Capitol Records has won a court ruling against a store that sells "used" digital song files.
ReDigi infringed Capitol's copyright by allowing users to buy and sell tracks originally bought on Apple's iTunes store, said District Judge Richard Sullivan. The decision is a set-back to the idea of a used digital marketplace, similar to that for physical goods like CDs or books.
Capitol started legal action in January 2012 to protect the work of its artists who include Coldplay, Katy Perry and Norah Jones. ReDigi could now be shut down or have to pay damages to Capitol.
The service, which started in October 2011, allows people to buy and sell tracks for as little as $0.49 and takes a cut from each sale. The site says it gives 20 percent from each sale back to the original artist.
It also monitors its users computers to ensure they have not kept hold of any songs they have sold on.
But Judge Sullivan ruled that ReDigi "infringes Capitol's reproduction rights" because, crucially, a new unauthorized copy of the file is made when a sale takes place.
ReDigi denies that claim and instead says it "migrates" the same file between users.
The company's planned roll-out to Europe now looks to be in serious doubt after some scathing comments. The Manhattan judge labelled its business model "fundamentally flawed" and said the "first sale" principle, which lets people sell on copyrighted works, does not yet apply to the digital world.
However, that does not mean that buying or selling used music or film files will never happen. It just suggests that the copyright holder must agree first and likely be involved in any future second-hand marketplace.
Such a system already appears to be in the works.
Earlier this year, Amazon was awarded a patent for an online mechanism to allow customers to sell or transfer digital goods and Apple has also applied for a patent covering a similar system.
In the ReDigi case, potential damages or closure are still in the balance, with both sides having until April 12 to submit a joint letter on what should happen next.