I. A. World of Warcraft In November 2004, Blizzard created WoW, a “massively multiplayer online role-playing game” in which players interact in a virtual world. WoW has ten million subscribers, of which two and a half million are in North America. The WoW software has two components: (1) the game client software that a player installs on the computer; and (2) the game server software, which the player accesses on a subscription basis by connecting to WoW's online servers. WoW does not have single-player or offline modes.
WoW players roleplay different characters, such as humans, elves, and dwarves. A player's central objective is to advance the character through the game's 70 levels by participating in quests and engaging in battles with monsters. As a player advances, the character collects rewards such as in-game currency, weapons, and armor. WoW's virtual world has its own economy, in which characters use their virtual currency to buy and sell items directly from each other, through vendors, or using auction houses. Some players also utilize WoW's chat capabilities to interact with others.
C. Development of Glider and Warden Donnelly is a WoW player and software programmer. In March 2005, he developed Glider, a software “bot” (short for robot) that automates play of WoW's early levels, for his personal use. A user need not be at the computer while Glider is running. As explained in the Frequently Asked Questions (“FAQ”) on MDY's website for Glider:
Glider ... moves the mouse around and pushes keys on the keyboard. You tell it about your character, where you want to kill things, and when you want to kill. Then it kills for you, automatically. You can do something else, like eat dinner or go to a movie, and when you return, you'll have a lot more experience and loot.
Glider does not alter or copy WoW's game client software, does not allow a player to avoid paying monthly subscription dues to Blizzard, and has no commercial use independent of WoW. Glider was not initially designed to avoid detection by Blizzard.
The parties dispute Glider's impact on the WoW experience. Blizzard contends that Glider disrupts WoW's environment for non-Glider players by enabling Glider users to advance quickly and unfairly through the game and to amass additional game assets. MDY contends that Glider has a minimal effect on non-Glider players, enhances the WoW experience for Glider users, and facilitates disabled players' access to WoW by auto-playing the game for them.
In summer 2005, Donnelly began selling Glider through MDY's website for fifteen to twenty-five dollars per license. Prior to marketing Glider, Donnelly reviewed Blizzard's EULA and client-server manipulation policy. He reached the conclusion that Blizzard had not prohibited bots in those documents.
In September 2005, Blizzard launched Warden, a technology that it developed to prevent its players who use unauthorized third-party software, including bots, from connecting to WoW's servers. Warden was able to detect Glider, and Blizzard immediately used Warden to ban most Glider users. MDY responded by modifying Glider to avoid detection and promoting its new anti-detection features on its website's FAQ. It added a subscription service, Glider Elite, which offered “additional protection from game detection software” for five dollars a month.
Thus, by late 2005, MDY was aware that Blizzard was prohibiting bots. MDY modified its website to indicate that using Glider violated Blizzard's ToU. In November 2005, Donnelly wrote in an email interview, “Avoiding detection is rather exciting, to be sure. Since Blizzard does not want bots running at all, it's a violation to use them.” Following MDY's anti-detection modifications, Warden only occasionally detected Glider. As of September 2008, MDY had gross revenues of $3.5 million based on 120,000 Glider license sales.
D. Financial and practical impact of Glider Blizzard claims that from December 2004 to March 2008, it received 465,000 complaints about WoW bots, several thousand of which named Glider. Blizzard spends $940,000 annually to respond to these complaints, and the parties have stipulated that Glider is the principal bot used by WoW players. Blizzard introduced evidence that it may have lost monthly subscription fees from Glider users, who were able to reach WoW's highest levels in fewer weeks than players playing manually. Donnelly acknowledged in a November 2005 email that MDY's business strategy was to make Blizzard's anti-bot detection attempts financially prohibitive:
The trick here is that Blizzard has a finite amount of development and test resources, so we want to make it bad business to spend that much time altering their detection code to find Glider, since Glider's negative effect on the game is debatable.... [W]e attack th[is] weakness and try to make it a bad idea or make their changes very risky, since they don't want to risk banning or crashing innocent customers.
E. Pre-litigation contact between MDY and Blizzard In August 2006, Blizzard sent MDY a cease-and-desist letter alleging that MDY's website hosted WoW screenshots and a Glider install file, all of which infringed Blizzard's copyrights. Donnelly removed the screenshots and requested Blizzard to clarify why the install file was infringing, but Blizzard did not respond. In October 2006, Blizzard's counsel visited Donnelly's home, threatening suit unless MDY immediately ceased selling Glider and remitted all profits to Blizzard. MDY immediately commenced this action.
II. On December 1, 2006, MDY filed an amended complaint seeking a declaration that Glider does not infringe Blizzard's copyright or other rights. In February 2007, Blizzard filed counterclaims and third-party claims against MDY and Donnelly for, inter alia, contributory and vicarious copyright infringement, violation of DMCA § 1201(a)(2) and (b)(1), and tortious interference with contract.
. . .
On April 1, 2009, the district court entered judgment against MDY and Donnelly for $6.5 million, an adjusted figure to which the parties stipulated based on MDY's DMCA liability and post-summary judgment Glider sales. The district court permanently enjoined MDY from distributing Glider. MDY's efforts to stay injunctive relief pending appeal were unsuccessful. On April 29, 2009, MDY timely filed this appeal. On May 12, 2009, Blizzard timely cross-appealed the district court's holding that MDY did not violate DMCA § 1201(a)(2) and (b)(1) as to the game software's source code.
III. We review de novo the district court's (1) orders granting or denying summary judgment; (2) conclusions of law after a bench trial; and (3) interpretations of state law. . . . We review the district court's findings of fact for clear error. . . .
IV. We first consider whether MDY committed contributory or vicarious infringement (collectively, “secondary infringement”) of Blizzard's copyright by selling Glider to WoW players. See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1454 (7th Cir.1996) (“A copyright is a right against the world. Contracts, by contrast, generally affect only their parties.”). To establish secondary infringement, Blizzard must first demonstrate direct infringement. . . . To establish direct infringement, Blizzard must demonstrate copyright ownership and violation of one of its exclusive rights by Glider users. . . . MDY is liable for contributory infringement if it has “intentionally induc[ed] or encourag[ed] direct infringement” by Glider users. MGM Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005). MDY is liable for vicarious infringement if it (1) has the right and ability to control Glider users' putatively infringing activity and (2) derives a direct financial benefit from their activity. Id. If Glider users directly infringe, MDY does not dispute that it satisfies the other elements of contributory and vicarious infringement.
As a copyright owner, Blizzard possesses the exclusive right to reproduce its work. 17 U.S.C. § 106(1). The parties agree that when playing WoW, a player's computer creates a copy of the game's software in the computer's random access memory (“RAM”), a form of temporary memory used by computers to run software programs. This copy potentially infringes unless the player (1) is a licensee whose use of the software is within the scope of the license or (2) owns the copy of the software. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir.1999) (“Sun I”); 17 U.S.C. § 117(a). As to the scope of the license, ToU § 4(B), “Limitations on Your Use of the Service,” provides:
You agree that you will not ... (ii) create or use cheats, bots, “mods,” and/or hacks, or any other third-party software designed to modify the World of Warcraft experience; or (iii) use any third-party software that intercepts, “mines,” or otherwise collects information from or through the Program or Service.
By contrast, if the player owns the copy of the software, the “essential step” defense provides that the player does not infringe by making a copy of the computer program where the copy is created and used solely “as an essential step in the utilization of the computer program in conjunction with a machine.” 17 U.S.C. § 117(a)(1).
A. Essential step defense We consider whether WoW players, including Glider users, are owners or licensees of their copies of WoW software. If WoW players own their copies, as MDY contends, then Glider users do not infringe by reproducing WoW software in RAM while playing, and MDY is not secondarily liable for copyright infringement.
In Vernor v. Autodesk, Inc., we recently distinguished between “owners” and “licensees” of copies for purposes of the essential step defense. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1108–09 (9th Cir.2010); see also MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 519 n. 5 (9th Cir.1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330, 1333, 1335–36 (9th Cir.1995); Wall Data, Inc. v. Los Angeles County Sheriff's Dep't, 447 F.3d 769, 784–85 (9th Cir.2006). In Vernor, we held “that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use” restrictions. 621 F.3d at 1111 (internal footnote omitted).
