One-year-old start-up ReDigi is battling music giant EMI over whether digital music can be retraded after it has been legally purchased.
ReDigi says that its software is designed to comply with existing United States copyright laws.
But EMI argues a legal principle which allows consumers to resell purchased material goods does not apply.
A judge at the district court in Manhattan, New York, will hear opening arguments in the case on Friday after EMI sued ReDigi for copyright infringement earlier this year.
Launched in October 2011, ReDigi bills itself as the first legal online marketplace for second-hand digital material.
The company says thousands of people downloaded its software in the weeks after launch, but it says growth slowed after Capitol Records, a subset of EMI, sued in January.
EMI argues that digital music is not the same as CDs or books, meaning that the “first sale doctrine” does not apply.
It says that the only way to move music around involves making duplicates, and there is is no way to guarantee all the original owner’s copies of the files have been deleted.
The lawsuit will be closely watched by the wider media industry as it could set a precedent.
Search giant Google has written a letter to the judge arguing that the company had a “specific and vital interest” in the outcome.
“I think it could absolutely transform the industry,” Benjamin Shiller, a professor in economics at Brandeis University, told the BBC.
Switch to digital
US digital music sales are set to surpass CD and vinyl sales for the first time ever this year, according to research firm Strategy Analytics.
It estimates that digital sales will rise to $3.4bn (£2.1bn), compared to $3.38bn for physical sales.
“Most lawful users of music and books have hundreds of dollars of lawfully obtained things on their computers and right now the value of that is zero dollars,” said ReDigi’s chief executive John Ossenmacher.
“ReDigi takes zero dollars and we create billions of dollars in wealth overnight.”
ReDigi asks users to download proprietary software, which verifies if a file was bought legally. If the song checks out, it is then erased from the seller’s hard drive and uploaded to ReDigi’s computer servers.
ReDigi’s software is designed to prevent sellers from reinstalling a sold song to their computer, and offers users the chance to check their libraries for illegal music.
Mr Ossenmacher said that with all of the checks in place: “We were surprised by the lawsuit.”
EMI’s lawyer Richard Mandel, declined to comment on the pending case.
In court documents the firm acknowledges that it had held discussions with ReDigi, but adds that it “certainly did not provide any approval of [its] concept”.
EMI’s suit demands ReDigi pay a penalty of $150,000 for each song in EMI’s catalogue that was sold via the service since its launch.
It may seem like a large sum, but legal experts note that the financial impact of ReDigi’s business model could be larger if it is judged to be legal.
“What this case points out is that the copyright statutes were written in an era when works of authorship were only available in tangible form,” said Jonathan Handel, an entertainment attorney at TroyGould.
“The copyright statute looks at the world through a lens of atoms not bits.”
Europe has already issued a ruling on a related case.
In July, a European Union court sided in favour of UsedSoft, a German company that resold Oracle software, arguing that “an author of a software cannot oppose the resale of his ‘used’ licences”.
Regardless of the outcome of the US suit, Mr Ossenmacher insists that ReDigi will continue to exist, with or without the record labels’ permission.
He has already announced plans to expand into the ebook market.
It could be a potentially lucrative step bearing in mind that digital books cost more than digital songs, and are likely to be resold sooner after purchase.