is it exactly?

CHATILLON: What it is is often what’s called a license, which is an agreement between the end user, in this case the consumer, and the publisher/distributor, and that can vary depending on how and where you buy it, that governs the terms of that person’s ability to use a digital file. So instead of selling them the physical copy, because in this case we don’t really have one, what it says is, you can use and read this on your device, or on your computer, or on all of those, in many cases, but you can only use it for personal use. You can’t resell it, you can’t transfer it to another person or child, and that will be part of all those obscure things that we all click through without reading. And I am as guilty of this as anyone else. When iTunes has a new, for example, version of it, they’ll say, you have to agree to the iTunes agreement. Buried in that 20-page agreement is the license for all the content that’s on iTunes.

KENNEALLY: Right, and we’re familiar, at least we all became familiar with those particular terms when we were acquiring software back in the day, and now because so much of what we do is in the digital realm, these kinds of licenses apply, as you say, to iTune music and books on Kindle, and so forth.

CHATILLON: Let me just interrupt you there, Chris, excuse me for a second, to say that in the software realm, one of the things – and this is the only place where we have any law on this, there is law – it’s somewhat idiosyncratic dependent on the facts and it varies a little bit by circuit, so I’m not going to get too much into the depth – about what is a sale and what is a license. And the fact that a distributor or a publisher may call something a license may not be the determinative thing. The courts will look to other indicia to say whether it’s actually been a sale of something, or a license. But in most cases if there is some degree of control kept by the distributor or publisher, the courts will honor that entity’s determination of what they’ve done is enter into a license with the end user, and not a sale.

KENNEALLY: Well, in fact, it’s interesting, and we don’t want to go too far off on this tangent, but that notion of control and limitations is what has an impact in the library market, for example, when it comes to e-books. Libraries are accustomed to acquiring a book and being able to do what they want with that particular physical copy of the book. Now with e-books, they are licenses and those licenses often do restrict what kind of lending can be done and for how long, and so forth.

CHATILLON: Right, but it’s also in that case – and we’ll come to this, we can jump ahead and then come back and go back again. The publishers are faced with the fact that a digital copy doesn’t wear out. So in the old days, even with library versions of books and certainly Scholastic, one of the places I worked, had a very nice small market in making library versions – reinforced bindings especially for kids, able to withstand the wear and tear of multiple users of a particular volume. Even with that, books wear out, so I can sell you a book for $25 and you’ll be able to lend it out, say, 100 times – I’m making up the numbers here – and then you’ll have to buy another book if that book is still in demand by your community.

In a digital world, it never wears out. The technology on which it’s based may shift, that may be a natural limit. We haven’t been doing this long enough to know that yet. But, in fact, you can lend that copy out a million times, maybe two million times, 10 million times, which is not possible. So the question is, as you go from the physical world to the digital world, how do we not destroy our communities and markets by using the way we used to do things and being too rigidly bound to them.

KENNEALLY: Right. Well, we are talking on Beyond the Book today with Devereux Chatillon, an IP attorney, well experienced in copyright. I guess, Dev, the real question for us at the moment is, again, back to the notion of a sale. Let’s assume for the moment that a sale has happened. I guess the question that follows is whether it’s possible to resell a digital book under copyright law, because copyright law offers the rights-holder certain kinds of exclusive rights, and you can’t resell something if you don’t have the rights lined up, if you will. So sort that out for us. What are the issues there?

CHATILLON: There are a couple of different issues there, and to take them in order – and feel free, Chris, to interrupt if I get too obscure or it will help clarify. The first sale doctrine that we talked about before, the ability I have with certainly a physical copy, to dispose of that physical copy in any way I wish, including resale of it to someone else. It’s a specific exception in the statute to one is exclusive rights that goes to the copyright holder, which is the right to distribute.

So one of the questions is, in the digital world, does that still work? Can I still do that? And the answer from the one really clear decision we have, which is the ReDigi court in the Southern District that you referenced was, no. The first sale doctrine doesn’t apply because it’s not the same physical copy. How the court figured that out is it went through, with some precision, exactly what happens when I get a digital copy. I think it will help if I describe a little bit what ReDigi service did –


CHATILLON: – to explain this. What ReDigi did is say – I’m going to use me as an example – I, Dev Chatillon, have a few thousand songs that I’ve downloaded from iTunes. And they’ve restricted themselves to iTunes and other places where they could trace the acquisition, originally, of the digital copy had been done lawfully. So if I upload my various Joni Mitchell disks to my computer, that wouldn’t count for ReDigi purposes because they wanted to make sure they had a trail they could follow lawfully. So limited to iTunes accounts, I have a certain number of songs, I’ve decided really don’t like Bob Dylan anymore because I’ve had a huge lapse of taste. So I want to resell all of my Bob Dylan tunes.