Applying Vernor, we hold that WoW players are licensees of WoW's game client software. Blizzard reserves title in the software and grants players a non-exclusive, limited license. Blizzard also imposes transfer restrictions if a player seeks to transfer the license: the player must (1) transfer all original packaging and documentation; (2) permanently delete all of the copies and installation of the game client; and (3) transfer only to a recipient who accepts the EULA. A player may not sell or give away the account.
Blizzard also imposes a variety of use restrictions. The game must be used only for non-commercial entertainment purposes and may not be used in cyber cafes and computer gaming centers without Blizzard's permission. Players may not concurrently use unauthorized third-party programs. Also, Blizzard may alter the game client itself remotely without a player's knowledge or permission, and may terminate the EULA and ToU if players violate their terms. Termination ends a player's license to access and play WoW. Following termination, players must immediately destroy their copies of the game and uninstall the game client from their computers, but need not return the software to Blizzard.
Since WoW players, including Glider users, do not own their copies of the software, Glider users may not claim the essential step defense. 17 U.S.C. § 117(a)(1). Thus, when their computers copy WoW software into RAM, the players may infringe unless their usage is within the scope of Blizzard's limited license.
B. Contractual covenants vs. license conditions “A copyright owner who grants a nonexclusive, limited license ordinarily waives the right to sue licensees for copyright infringement, and it may sue only for breach of contract.” Sun I, 188 F.3d at 1121 (internal quotations omitted). However, if the licensee acts outside the scope of the license, the licensor may sue for copyright infringement. Id. (citing S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir.1989)). Enforcing a copyright license “raises issues that lie at the intersection of copyright and contract law.” Id. at 1122.
We refer to contractual terms that limit a license's scope as “conditions,” the breach of which constitute copyright infringement. Id. at 1120. We refer to all other license terms as “covenants,” the breach of which is actionable only under contract law. Id. We distinguish between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy. Foad Consulting Group v. Musil Govan Azzalino, 270 F.3d 821, 827 (9th Cir.2001).
A Glider user commits copyright infringement by playing WoW while violating a ToU term that is a license condition. To establish copyright infringement, then, Blizzard must demonstrate that the violated term—ToU § 4(B)—is a condition rather than a covenant. Sun I, 188 F.3d at 1122. Blizzard's EULAs and ToUs provide that they are to be interpreted according to Delaware law. Accordingly, we first construe them under Delaware law, and then evaluate whether that construction is consistent with federal copyright law and policy.
A covenant is a contractual promise, i.e., a manifestation of intention to act or refrain from acting in a particular way, such that the promisee is justified in understanding that the promisor has made a commitment. See Travel Centers of Am. LLC v. Brog, No. 3751–CC, 2008 Del. Ch. LEXIS 183, *9 (Del. Ch. Dec. 5, 2008); see also Restatement (Second) of Contracts § 2 (1981). A condition precedent is an act or event that must occur before a duty to perform a promise arises. AES P.R., L.P. v. Alstom Power, Inc., 429 F.Supp.2d 713, 717 (D.Del.2006) (citing Delaware state law); see also Restatement (Second) of Contracts § 224. Conditions precedent are disfavored because they tend to work forfeitures. AES, 429 F.Supp.2d at 717 (internal citations omitted). Wherever possible, equity construes ambiguous contract provisions as covenants rather than conditions. See Wilmington Tr. Co. v. Clark, 325 A.2d 383, 386 (Del.Ch.1974). However, if the contract is unambiguous, the court construes it according to its terms. AES, 429 F.Supp.2d at 717 (citing 17 Am.Jur.2d Contracts § 460 (2006)).
Applying these principles, ToU § 4(B)(ii) and (iii)'s prohibitions against bots and unauthorized third-party software are covenants rather than copyright-enforceable conditions. See Greenwood v. CompuCredit Corp., 615 F.3d 1204, 1212, (9th Cir.2010) (“[H]eadings and titles are not meant to take the place of the detailed provisions of the text,” and ... “the heading of a section cannot limit the plain meaning of the text.” (quoting Bhd. of R.R. Trainmen v. Balt. & Ohio R.R., 331 U.S. 519, 528—29, 67 S.Ct. 1387, 91 L.Ed. 1646 (1947))). Although ToU § 4 is titled, “Limitations on Your Use of the Service,” nothing in that section conditions Blizzard's grant of a limited license on players' compliance with ToU § 4's restrictions. To the extent that the title introduces any ambiguity, under Delaware law, ToU § 4(B) is not a condition, but is a contractual covenant. Cf. Sun Microsystems, Inc. v. Microsoft Corp., 81 F.Supp.2d 1026, 1031–32 (N.D.Cal.2000) (“Sun II ”) (where Sun licensed Microsoft to create only derivative works compatible with other Sun software, Microsoft's “compatibility obligations” were covenants because the license was not specifically conditioned on their fulfillment).
To recover for copyright infringement based on breach of a license agreement, (1) the copying must exceed the scope of the defendant's license and (2) the copyright owner's complaint must be grounded in an exclusive right of copyright (e.g., unlawful reproduction or distribution). See Storage Tech. Corp. v. Custom Hardware Eng'g & Consulting, Inc., 421 F.3d 1307, 1315–16 (Fed.Cir.2005). Contractual rights, however, can be much broader:
[C]onsider a license in which the copyright owner grants a person the right to make one and only one copy of a book with the caveat that the licensee may not read the last ten pages. Obviously, a licensee who made a hundred copies of the book would be liable for copyright infringement because the copying would violate the Copyright Act's prohibition on reproduction and would exceed the scope of the license. Alternatively, if the licensee made a single copy of the book, but read the last ten pages, the only cause of action would be for breach of contract, because reading a book does not violate any right protected by copyright law.
Id. at 1316. Consistent with this approach, we have held that the potential for infringement exists only where the licensee's action (1) exceeds the license's scope (2) in a manner that implicates one of the licensor's exclusive statutory rights. See, e.g., Sun I, 188 F.3d at 1121–22 (remanding for infringement determination where defendant allegedly violated a license term regulating the creation of derivative works).
Here, ToU § 4 contains certain restrictions that are grounded in Blizzard's exclusive rights of copyright and other restrictions that are not. For instance, ToU § 4(D) forbids creation of derivative works based on WoW without Blizzard's consent. A player who violates this prohibition would exceed the scope of her license and violate one of Blizzard's exclusive rights under the Copyright Act. In contrast, ToU § 4(C)(ii) prohibits a player's disruption of another player's game experience. Id. A player might violate this prohibition while playing the game by harassing another player with unsolicited instant messages. Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard's exclusive rights of copyright. The antibot provisions at issue in this case, ToU § 4(B)(ii) and (iii), are similarly covenants rather than conditions. A Glider user violates the covenants with Blizzard, but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard's exclusive rights. For instance, the use does not alter or copy WoW software.
Were we to hold otherwise, Blizzard—or any software copyright holder—could designate any disfavored conduct during software use as copyright infringement, by purporting to condition the license on the player's abstention from the disfavored conduct. The rationale would be that because the conduct occurs while the player's computer is copying the software code into RAM in order for it to run, the violation is copyright infringement. This would allow software copyright owners far greater rights than Congress has generally conferred on copyright owners.FN3 FN3. A copyright holder may wish to enforce violations of license agreements as copyright infringements for several reasons. First, breach of contract damages are generally limited to the value of the actual loss caused by the breach. See 24 Richard A. Lord, Williston on Contracts § 65:1 (4th ed.2007). In contrast, copyright damages include the copyright owner's actual damages and the infringer's actual profits, or statutory damages of up to $150,000 per work. 17 U.S.C. § 504; see Frank Music Corp. v. MGM, Inc., 772 F.2d 505, 512 n. 5 (9th Cir.1985). Second, copyright law offers injunctive relief, seizure of infringing articles, and awards of costs and attorneys' fees. 17 U.S.C. §§ 502–03, 505. Third, as amicus Software & Information Industry Association highlights, copyright law allows copyright owners a remedy against “downstream” infringers with whom they are not in privity of contract. See ProCD, Inc., 86 F.3d at 1454.
