Will This Startup Get Shut Down For Abusing iTunes?

Though dated and becoming obsolete, CDs and DVDs still offer one distinction over digital media: if you don’t want it anymore, you can sell it off again. Not so for music and movies bought off the web, a court has ruled — once you make your iTunes purchase, you’re stuck with it.

A start-up firm, ReDigi, was brought to court by Capitol Records, which insisted that Redigi did not possess the authorization necessary to resell music purchased through Apple’s (NASDAQ:AAPL) iTunes program, and the judge overseeing the case, U.S. District Judge Richard Sullivan, sided with Capitol.

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The decision, handed down on Monday, offers slim hope that there may one day be a used marketplace for digital media, similar to one based on used books and CDs.

“This will profoundly affect the economics of any digital re-sale marketplace,” by limiting what can be sold as “used” or forcing sellers to obtain copyright holders’ approval before transacting business, said Bill Rosenblatt, president of consulting firm GiantSteps Media Technology Strategies.

Digital music surpassed physical purchases for the first time in 2011, and made up over 55 percent of all music purchases in 2012 according to Nielsen SoundScan, which tracks sales of recorded music.

Sullivan said that there were some open issues remaining, and there are still questions to be answered in regards to damages owed by ReDigi and injunctive relief. The companies are to report back to him by April 12.

ReDigi allows listeners to swap music tracks at a fraction of the cost of buying them on iTunes. ReDigi makes money from fees on each transaction. Sullivan barred efforts to shut down the service in February of last year, pointing out that Capitol could not demonstrate irreparable harm that had been done to them. Capitol sought $150,000 per infringement.

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Sullivan’s latest decision states that ReDigi “infringes Capitol’s reproduction rights under any description of the technology,” and does not deserve protection under the theory of fair use.

“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,” Sullivan wrote. “It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.”

ReDigi fought for its rights under the first sale doctrine, which lets people buy and sell copyrighted works after the creators first put them into the marketplace. Sullivan rejected the defense, deciding that ReDigi did not have protection under the doctrine.

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Joe Wikert, general manager and publisher at O’Reilly Media, Inc., described the Capitol Records ruling as “not a good first step” in the development of marketplaces for used digital goods. ”Both Amazon (NASDAQ:AMZN) and Apple have been working on patents, which are insurance policies for both of them in my view.” Wikert added. “They have been sitting on the sidelines watching the ReDigi case.”

The ruling was disappointing because ReDigi planned to give a cut of proceeds from re-sales to copyright holders and the firm was escrowing money for record labels from digital music transactions that had already happened on its nascent service, Wikert explained.

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