What the ReDigi service would do, and I’m sure this is slightly oversimplified, according to the court, is it would come in, it would examine – I would sign up for it, I would download software, it would look at my computer, it would look at my Bob Dylan songs, it would make sure that those songs had, in fact, been lawfully acquired by iTunes. It would upload those songs to the ReDigi server, make them available for resale, and disconnect me from my copies so that I would no longer have access to those. And they would be offered anywhere from 29¢ to 79¢ between the iTunes 99¢ per song, for resale – and I’m using air quotes around resale – to another digital user.

What the court said is, OK, let’s look at that. What’s happening when I download from iTunes is I’m downloading a code that gets encapsulated in parts of the hard drive of my computer or my iPod or my iPad or my iPhone or my android, or whatever – my device. When it goes back up to ReDigi, that code gets copied, and I’ll come back to that – to the ReDigi servers, and it occupies a different physical on the ReDigi servers. So what the court said is, that’s not a first sale. That’s not a transfer of the physical copy because it is encapsulated in the copyrighted content in a different physical space, and that’s not covered by the current statute. And I think quite correctly the court concluded that.

KENNEALLY: What’s fascinating about that is it just points to what we all know but don’t think about very much which is that the Internet is simply a giant copying machine, and every time I send you an e-mail, you don’t get the e-mail, you get a copy of the e-mail that I originally wrote.

CHATILLON: Which could lead us into NSA territory, so we’ll stay away from that.

KENNEALLY: (laughter) OK, right.

CHATILLON: One of the things the court said that makes it, I think, quite clear is it distinguished between what ReDigi was doing, where that copy goes from iTunes to my computer up to the ReDigi servers and then down to the ultimate resale consumer, the person who bought it, and says that’s a distinction. So if I give my daughter my laptop, under the first sale doctrine what’s on here – Microsoft may not always agree with this, but what’s on here, at least in theory, no one gets paid for again. She gets the computer with the copyrighted content I may have on it. That doesn’t always work because of digital rights management software and other things. But that is more analogous, the court said, to the physical first sale doctrine that we’re used to than this ReDigi service where things got copied back and forth.

KENNEALLY: And so you mentioned that there are two particular exclusive rights of the copyright holder that potentially ReDigi, or at least in this case, the court found ReDigi had violated. So that first was the distribution right, and the other?

CHATILLON: Is the reproduction right. One of the – and this is involved in the physical resale doctrine and first sale doctrine as well, is one of the rights reserved to the copyright owner or licensor, in the case of a publisher, is – licensee, sorry – is the right to reproduce. So the reason Random House can put millions of copies of Dan Brown’s Inferno out to bookstores is they have the rights from Dan Brown to reproduce that book in physical form. And that’s an exclusive right of a copyright holder. It’s not granted when they sell a copy, which is why, if I buy a physical copy, a print copy of Dan Brown’s inferno, I can’t then turn around and make a ton of copies and sell them to other people because I would violate both the distribution right, but also the reproduction right held by the copyright holder. Those are embodied in Section 106 of the copyright act.

The first sale doctrine is an exception to the distribution right. It is not an exception – this explicit on the face of the statute –to the reproduction right. So you have to analyze that separately in all of these cases. The court said it clearly – because of, again, all the copying we’ve just described – violates the reproductive rights of the copyright holder.

KENNEALLY: Well, this is all pretty juicy stuff for copyright dweebs, but clearly with the agitation in the marketplace that ReDigi has surfaced and with the news that Amazon has a patent on a potential digital resale marketplace, there’s consumer interest in this and I think consumers may feel a bit as if all of this is very restrictive. They’ve paid for something and they feel like they should be able to do what they want with it. And even ReDigi, if I understand correctly, acknowledges that really what they’re driving towards is a reform of the law and legislation to sort this out. And I think the judge said as much, that it was to be left to Congress to make that move.

Could Congress change copyright law in such a way that would allow for digital resale? What would that look like?

CHATILLON: Absolutely, and Congress should rewrite the law if, in fact, we’re going to proceed with these kind of marketplaces. Again, going back to the physical world, the deal there was that the copyright holders in the example we’ve been using, Dan Brown’s Inferno, the publisher and Dan Brown, the author, were compensated on the first sale. But the resale market in the physical world is necessarily limited by physics, by the physics of books – used books, used CDs,, used VHS tapes, used prints. If I want to get a book, for example, using that, I may want to get a new book. I may want to make sure I can get a copy of the book I want, and in the used marketplace, the inventory fluctuates much more than it does in the new book marketplace, where the publishers make darn well sure – or they try to – that copies are always available at the outlets where the public expects to find them.

