On February 6, 2012, a judge for the U.S. District Court for the Southern District of New York ruled that ReDigi – an upstart, online marketplace for “used” MP3 files – can continue operating pending the outcome of copyright-infringement litigation initiated by Capitol Records. ReDigi went live in October 2011 with a business model that uses proprietary technology to verify, transfer and delete instances of digital music content from a user’s computer for inclusion in an online library of MP3 files available for download by others. The “source” users receive discounts or credits for purchasing files from ReDigi, and other users then can purchase the uploaded files at prices that appear to be about 80% of prices typically seen on iTunes for popular artists. ReDigi likens its service to the Internet equivalent of brick-and-mortar used music stores, which also received some negative attention from the music industry in their day.

Those brick-and-mortar stores were able to defend their business practices by relying on the first-sale doctrine, which permits owners of a particular copy of a work to re-sell that copy to others without violating copyright law, all without obtaining permission from the copyright holder. ReDigi also has invoked the first-sale doctrine in its defense. In its motion for a preliminary injunction against ReDigi’s continued business operations, pending trial, Capitol argued that the doctrine is inapplicable in this case as a matter of law. According to Capitol, the doctrine does not apply to digitally transmitted files, and ReDigi is not the “owner” of any of the files uploaded to its site. However, the Southern District Court apparently disagreed, holding that ReDigi could continue operating until the case is decided on the merits.

It is important to emphasize that this holding is limited in its effect – the court did not rule that ReDigi’s business was legal or permissible under U.S. copyright law. Rather, the order reflects only that Capitol was unable to prove that its legal claims were strong enough – and the likelihood of harm was great enough – that ReDigi should be shuttered in order not to compound Capitol’s alleged losses.

Still, this case presents a tantalizing possibility that there could be a split between the Second Circuit Court of Appeals (which encompasses New York in its jurisdiction) and the Ninth Circuit, which ruled in 2010 in the matter of Vernor v. Autodesk that the first-sale doctrine did not apply to limit software publishers’ ability to restrict end users’ ability to resell software licenses to third parties. While the kinds of copyrighted works at issue in these cases are somewhat distinct, the issues involved are similar. It will be very interesting to see how the ReDigi litigation progresses in coming months.