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.
ReDigi offers its service as a modern-day equivalent of a used record store.
EMI says the analogy is inapplicable because "used record stores do not make copies to fill their shelves". Instead it alleges that the service is a clearinghouse for copyright infringement.
ReDigi says its service does not infringe copyright because it is protected by the fair use and first sale doctrines.
EMI says it owns the "exclusive rights" to manufacture, reproduce, distribute and sell digital versions of the copyrighted works of its artists. It notes that authorised services including Apple's iTunes and Amazon's MP3 store had to sign agreements with it.
iTunes's rules state that users must comply with "the applicable usage rules established by Apple and its licensors, and that any other use of the iTunes Products may constitute a copyright infringement".
ReDigi says that EMI's distribution rights are limited to material objects, and if digital files are judged to be material objects it can invoke the first sale doctrine which permits resales.
EMI says ReDigi also offer 30 second clips of songs which are stored in users' "memory banks" which it claims is another unauthorised copying act.
ReDigi says the songs are only loaded into a computer's RAM memory so that they "disappear" after the track has stopped playing.
EMI says that given the widespread piracy of sound recordings it is "questionable" where ReDigi can effectively determine if the files were obtained legally in the first place.
ReDigi says that the only eligible files are ones originally downloaded from iTunes and that it excludes tracks ripped from CDs or taken from other stores, allowing it to use software to validate ownership.
EMI notes that ReDigi has acknowledged that there is no way to ensure that users do not retain copies of the files they upload.
ReDigi says its software is designed to run "continuously" in the background to detect songs on any device attached to the user's computers at a later date. It says if they refuse to delete the files their ReDigi account is suspended.
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.
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.