And in addition to that, used copies of books, in particular, get used. They get soiled, the covers get torn, people write in them, and there are times when that’s fine and that’s what I want, or that’s what a consumer wants, and there are other times when that’s not. So there are limits on it, and eventually it wears out. There are very few books still around, and we consider most of them rare books, that have lasted 100, 200, several hundred years, going back to the Gutenberg bible, which are highly prized and priceless and relics of the original printing presses.

So all of that limits what a used physical goods marketplace can do to the compensation being paid to the copyright holders to create this in the first place. If we’re going to change that in the digital world, where you can make an infinite number of copies from a digital file, and each copy will be as good as the original. There is no deterioration in that copy. It may well be that platforms may change that may, at some point, provide a sort of natural end to the viability of particular digital copies. We may find that, we don’t know that yet. But at least in theory, I can resell a digital copy of a song or of a book or of a movie an infinite number of times, and each one will be as good, indistinguishable from the new copy – and I’m using air quotes here – put out by the studio, the record label, the musician, the author, or the publisher.

So if we’re going to change that, we need to make sure that everyone in that chain is getting the compensation they need to create a viable marketplace so that artists will create art, authors will create literature and stories, studios will create movies for consumers, and television shows for consumers to enjoy. Because if you don’t do that, what you end up is stifling it at one end. People can’t write books and pay their bills. People can’t make music and raise their kids. And if we do that, which is a core purpose of the copyright law, that’s what it’s supposed to do is provide adequate compensation to the creators. If we do that without thinking about it, which is what Congress is at least supposed to do, we’re going to have a problem.

KENNEALLY: Indeed, and I guess we’ll have to wait for Congress to do that legislative work, but I wonder whether Amazon, now that it has this patent, could try to create an e-book market itself, without changes in the law. If they went to rights holders to get their OK, that might work.

CHATILLON: Yes, they could. And remember, Amazon has its own publishing arm, and also allows self-publishing. But I think at least a component of that would have to be some kind of royalty or some kind of payment of some kind to the copyright holder. Because without that, again the digital market will end up sort of eating, if you will, the original market, the “new market.” And then no one, again, can make any money doing this and they won’t do it anymore because people have to eat.

So they can, they absolutely can. They could impose those requirements on people selling e-books through Amazon, and I think when Amazon has – I think I just read – this is from the e-book trial that just took place in New York – that they had something like 60% of the e-book market. If they use that kind of market power to impose it on others without it, then you have private parties rather than societal parties, governmental parties, resolving this, and that’s always a concern because it doesn’t necessarily take into the different and competing needs of the various components of the marketplace, including not for profit institutions – libraries, art galleries, museums, all sorts of people and entities whose needs need to be taken into account in any resolution of this.

KENNEALLY: Indeed, and when it comes to Amazon, they certainly have experience with used goods and establishing marketplaces for that. After all, I think they were the ones who – if they didn’t pioneer it, they certainly perfected the used book marketplace.

CHATILLON: Well, they didn’t pioneer it. The Strand Bookstore has been on the corner of 12th and Broadway –

KENNEALLY: That’s right. I meant online, of course, yes.

CHATILLON: But what they did was – it was very controversial at the time, this is now a few years ago – when you’re a consumer and you’re going on Amazon and you’re buying a CD or a DVD or a book, they put a used button next to the new button. So in the same seamless transaction, you can buy a used book, for example, rather than a new book. The publishers and Authors Guild and other people, and, I think, some of the musicians were very unhappy with that because of course they get royalties and compensation from a new purchase, and they don’t from a used, because of the first sale doctrine. However, we seem to have survived that, at least so far.

KENNEALLY: So far. Dev Chatillon, you’ve been very good in explaining for us the ins and outs of the digital resale marketplace and the potential digital resale marketplace. Thanks so much for updating us here on Beyond the Book, Dev Chatillon.

CHATILLON: It’s my pleasure. Thanks so much, Chris, I hope I can do something like this again.

KENNEALLY: We look forward to having you join us. Beyond the Book is produced by Copyright Clearance Center, a global rights broker for the world’s most sought-after materials, including millions of books and e-books, journals, newspapers, and magazines, and blogs, as well as images, movies, and television shows. Follow Beyond the Book on Twitter, find us on Facebook, and subscribe to the free podcast series on iTunes, or at the Copyright Clearance Center Website, Just click on Beyond the Book.

Our engineer is Jeremy Brieske of Burst Marketing. My name is Christopher Kenneally. For all of us at Copyright Clearance Center, thanks for listening to Beyond the Book.