We conclude that for a licensee's violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor's exclusive rights of copyright. Here, WoW players do not commit copyright infringement by using Glider in violation of the ToU. MDY is thus not liable for secondary copyright infringement, which requires the existence of direct copyright infringement. Grokster, 545 U.S. at 930, 125 S.Ct. 2764.
It follows that because MDY does not infringe Blizzard's copyrights, we need not resolve MDY's contention that Blizzard commits copyright misuse. Copyright misuse is an equitable defense to copyright infringement, the contours of which are still being defined. See Practice Mgmt. Info. Corp. v. Am. Med. Ass'n, 121 F.3d 516, 520 (9th Cir.1997). The remedy for copyright misuse is to deny the copyright holder the right to enforce its copyright during the period of misuse. Since MDY does not infringe, we do not consider whether Blizzard committed copyright misuse.
We thus reverse the district court's grant of summary judgment to Blizzard on its secondary copyright infringement claims. Accordingly, we must also vacate the portion of the district court's permanent injunction that barred MDY and Donnelly from “infringing, or contributing to the infringement of, Blizzard's copyrights in WoW software.”
Capitol Records, LLC v. ReDigi Inc.
--- F.Supp.2d ----, 2013 WL 1286134 (S.D.N.Y.), 2013
MEMORANDUM AND ORDER
RICHARD J. SULLIVAN, District Judge.
Capitol Records, LLC (“Capitol”), the recording label for such classic vinyls as Frank Sinatra's “Come Fly With Me” and The Beatles' “Yellow Submarine,” brings this action against ReDigi Inc. (“ReDigi”), a twenty-first century technology company that touts itself as a “virtual” marketplace for “pre-owned” digital music. What has ensued in a fundamental clash over culture, policy, and copyright law, with Capitol alleging that ReDigi's web-based service amounts to copyright infringement in violation of the Copyright Act of 1976 (the “Copyright Act”), 17 U.S.C. § 101 et seq. Now before the Court are Capitol's motion for partial summary judgment and ReDigi's motion for summary judgment, both filed pursuant to Federal Rule of Civil Procedure 56. Because this is a court of law and not a congressional subcommittee or technology blog, the issues are narrow, technical, and purely legal. Thus, for the reasons that follow, Capitol's motion is granted and ReDigi's motion is denied.
ReDigi markets itself as “the world's first and only online marketplace for digital used music.” (Capitol 56.1 Stmt., Doc. No. 50 (“Cap. 56.1”), ¶ 6.) Launched on October 13, 2011, ReDigi's website invites users to “sell their legally acquired digital music files, and buy used digital music from others at a fraction of the price currently available on iTunes.” (Id. ¶¶ 6, 9.) Thus, much like used record stores, ReDigi permits its users to recoup value on their unwanted music. Unlike used record stores, however, ReDigi's sales take place entirely in the digital domain. (See ReDigi Reply 56.1 Stmt., Doc. No. 83 (“RD Rep. 56.1”), 4 ¶ 16.)
To sell music on ReDigi's website, a user must first download ReDigi's “Media Manager” to his computer. (ReDigi 56.1 Stmt., Doc. No. 56 (“RD 56.1”), ¶ 8.) Once installed, Media Manager analyzes the user's computer to build a list of digital music files eligible for sale. (Id.) A file is eligible only if it was purchased on iTunes or from another ReDigi user; music downloaded from a CD or other file-sharing website is ineligible for sale. (Id.) After this validation process, Media Manager continually runs on the user's computer and attached devices to ensure that the user has not retained music that has been sold or uploaded for sale. (Id. ¶ 10.) However, Media Manager cannot detect copies stored in other locations. (Cap. 56.1 ¶¶ 59–61, 63; see Capitol Reply 56.1 Stmt., Doc. No. 78 (“Cap. Rep. 56.1”), ¶ 10.) If a copy is detected, Media Manager prompts the user to delete the file. (Cap. 56.1 ¶ 64.) The file is not deleted automatically or involuntarily, though ReDigi's policy is to suspend the accounts of users who refuse to comply. (Id.)
After the list is built, a user may upload any of his eligible files to ReDigi's “Cloud Locker,” an ethereal moniker for what is, in fact, merely a remote server in Arizona. (RD 56.1 ¶¶ 9, 11; Cap. 56.1 ¶ 22.) ReDigi's upload process is a source of contention between the parties. (See RD 56.1 ¶ ¶ 14–23; Cap. Rep. 56.1 ¶¶ 14–23.) ReDigi asserts that the process involves “migrating” a user's file, packet by packet—“analogous to a train”—from the user's computer to the Cloud Locker so that data does not exist in two places at any one time.FN2 (RD 56.1 ¶¶ 14, 36.) Capitol asserts that, semantics aside, ReDigi's upload process “necessarily involves copying” a file from the user's computer to the Cloud Locker. (Cap. Rep. 56.1 ¶ 14.) Regardless, at the end of the process, the digital music file is located in the Cloud Locker and not on the user's computer. (RD 56.1 ¶ 21.) Moreover, Media Manager deletes any additional copies of the file on the user's computer and connected devices. (Id. ¶ 38.)
Once uploaded, a digital music file undergoes a second analysis to verify eligibility. (Cap. 56.1 ¶¶ 31–32.) If ReDigi determines that the file has not been tampered with or offered for sale by another user, the file is stored in the Cloud Locker, and the user is given the option of simply storing and streaming the file for personal use or offering it for sale in ReDigi's marketplace. (Id. ¶¶ 33–37.) If a user chooses to sell his digital music file, his access to the file is terminated and transferred to the new owner at the time of purchase. (Id. ¶ 49.) Thereafter, the new owner can store the file in the Cloud Locker, stream it, sell it, or download it to her computer and other devices. (Id. ¶ 50.) No money changes hands in these transactions. (RD Rep. 56.15 ¶ 18.) Instead, users buy music with credits they either purchased from ReDigi or acquired from other sales. (Id.) ReDigi credits, once acquired, cannot be exchanged for money. (Id.) Instead, they can only be used to purchase additional music. (Id.)
To encourage activity in its marketplace, ReDigi initially permitted users to preview thirty-second clips and view album cover art of songs posted for sale pursuant to a licensing agreement with a third party. (See RD 56.1 ¶¶ 73–78.) However, shortly after its launch, ReDigi lost the licenses. (Id.) Accordingly, ReDigi now sends users to either YouTube or iTunes to listen to and view this promotional material. (Id. ¶¶ 77, 79.) ReDigi also offers its users a number of incentives. (Cap. 56.1 ¶ 39.) For instance, ReDigi gives twenty-cent credits to users who post files for sale and enters active sellers into contests for prizes. (Id. ¶¶ 39, 42.) ReDigi also encourages sales by advising new users via email that they can “[c]ash in” their music on the website, tracking and posting the titles of sought after songs on its website and in its newsletter, notifying users when they are low on credits and advising them to either purchase more credits or sell songs, and connecting users who are seeking unavailable songs with potential sellers. (Id. ¶¶ 39–48.)
Finally, ReDigi earns a fee for every transaction. (Id. ¶ 54.) ReDigi's website prices digital music files at fifty-nine to seventy-nine cents each. (Id. ¶ 55.) When users purchase a file, with credits, 20% of the sale price is allocated to the seller, 20% goes to an “escrow” fund for the artist, and 60% is retained by ReDigi.FN3 (Id.)
