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17 U.S.C.S. § 106(1) and (3) of the Copyright Act respectively grant the owner of a copyright the exclusive right to control the reproduction and the distribution of the copyrighted work. Under the first sale doctrine, codified in 17 U.S.C.S. § 109(a), the rights holder's control over the distribution of any particular copy or phonorecord that was lawfully made effectively terminates when that copy or phonorecord is distributed to its first recipient. Section 109(a) provides that notwithstanding the provisions of § 106(3), the owner of a particular copy or phonorecord lawfully made under Title 17, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.
Plaintiffs Capitol Records, LLC, Capitol Christian Music Group, Inc., and Virgin Records IR Holdings, Inc. were record companies owning copyrights or licenses in sound recordings or musical performances, which they distribute in the form of digital files, sold to the public by authorized agent services, such as Apple iTunes, under license from plaintiffs. Purchasers from the Apple iTunes online store download the files onto their personal computers or other devices. Defendants Larry Rudolph and John Ossenmacher had created an Internet platform designed to enable the lawful resale, under the first sale doctrine, of lawfully purchased digital music files, and had hosted resales of such files on the platform. Plaintiffs brought an action against defendants, alleging that the operation of the defendants’ system infringed plaintiffs’ copyrights by unauthorized reproduction and distribution of plaintiffs’ copyrighted works. The district court concluded that, notwithstanding the "first sale" doctrine, codified in the Copyright Act of 1976, 17 U.S.C. § 109(a), the defendants infringed the plaintiffs' copyrights by enabling the resale of such digital files containing sound recordings of plaintiffs' copyrighted music. Defendants challenged the decision.
Notwithstanding the first sale doctrine, did the defendants infringe the plaintiffs copyright by enabling the resale of the digital files containing sound recordings of plaintiffs' copyrighted music?
The Court held that the district court properly found that the defendants, creators of an Internet platform system that enabled the resale of digital music files, infringed the plaintiffs record companies' exclusive rights under 17 U.S.C.S. § 106(1) to reproduce copyrighted works where even if the digital file transferred qualified as a phonorecord protected by 17 U.S.C.S. § 109(a), the fixing of the digital file in the creators' server, as well as in the new purchaser's device, created a new phonorecord, which was an unauthorized reproduction. According to the Court, the making of the reproductions was not a fair use under 17 U.S.C.S. § 107 where the defendants made no change to the copyrighted sound recordings, the system made identical copies of the whole of the recordings, and the reproductions were made for the purpose of resale in competition with the record companies.