B. Procedural History
Capitol, which owns a number of the recordings sold on ReDigi's website, commenced this action by filing the Complaint on January 6, 2012. (See Complaint, dated Jan. 5, 2012, Doc. No. 1 (“Compl.”); Cap. 56.1 ¶¶ 68–73.) In its Complaint, Capitol alleges multiple violations of the Copyright Act, 17 U.S.C. § 101, et seq., including direct copyright infringement, inducement of copyright infringement, contributory and vicarious copyright infringement, and common law copyright infringement. (Compl. ¶¶ 44–88.) Capitol seeks preliminary and permanent injunctions of ReDigi's services, as well as damages, attorney's fees and costs, interest, and any other appropriate relief. (Id. at 17–18.) On February 6, 2012, the Court denied Capitol's motion for a preliminary injunction, finding that Capitol had failed to establish irreparable harm. (Doc. No. 26.)
On July 20, 2012, Capitol filed its motion for partial summary judgment on the claims that ReDigi directly and secondarily infringed Capitol's reproduction and distribution rights. (Doc. No. 48.) ReDigi filed its cross-motion the same day, seeking summary judgment on all grounds of liability, including ReDigi's alleged infringement of Capitol's performance and display rights.FN4 (Doc. No. 54.) Both parties responded on August 14, 2012 and replied on August 24, 2012. (Doc. Nos. 76, 79, 87, 90.) The Court heard oral argument on October 5, 2012.
II. LEGAL STANDARD
Pursuant to Federal Rule of Civil Procedure 56(a), a court may not grant a motion for summary judgment unless “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the burden of showing that it is entitled to summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The court “is not to weigh evidence but is instead required to view the evidence in the light most favorable to the party opposing summary judgment, to draw all reasonable inferences in favor of that party, and to eschew credibility assessments.” Amnesty Am. v. Town of W. Hartford, 361 F.3d 113, 122 (2d Cir.2004) (internal quotation marks omitted); accord Anderson, 477 U.S. at 249, 106 S.Ct. 2505. As such, “if there is any evidence in the record from any source from which a reasonable inference in the [nonmoving party's] favor may be drawn, the moving party simply cannot obtain a summary judgment.” Binder & Binder PC v. Barnhart, 481 F.3d 141, 148 (2d Cir.2007) (internal quotation marks omitted).
Inferences and burdens of proof on cross-motions for summary judgment are the same as those for a unilateral motion. See Straube v. Fla. Union Free Sch. Dist., 801 F.Supp. 1164, 1174 (S.D.N.Y.1992). “That is, each cross-movant must present sufficient evidence to satisfy its burden of proof on all material facts.” U.S. Underwriters Ins. Co. v. Roka LLC, No. 99 Civ. 10136(AGS), 2000 WL 1473607, at *3 (S.D.N.Y. Sept. 29, 2000); see Barhold v. Rodriguez, 863 F.2d 233, 236 (2d Cir.1988).
Section 106 of the Copyright Act grants “the owner of copyright under this title” certain “exclusive rights,” including the right “to reproduce the copyrighted work in copies or phonorecords,” “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership,” and to publicly perform and display certain copyrighted works. 17 U.S.C. §§ 106(1), (3)-(5). However, these exclusive rights are limited by several subsequent sections of the statute. Pertinently, Section 109 sets forth the “first sale” doctrine, which provides that “the owner of a particular copy or phonorecord lawfully made under this title, 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.” Id. § 109(a). The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine. The Court determines that it cannot.
A. Infringement of Capitol's Copyrights
To state a claim for copyright infringement, a plaintiff must establish that it owns a valid copyright in the work at issue and that the defendant violated one of the exclusive rights the plaintiff holds in the work. Twin Peaks Prods., Inc. v. Publ'ns Int'l, Ltd., 996 F.2d 1366, 1372 (2d Cir.1993) (citing Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991)). It is undisputed that Capitol owns copyrights in a number of the recordings sold on ReDigi's website. (See Cap. 56.1 ¶¶ 68–73; RD Rep. 56.118–19, ¶¶ 68–73; Decl. of Richard S. Mandel, dated July 19, 2012, Doc. No. 52 (“Mandel Decl.”), ¶ 16, Ex. M; Decl. of Alasdair J. McMullan, dated July 19, 2012, Doc. No. 51 (“McMullan Decl.”), ¶¶ 3–5, Ex. 1.) It is also undisputed that Capitol did not approve the reproduction or distribution of its copyrighted recordings on ReDigi's website. Thus, if digital music files are “reproduce[d]” and “distribute[d]” on ReDigi's website within the meaning of the Copyright Act, Capitol's copyrights have been infringed.
1. Reproduction Rights
Courts have consistently held that the unauthorized duplication of digital music files over the Internet infringes a copyright owner's exclusive right to reproduce. See, e.g., A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1014 (9th Cir.2001). However, courts have not previously addressed whether the unauthorized transfer of a digital music file over the Internet—where only one file exists before and after the transfer—constitutes reproduction within the meaning of the Copyright Act. The Court holds that it does.
The Copyright Act provides that a copyright owner has the exclusive right “to reproduce the copyrighted work in ... phonorecords.” 17 U.S.C. § 106(1) (emphasis added). Copyrighted works are defined to include, inter alia, “sound recordings,” which are “works that result from the fixation of a series of musical, spoken, or other sounds.” Id. § 101. Such works are distinguished from their material embodiments. These include phonorecords, which are the “material objects in which sounds ... are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” Id. § 101 (emphasis added). Thus, the plain text of the Copyright Act makes clear that reproduction occurs when a copyrighted work is fixed in a new material object. See Matthew Bender & Co., Inc. v. W. Pub. Co., 158 F.3d 693, 703 (2d Cir.1998).
The legislative history of the Copyright Act bolsters this reading. The House Report on the Copyright Act distinguished between sound recordings and phonorecords, stating that “[t]he copyrightable work comprises the aggregation of sounds and not the tangible medium of fixation. Thus, ‘sound recordings' as copyrightable subject matter are distinguished from ‘phonorecords[,]’ the latter being physical objects in which sounds are fixed.” H.R.Rep. No. 94–1476, at 56 (1976), 1976 U.S.C.C.A.N. 5659, 5669. Similarly, the House and Senate Reports on the Act both explained:
Read together with the relevant definitions in [S]ection 101, the right “to reproduce the copyrighted work in copies or phonorecords” means the right to produce a material object in which the work is duplicated, transcribed, imitated, or simulated in a fixed form from which it can be “perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” Id. at 61, 1976 U.S.C.C.A.N. at 5675; S.Rep. No. 94–473, at 58 (1975). Put differently, the reproduction right is the exclusive right to embody, and to prevent others from embodying, the copyrighted work (or sound recording) in a new material object (or phonorecord). See Nimmer on Copyright § 8.02 (stating that “in order to infringe the reproduction right, the defendant must embody the plaintiff's work in a ‘material object’ ”).
Courts that have dealt with infringement on peer-to-peer (“P2P”) file-sharing systems provide valuable guidance on the application of this right in the digital domain. For instance, in London–Sire Records, Inc. v. John Doe 1, the court addressed whether users of P2P software violated copyright owners' distribution rights. 542 F.Supp.2d 153, 166 & n. 16 (D.Mass.2008). Citing the “material object” requirement, the court expressly differentiated between the copyrighted work—or digital music file—and the phonorecord—or “appropriate segment of the hard disk” that the file would be embodied in following its transfer. Id. at 171. Specifically,
[w]hen a user on a[P2P] network downloads a song from another user, he receives into his computer a digital sequence representing the sound recording. That sequence is magnetically encoded on a segment of his hard disk (or likewise written on other media). With the right hardware and software, the downloader can use the magnetic sequence to reproduce the sound recording. The electronic file (or, perhaps more accurately, the appropriate segment of the hard disk) is therefore a “phonorecord” within the meaning of the statute.
Id. (emphasis added). Accordingly, when a user downloads a digital music file or “digital sequence” to his “hard disk,” the file is “reproduce[d]” on a new phonorecord within the meaning of the Copyright Act. Id. This understanding is, of course, confirmed by the laws of physics. It is simply impossible that the same “material object” can be transferred over the Internet. Thus, logically, the court in London–Sire noted that the Internet transfer of a file results in a material object being “created elsewhere at its finish.” Id. at 173. Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act.
This finding holds regardless of whether one or multiple copies of the file exist. London–Sire, like all of the P2P cases, obviously concerned multiple copies of one digital music file. But that distinction is immaterial under the plain language of the Copyright Act. Simply put, it is the creation of a new material object and not an additional material object that defines the reproduction right. The dictionary defines “reproduction” to mean, inter alia, “to produce again” or “to cause to exist again or anew.” See Merriam–Webster Collegiate Edition 994 (10th ed. 1998) (emphasis added). Significantly, it is not defined as “to produce again while the original exists.” Thus, the right “to reproduce the copyrighted work in ... phonorecords” is implicated whenever a sound recording is fixed in a new material object, regardless of whether the sound recording remains fixed in the original material object.
Given this finding, the Court concludes that ReDigi's service infringes Capitol's reproduction rights under any description of the technology. ReDigi stresses that it “migrates” a file from a user's computer to its Cloud Locker, so that the same file is transferred to the ReDigi server and no copying occurs.FN5 However, even if that were the case, the fact that a file has moved from one material object—the user's computer—to another—the ReDigi server—means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.
ReDigi struggles to avoid this conclusion by pointing to C.M. Paula Co. v. Logan, a 1973 case from the Northern District of Texas where the defendant used chemicals to lift images off of greeting cards and place them on plaques for resale. 355 F.Supp. 189, 190 (N.D.Tex.1973); (see ReDigi Mem. of Law, dated July 20, 2012, Doc. No. 55 (“ReDigi Mem.”), at 13). The court determined that infringement did not occur because “should defendant desire to make one hundred ceramic plaques ..., defendant would be required to purchase one hundred separate ... prints.” C.M. Paula, 355 F.Supp. at 191. ReDigi argues that, like the defendant in C.M. Paula, its users must purchase a song on iTunes in order to sell a song on ReDigi. (ReDigi Mem. 13.) Therefore, no “duplication” occurs. See C.M. Paula, 355 F.Supp. at 191 (internal quotation marks omitted). ReDigi's argument is unavailing. Ignoring the questionable merits of the court's holding in C.M. Paula, ReDigi's service is distinguishable from the process in that case. There, the copyrighted print, or material object, was lifted from the greeting card and transferred in toto to the ceramic tile; no new material object was created. By contrast, ReDigi's service by necessity creates a new material object when a digital music file is either uploaded to or downloaded from the Cloud Locker.
ReDigi also argues that the Court's conclusion would lead to “irrational” outcomes, as it would render illegal any movement of copyrighted files on a hard drive, including relocating files between directories and defragmenting. (ReDigi Opp'n, dated Aug. 14, 2012, Doc. No. 79 (“ReDigi Opp'n”), at 8.) However, this argument is nothing more than a red herring. As Capitol has conceded, such reproduction is almost certainly protected under other doctrines or defenses, and is not relevant to the instant motion. (Cap. Reply, dated Aug. 24, 2012, Doc. No. 87 (“Cap. Reply”), at 5 n. 1.)
Accordingly, the Court finds that, absent the existence of an affirmative defense, the sale of digital music files on ReDigi's website infringes Capitol's exclusive right of reproduction.
. . .
2. First Sale
The first sale defense, a common law principle recognized in Bobbs–Merrill Co. v. Straus, 210 U.S. 339, 350, 28 S.Ct. 722, 52 L.Ed. 1086 (1908) and now codified at Section 109(a) of the Copyright Act, provides that:
Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, 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.
17 U.S.C. § 109. Under the first sale defense, “once the copyright owner places a copyrighted item [here, a phonorecord] in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.” Quality King Distribs., Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135, 152, 118 S.Ct. 1125, 140 L.Ed.2d 254 (1998); see Kirtsaeng v. John Wiley & Sons, Inc., ––– U.S. ––––, 133 S.Ct. 1351, 1354–55, 185 L.Ed.2d 392 (2013).
ReDigi asserts that its service, which involves the resale of digital music files lawfully purchased on iTunes, is protected by the first sale defense. (ReDigi Mem. 19.) The Court disagrees . . .
[T]he first sale doctrine does not protect ReDigi's distribution of Capitol's copyrighted works. This is because, as an unlawful reproduction, a digital music file sold on ReDigi is not “lawfully made under this title.” 17 U.S.C. § 109(a). Moreover, the statute protects only distribution by “the owner of a particular copy or phonorecord ... of that copy or phonorecord.” Id. Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her “particular” phonorecord on ReDigi, the first sale statute cannot provide a defense. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users' hard drives. The first sale defense does not cover this any more than it covered the sale of cassette recordings of vinyl records in a bygone era.
Rejecting such a conclusion, ReDigi argues that, because “ ‘technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of [its] basic purpose,’ ” namely, to incentivize creative work for the “ultimate[ ] ... cause of promoting broad public availability of literature, music, and the other arts.” Sony, 464 U.S. at 432, 104 S.Ct. 774 (quoting Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S.Ct. 2040, 45 L.Ed.2d 84 (1975)). Thus, ReDigi asserts that refusal to apply the first sale doctrine to its service would grant Capitol “a Court sanctioned extension of rights under the [C]opyright [A]ct ... which is against policy, and should not be endorsed by this Court.” (ReDigi Mem. 24.)
The Court disagrees. ReDigi effectively requests that the Court amend the statute to achieve ReDigi's broader policy goals—goals that happen to advance ReDigi's economic interests. However, ReDigi's argument fails for two reasons. First, while technological change may have rendered Section 109(a) unsatisfactory to many contemporary observers and consumers, it has not rendered it ambiguous. The statute plainly applies to the lawful owner's “particular” phonorecord, a phonorecord that by definition cannot be uploaded and sold on ReDigi's website. Second, amendment of the Copyright Act in line with ReDigi's proposal is a legislative prerogative that courts are unauthorized and ill suited to attempt.
Nor are the policy arguments as straightforward or uncontested as ReDigi suggests. Indeed, when confronting this precise subject in its report on the Digital Millenium Copyright Act, 17 U.S.C. § 512, the United States Copyright Office (the “USCO”) rejected extension of the first sale doctrine to the distribution of digital works, noting that the justifications for the first sale doctrine in the physical world could not be imported into the digital domain. See USCO, Library of Cong., DMCA Section 104 Report (2001) (“DMCA Report”); see also Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121, 129 (2d Cir.2008) (finding that the DMCA report is entitled to deference under Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944)). For instance, the USCO stated that “the impact of the [first sale] doctrine on copyright owners [is] limited in the off-line world by a number of factors, including geography and the gradual degradation of books and analog works.” DMCA Report at xi. Specifically,
[p]hysical copies of works degrade with time and use, making used copies less desirable than new ones. Digital information does not degrade, and can be reproduced perfectly on a recipient's computer. The “used” copy is just as desirable as (in fact, is indistinguishable from) a new copy of the same work. Time, space, effort and cost no longer act as barriers to the movement of copies, since digital copies can be transmitted nearly instantaneously anywhere in the world with minimal effort and negligible cost. The need to transport physical copies of works, which acts as a natural brake on the effect of resales on the copyright owner's market, no longer exists in the realm of digital transmissions. The ability of such “used” copies to compete for market share with new copies is thus far greater in the digital world.
Id. at 82–83 (footnotes omitted). Thus, while ReDigi mounts attractive policy arguments, they are not as one-sided as it contends.
Finally, ReDigi feebly argues that the Court's reading of Section 109(a) would in effect exclude digital works from the meaning of the statute. (ReDigi Mem. 21.) That is not the case. Section 109(a) still protects a lawful owner's sale of her “particular” phonorecord, be it a computer hard disk, iPod, or other memory device onto which the file was originally downloaded. While this limitation clearly presents obstacles to resale that are different from, and perhaps even more onerous than, those involved in the resale of CDs and cassettes, the limitation is hardly absurd—the first sale doctrine was enacted in a world where the ease and speed of data transfer could not have been imagined. There are many reasons, some discussed herein, for why such physical limitations may be desirable. It is left to Congress, and not this Court, to deem them outmoded.
Accordingly, the Court concludes that the first sale defense does not permit sales of digital music files on ReDigi's website.
Princeton University Press v. Michigan Document Services
99 F.3d 1381 (6th Cir. 1996)
David A. Nelson, Circuit Judge.
This is a copyright infringement case. The corporate defendant, Michigan Document Services, Inc., is a commercial copyshop that reproduced substantial segments of copyrighted works of scholarship, bound the copies into “coursepacks,” and sold the coursepacks to students for use in fulfilling reading assignments given by professors at the University of Michigan. The copyshop acted without permission from the copyright holders, and the main question presented is whether the “fair use” doctrine codified at 17 U.S.C. § 107 obviated the need to obtain such permission.
Answering this question “no,” and finding the infringement willful, the district court entered a summary judgment order in which the copyright holders were granted equitable relief and were awarded damages that may have been enhanced for willfulness. Princeton Univ. Press v. Michigan Document Servs., Inc., 855 F.Supp. 905 (E.D.Mich.1994). A three-judge panel of this court reversed the judgment on appeal, but a majority of the active judges of the court subsequently voted to rehear the case en banc. The appeal has now been argued before the full court.
We agree with the district court that the defendants' commercial exploitation of the copyrighted materials did not constitute fair use, and we shall affirm that branch of the district court's judgment. We believe that the district court erred in its finding of willfulness, however, and we shall vacate the damages award because of its possible linkage to that finding.
Thanks to relatively recent advances in technology, the coursepack-an artifact largely unknown to college students when the author of this opinion was an undergraduate-has become almost as ubiquitous at American colleges and universities as the conventional textbook. From the standpoint of the professor responsible for developing and teaching a particular course, the availability of coursepacks has an obvious advantage; by selecting readings from a variety of sources, the professor can create what amounts to an anthology perfectly tailored to the course the professor wants to present.
The physical production of coursepacks is typically handled by a commercial copyshop. The professor gives the copyshop the materials of which the coursepack is to be made up, and the copyshop does the rest. Adding a cover page and a table of contents, perhaps, the copyshop runs off as many sets as are needed, does the necessary binding, and sells the finished product to the professor's students.
Ann Arbor, the home of the University of Michigan, is also home to several copyshops. Among them is defendant Michigan Document Services (MDS), a corporation owned by defendant James Smith. We are told that MDS differs from most, if not all, of its competitors in at least one important way: it does not request permission from, nor does it pay agreed royalties to, copyright owners.
Mr. Smith has been something of a crusader against the system under which his competitors have been paying agreed royalties, or “permission fees” as they are known in the trade. The story begins in March of 1991, when Judge Constance Baker Motley, of the United States District Court for the Southern District of New York, decided the first reported case involving the copyright implications of educational coursepacks. See Basic Books, Inc. v. Kinko's Graphics Corp., 758 F.Supp. 1522 (S.D.N.Y.1991), holding that a Kinko's copyshop had violated the copyright statute by creating and selling coursepacks without permission from the publishing houses that held the copyrights. After Kinko's, we are told, many copyshops that had not previously requested permission from copyright holders began to obtain such permission. Mr. Smith chose not to do so. He consulted an attorney, and the attorney apparently advised him that while it was “risky” not to obtain permission, there were flaws in the Kinko's decision. Mr. Smith also undertook his own study of the fair use doctrine, reading what he could find on this subject in a law library. He ultimately concluded that the Kinko's case had been wrongly decided, and he publicized this conclusion through speeches, writings, and advertisements. His advertisements stressed that professors whose students purchased his coursepacks would not have to worry about delays attendant upon obtaining permission from publishers.
Not surprisingly, Mr. Smith attracted the attention of the publishing industry. Three publishers-Princeton University Press, MacMillan, Inc., and St. Martin's Press, Inc.-eventually brought the present suit against Mr. Smith and his corporation.
Each of the plaintiff publishers maintains a department that processes requests for permission to reproduce portions of copyrighted works. (In addition, copyshops may request such permission through the Copyright Clearance Center, a national clearinghouse.) Macmillan and St. Martin's, both of which are for-profit companies, claim that they generally respond within two weeks to requests for permission to make copies for classroom use. Princeton, a non-profit organization, claims to respond within two to four weeks. Mr. Smith has not put these claims to the test, and he has not paid permission fees.
The plaintiffs allege infringement of the copyrights on six different works that were excerpted without permission. The works in question, and the statistics on the magnitude of the excerpts, are as follows: Nancy J. Weiss, Farewell to the Party of Lincoln: Black Politics in the Age of FDR (95 pages copied, representing 30 percent of the entire book); Walter Lippmann, Public Opinion (45 pages copied, representing 18 percent of the whole); Robert E. Layne, Political Ideology: Why the American Common Man Believes What He Does (78 pages, 16 percent); Roger Brown, Social Psychology (52 pages, 8 percent); Milton Rokeach, The Nature of Human Values (77 pages, 18 percent); James S. Olson and Randy Roberts, Where the Domino Fell, America and Vietnam, 1945-1950 (17 pages, 5 percent). The extent of the copying is undisputed, and the questions presented by the case appear to be purely legal in nature.
The fair use doctrine, which creates an exception to the copyright monopoly, “permits [and requires] courts to avoid rigid application of the copyright statute when, on occasion, it would stifle the very creativity which that law is designed to foster.” Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577, 114 S.Ct. 1164, 1170, 127 L.Ed.2d 500 (1994), quoting Stewart v. Abend, 495 U.S. 207, 236, 110 S.Ct. 1750, 1768, 109 L.Ed.2d 184 (1990). Initially developed by the courts, the doctrine was codified at 17 U.S.C. § 107 in 1976. Congress used the following formulation in Section 107:
“[T]he fair use of a copyrighted work, including such use by reproduction in copies ... for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include-
(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work....”
This language does not provide blanket immunity for “multiple copies for classroom use.” Rather, “whether a use referred to in the first sentence of Section 107 is a fair use in a particular case ... depend[s] upon the application of the determinative factors.” Campbell, 510 U.S. at 578 n. 9, 114 S.Ct. at 1170 n. 9, quoting S.Rep. No. 94-473, p. 62.
The four statutory factors may not have been created equal. In determining whether a use is “fair,” the Supreme Court has said that the most important factor is the fourth, the one contained in 17 U.S.C. § 107(4). . . . We take it that this factor, “the effect of the use upon the potential market for or value of the copyrighted work,” is at least primus inter pares, figuratively speaking, and we shall turn to it first.
The burden of proof as to market effect rests with the copyright holder if the challenged use is of a “noncommercial” nature. The alleged infringer has the burden, on the other hand, if the challenged use is “commercial” in nature. Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 451, 104 S.Ct. 774, 793, 78 L.Ed.2d 574 (1984). In the case at bar the defendants argue that the burden of proof rests with the publishers because the use being challenged is “noncommercial.” We disagree.
It is true that the use to which the materials are put by the students who purchase the coursepacks is noncommercial in nature. But the use of the materials by the students is not the use that the publishers are challenging. What the publishers are challenging is the duplication of copyrighted materials for sale by a for-profit corporation that has decided to maximize its profits-and give itself a competitive edge over other copyshops-by declining to pay the royalties requested by the holders of the copyrights.
The defendants' use of excerpts from the books at issue here was no less commercial in character than was The Nation magazine's use of copyrighted material in Harper & Row, where publication of a short article containing excerpts from the still unpublished manuscript of a book by President Ford was held to be an unfair use. Like the students who purchased unauthorized coursepacks, the purchasers of The Nation did not put the contents of the magazine to commercial use—but that did not stop the Supreme Court from characterizing the defendant's use of the excerpts as “a publication [that] was commercial as opposed to nonprofit....” Harper & Row, 471 U.S. at 562, 105 S.Ct. at 2231. And like the use that is being challenged in the case now before us, the use challenged in Harper & Row was “presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright.” Id., quoting Sony, 464 U.S. at 451, 104 S.Ct. at 793
The strength of the Sony presumption may vary according to the context in which it arises, and the presumption disappears entirely where the challenged use is one that transforms the original work into a new artistic creation. See Campbell, 510 U.S. at 587-89, 114 S.Ct. at 1176. Perhaps the presumption is weaker in the present case than it would be in other contexts. There is a presumption of unfairness here, nonetheless, and we are not persuaded that the defendants have rebutted it.
If we are wrong about the existence of the presumption—if the challenged use is not commercial, in other words, and if the plaintiff publishers have the burden of proving an adverse effect upon either the potential market for the copyrighted work or the potential value of the work—we believe that the publishers have carried the burden of proving a diminution in potential market value.
One test for determining market harm [is this:] “[T]o negate fair use,” the Supreme Court has said, “one need only show that if the challenged use ‘should become widespread, it would adversely affect the potential market for the copyrighted work.’ ” Harper & Row, 471 U.S. at 568, 105 S.Ct. at 2234, quoting Sony, 464 U.S. at 451, 104 S.Ct. at 793 (emphasis supplied in part). Under this test, we believe, it is reasonably clear that the plaintiff publishers have succeeded in negating fair use.
As noted above, most of the copyshops that compete with MDS in the sale of coursepacks pay permission fees for the privilege of duplicating and selling excerpts from copyrighted works. The three plaintiffs together have been collecting permission fees at a rate approaching $500,000 a year. If copyshops across the nation were to start doing what the defendants have been doing here, this revenue stream would shrivel and the potential value of the copyrighted works of scholarship published by the plaintiffs would be diminished accordingly.
The defendants contend that it is circular to assume that a copyright holder is entitled to permission fees and then to measure market loss by reference to the lost fees. They argue that market harm can only be measured by lost sales of books, not permission fees. But the circularity argument proves too much. Imagine that the defendants set up a printing press and made exact reproductions-asserting that such reproductions constituted “fair use”-of a book to which they did not hold the copyright. Under the defendants' logic it would be circular for the copyright holder to argue market harm because of lost copyright revenues, since this would assume that the copyright holder had a right to such revenues.
A “circularity” argument indistinguishable from that made by the defendants here was rejected by the Second Circuit in American Geophysical, 60 F.3d at 929-31 (Jon O. Newman, C.J.), where the photocopying of scientific articles for use by Texaco researchers was held to be an unfair use. It is true, the Second Circuit acknowledged, that “a copyright holder can always assert some degree of adverse [e]ffect on its potential licensing revenues as a consequence of [the defendant's use] ... simply because the copyright holder has not been paid a fee to permit that particular use.” Id. at 929 n. 17. But such an assertion will not carry much weight if the defendant has “filled a market niche that the [copyright owner] simply had no interest in occupying.” Id. at 930 (quoting Twin Peaks Prods., Inc. v. Publications Int'l, Ltd., 996 F.2d 1366, 1377 (2d Cir.1993)). Where, on the other hand, the copyright holder clearly does have an interest in exploiting a licensing market-and especially where the copyright holder has actually succeeded in doing so-“it is appropriate that potential licensing revenues for photocopying be considered in a fair use analysis.” American Geophysical, 60 F.3d at 930. Only “traditional, reasonable, or likely to be developed markets” are to be considered in this connection, and even the availability of an existing system for collecting licensing fees will not be conclusive. Id. at 930-31. But Congress has implicitly suggested that licensing fees should be recognized in appropriate cases as part of the potential market for or value of the copyrighted work, and it was primarily because of lost licensing revenue that the Second Circuit agreed with the finding of the district court in American Geophysical that “the publishers have demonstrated a substantial harm to the value of their copyrights through [Texaco's] copying.” Id. at 931 (quoting the district court opinion (Pierre N. Leval, J.) reported at 802 F.Supp. 1, 21 (S.D.N.Y.1992)).
The approach followed by Judges Newman and Leval in the American Geophysical litigation is fully consistent with the Supreme Court case law. In Harper & Row, where there is no indication in the opinion that the challenged use caused any diminution in sales of President Ford's memoirs, the Court found harm to the market for the licensing of excerpts. The Court's reasoning—which was obviously premised on the assumption that the copyright holder was entitled to licensing fees for use of its copyrighted materials—is no more circular than that employed here. And in Campbell, where the Court was unwilling to conclude that the plaintiff had lost licensing revenues under the fourth statutory factor, the Court reasoned that a market for critical parody was not one “that creators of original works would in general develop or license others to develop.” Campbell, 510 U.S. at 592, 114 S.Ct. at 1178.
The potential uses of the copyrighted works at issue in the case before us clearly include the selling of permission to reproduce portions of the works for inclusion in coursepacks-and the likelihood that publishers actually will license such reproduction is a demonstrated fact. A licensing market already exists here, as it did not in a case on which the plaintiffs rely, Williams & Wilkins Co. v. United States, 203 Ct.Cl. 74, 487 F.2d 1345 (1973), aff'd by an equally divided Court, 420 U.S. 376, 95 S.Ct. 1344, 43 L.Ed.2d 264 (1975). Thus there is no circularity in saying, as we do say, that the potential for destruction of this market by widespread circumvention of the plaintiffs' permission fee system is enough, under the Harper & Row test, “to negate fair use.”
Our final point with regard to the fourth statutory factor concerns the affidavits of the three professors who assigned one or more of the copyrighted works to be read by their students. The defendants make much of the proposition that these professors only assigned excerpts when they would not have required their students to purchase the entire work. But what seems significant to us is that none of these affidavits shows that the professor executing the affidavit would have refrained from assigning the copyrighted work if the position taken by the copyright holder had been sustained beforehand.
It is true that Professor Victor Lieberman, who assigned the excerpt from the Olson and Roberts book on America and Vietnam, raises questions about the workability of the permission systems of “many publishers.” In 1991, Professor Lieberman avers, a Kinko's copyshop to which he had given materials for inclusion in a coursepack experienced serious delays in obtaining permissions from unnamed publishers. Professor Lieberman does not say that timely permission could not have been obtained from the publisher of the Olson and Roberts book, however, and he does not say that he would have refrained from assigning the work if the copyshop had been required to pay a permission fee for it.
It is also true that the publisher of one of the copyrighted works in question here (Public Opinion, by Walter Lippmann) would have turned down a request for permission to copy the 45-page excerpt included in a coursepack prepared to the specifications of Professor Donald Kinder. The excerpt was so large that the publisher would have preferred that students buy the book itself, and the work was available in an inexpensive paperback edition. But Professor Kinder does not say that he would have refrained from assigning the excerpt from the Lippmann book if it could not have been included in the coursepack. Neither does he say that he would have refrained from assigning any of the other works mentioned in his affidavit had he known that the defendants would be required to pay permission fees for them.
The third professor, Michael Dawson, assigned a 95-page excerpt from the book on black politics by Nancy Weiss. Professor Dawson does not say that a license was not available from the publisher of the Weiss book, and he does not say that the license fee would have deterred him from assigning the book.
In the context of nontransformative uses, at least, and except insofar as they touch on the fourth factor, the other statutory factors seem considerably less important. We shall deal with them relatively briefly.
As to “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes,” 17 U.S.C. § 107(1), we have already explained our reasons for concluding that the challenged use is of a commercial nature.
The defendants argue that the copying at issue here would be considered “nonprofit educational” if done by the students or professors themselves. The defendants also note that they can profitably produce multiple copies for less than it would cost the professors or the students to make the same number of copies. Most of the copyshops with which the defendants compete have been paying permission fees, however, and we assume that these shops too can perform the copying on a more cost-effective basis than the professors or students can. This strikes us as a more significant datum than the ability of a black market copyshop to beat the do-it-yourself cost.
As to the proposition that it would be fair use for the students or professors to make their own copies, the issue is by no means free from doubt. We need not decide this question, however, for the fact is that the copying complained of here was performed on a profit-making basis by a commercial enterprise. And “[t]he courts have ... properly rejected attempts by for-profit users to stand in the shoes of their customers making nonprofit or noncommercial uses.” Patry, Fair Use in Copyright Law, at 420 n. 34. As the House Judiciary Committee stated in its report on the 1976 legislation,
“[I]t would not be possible for a non-profit institution, by means of contractual arrangements with a commercial copying enterprise, to authorize the enterprise to carry out copying and distribution functions that would be exempt if conducted by the non-profit institution itself.” H.R.Rep. No. 1476, 94th Cong., 2d Sess. at 74 (1976), U.S.Code Cong. & Admin.News 5659, 5687-88.
It should be noted, finally, that the degree to which the challenged use has transformed the original copyrighted works-another element in the first statutory factor-is virtually indiscernible. If you make verbatim copies of 95 pages of a 316-page book, you have not transformed the 95 pages very much-even if you juxtapose them to excerpts from other works and package everything conveniently. This kind of mechanical “transformation” bears little resemblance to the creative metamorphosis accomplished by the parodists in the Campbell case.
The second statutory factor, “the nature of the copyrighted work,” is not in dispute here. The defendants acknowledge that the excerpts copied for the coursepacks contained creative material, or “expression;” it was certainly not telephone book listings that the defendants were reproducing. This factor too cuts against a finding of fair use.
The third statutory factor requires us to assess “the amount and substantiality of the portion used in relation to the copyrighted work as a whole.” Generally speaking, at least, “the larger the volume (or the greater the importance) of what is taken, the greater the affront to the interests of the copyright owner, and the less likely that a taking will qualify as a fair use.” Pierre N. Leval, Toward a Fair Use Standard, 103 HARV. L. REV. 1105, 1122 (1990).
The amounts used in the case at bar--8,000 words in the shortest excerpt--far exceed the 1,000-word safe harbor that we shall discuss in the next part of this opinion. See H.R.Rep. No. 1476, 94th Cong., 2d Sess. (1976), reprinted after 17 U.S.C.A. § 107. The defendants were using as much as 30 percent of one copyrighted work, and in no case did they use less than 5 percent of the copyrighted work as a whole. These percentages are not insubstantial. And to the extent that the third factor requires some type of assessment of the “value” of the excerpted material in relation to the entire work, the fact that the professors thought the excerpts sufficiently important to make them required reading strikes us as fairly convincing “evidence of the qualitative value of the copied material.” Harper & Row, 471 U.S. at 565, 105 S.Ct. at 2233. We have no reason to suppose that in choosing the excerpts to be copied, the professors passed over material that was more representative of the major ideas of the work as a whole in preference to material that was less representative.
The third factor may have more significance for the 95-page excerpt from the black politics book than for the 17-page excerpt from the Vietnam book. In each instance, however, the defendants have failed to carry their burden of proof with respect to “amount and substantiality.”
We turn now to the pertinent legislative history. The general revision of the copyright law enacted in 1976 was developed through a somewhat unusual process. Congress and the Register of Copyrights initiated and supervised negotiations among interested groups-groups that included authors, publishers, and educators-over specific legislative language. Most of the language that emerged was enacted into law or was made a part of the committee reports. See Jessica Litman, Copyright, Compromise, and Legislative History, 72 CORNELL L. R EV. 857 (1987). The statutory fair use provisions are a direct result of this process. Id. at 876-77. So too is the “Agreement on Guidelines for Classroom Copying in Not-for-Profit Educational Institutions With Respect to Books and Periodicals”-commonly called the “Classroom Guidelines”-set out in H.R.Rep. No. 1476 at 68-71, 94th Cong., 2d Sess. (1976). The House and Senate conferees explicitly accepted the Classroom Guidelines “as part of their understanding of fair use,” H.R. Conf. Rep. No. 1733, 94th Cong.2d Sess. at 70 (1976), and the Second Circuit has characterized the guidelines as “persuasive authority....” American Geophysical, 60 F.3d at 919 n. 5, citing Kinko's, 758 F.Supp. at 1522-36.
There are strong reasons to consider this legislative history. The statutory factors are not models of clarity, and the fair use issue has long been a particularly troublesome one. . . . Not surprisingly, courts have often turned to the legislative history when considering fair use questions . . .
Although the Classroom Guidelines purport to “state the minimum and not the maximum standards of educational fair use,” they do evoke a general idea, at least, of the type of educational copying Congress had in mind. The guidelines allow multiple copies for classroom use provided that (1) the copying meets the test of brevity (1,000 words, in the present context); (2) the copying meets the test of spontaneity, under which “[t]he inspiration and decision to use the work and the moment of its use for maximum teaching effectiveness [must be] so close in time that it would be unreasonable to expect a timely reply to a request for permission;” (3) no more than nine instances of multiple copying take place during a term, and only a limited number of copies are made from the works of any one author or from any one collective work; (4) each copy contains a notice of copyright; (5) the copying does not substitute for the purchase of “books, publishers' reprints or periodicals;” and (6) the student is not charged any more than the actual cost of copying. The Classroom Guidelines also make clear that unauthorized copying to create “anthologies, compilations or collective works” is prohibited. H.R.Rep. No. 1476 at 69.
In its systematic and premeditated character, its magnitude, its anthological content, and its commercial motivation, the copying done by MDS goes well beyond anything envisioned by the Congress that chose to incorporate the guidelines in the legislative history. Although the guidelines do not purport to be a complete and definitive statement of fair use law for educational copying, and although they do not have the force of law, they do provide us general guidance. The fact that the MDS copying is light years away from the safe harbor of the guidelines weighs against a finding of fair use.
Although the Congress that passed the Copyright Act in 1976 would pretty clearly have thought it unfair for a commercial copyshop to appropriate as much as 30 percent of a copyrighted work without paying the license fee demanded by the copyright holder, the changes in technology and teaching practices that have occurred over the last two decades might conceivably make Congress more sympathetic to the defendants' position today. If the law on this point is to be changed, however, we think the change should be made by Congress and not by the courts.
We take as our text for the concluding part of this discussion of fair use Justice Stewart's well-known exposition of the correct approach to “ambiguities” (see Sony, 464 U.S. at 431-32, 104 S.Ct. at 783-84) in the copyright law:
“The immediate effect of our copyright law is to secure a fair return for an ‘author's' creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good. ‘The sole interest of the United States and the primary object in conferring the monopoly,’ this Court has said, ‘lie in the general benefits derived by the public from the labors of authors.’ ... When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose.” Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S.Ct. 2040, 2044, 45 L.Ed.2d 84 (1975) (footnotes and citations omitted).
The defendants attach considerable weight to the assertions of numerous academic authors that they do not write primarily for money and that they want their published writings to be freely copyable. The defendants suggest that unlicensed copying will “stimulate artistic creativity for the general public good.”
This suggestion would be more persuasive if the record did not demonstrate that licensing income is significant to the publishers. It is the publishers who hold the copyrights, of course-and the publishers obviously need economic incentives to publish scholarly works, even if the scholars do not need direct economic incentives to write such works.
The writings of most academic authors, it seems fair to say, lack the general appeal of works by a Walter Lippmann, for example. (Lippmann is the only non-academic author whose writings are involved in this case.) One suspects that the profitability of at least some of the other books at issue here is marginal. If publishers cannot look forward to receiving permission fees, why should they continue publishing marginally profitable books at all? And how will artistic creativity be stimulated if the diminution of economic incentives for publishers to publish academic works means that fewer academic works will be published?
The fact that a liberal photocopying policy may be favored by many academics who are not themselves in the publishing business has little relevance in this connection. As Judge Leval observed in American Geophysical, “It is not surprising that authors favor liberal photocopying; generally such authors have a far greater interest in the wide dissemination of their work than in royalties-all the more so when they have assigned their royalties to the publisher. But the authors have not risked their capital to achieve dissemination. The publishers have. Once an author has assigned her copyright, her approval or disapproval of photocopying is of no further relevance.” 802 F.Supp. at 27.
In the case at bar the district court was not persuaded that the creation of new works of scholarship would be stimulated by depriving publishers of the revenue stream derived from the sale of permissions. Neither are we. On the contrary, it seems to us, the destruction of this revenue stream can only have a deleterious effect upon the incentive to publish academic writings.
. . .
The grant of summary judgment on the fair use issue is