I don't think that it should be, but let's take a look at the actual law, since 'should be' doesn't provide much practical help.
What we're looking at is the Audio Home Recording Act, or AHRA, which is Chapter 10 of the Copyright Act, and can be found at 17 USC 1001 et seq.
17 USC 1002:
No person shall import, manufacture, or distribute any digital audio recording device or digital audio interface device that does not conform to-- (1) the Serial Copy Management System; (2) a system that has the same functional characteristics as the Serial Copy Management System and requires that copyright and generation status information be accurately sent, received, and acted upon between devices using the system's method of serial copying regulation and devices using the Serial Copy Management System; or (3) any other system certified by the Secretary of Commerce as prohibiting unauthorized serial copying.
17 USC 1004:
(a) Prohibition on Importation and Manufacture.-- No person shall import into and distribute, or manufacture and distribute, any digital audio recording device or digital audio recording medium unless such person records the notice specified by this section and subsequently deposits the statements of account and applicable royalty payments for such device or medium specified in section 1004.
So the question is, is this feature in the car a "digital audio recording device," "digital audio interface device," or "digital audio recording medium"? As always, if a term is specially defined in the statute, that meaning controls, as opposed to the ordinary meaning. Definitions are provided at section 1001. They're a bit complicated, and we'll have to work through several layers here.
Let's start with a digital audio recording device.
Per 17 USC 1001, a "digital audio recording device" is:
A "digital audio recording device" is any machine or device of a type commonly distributed to individuals for use by individuals, whether or not included with or as part of some other machine or device, the digital recording function of which is designed or marketed for the primary purpose of, and that is capable of, making a digital audio copied recording for private use, except for-- (A) professional model products, and (B) dictation machines, answering machines, and other audio recording equipment that is designed and marketed primarily for the creation of sound recordings resulting from the fixation of nonmusical sounds.
This refers to another definition:
A "digital audio copied recording" is a reproduction in a digital recording format of a digital musical recording, whether that reproduction is made directly from another digital musical recording or indirectly from a transmission.
And that refers to yet another definition:
(A) A "digital musical recording" is a material object-- (i) in which are fixed, in a digital recording format, only sounds, and material, statements, or instructions incidental to those fixed sounds, if any, and
(ii) from which the sounds and material can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.
(B) A "digital musical recording" does not include a material object-- (i) in which the fixed sounds consist entirely of spoken word recordings, or (ii) in which one or more computer programs are fixed, except that a digital musical recording may contain statements or instructions constituting the fixed sounds and incidental material, and statements or instructions to be used directly or indirectly in order to bring about the perception, reproduction, or communication of the fixed sounds and incidental material.
(C) For purposes of this paragraph-- (i) a "spoken word recording" is a sound recording in which are fixed only a series of spoken words, except that the spoken words may be accompanied by incidental musical or other sounds, and (ii) the term "incidental" means related to and relatively minor by comparison.
A âoeprofessional model productâ is an audio recording device that is designed, manufactured, marketed, and intended for use by recording professionals in the ordinary course of a lawful business, in accordance with such requirements as the Secretary of Commerce shall establish by regulation.
The machine in the cars is a digital audio recording device, as that term is defined in the statute, if:
1) It is commonly distributed to individuals, for use by individuals
I think that's true here
2) It doesn't matter whether or not it is included with, or part of some other machine or device
So the fact that it's part of a car doesn't protect it
3) The digital recording function (i.e. the CD ripping; more on this in a minute) is designed or marketed for the primary purpose of, and that is capable of, making a digital audio copied recording for private use.
Since this refers to only a specific function, and not to the whole device, or to the overall car (which was already excluded as being the other machine or device that this device is part of), I think it probably applies. The feature is designed to make copies, and the CD ripping feature is marketed for the purpose of making copies.
4) There's an exception for professional model products. But those are defined as being designed, manufactured, marketed, AND intended for use by recording professionals. I don't think that this qualifies, and therefore the exception doesn't help us.
5) There's another exception for dictation machines, answering machines, and equipment that is designed and marketed for making recordings of non-musical sounds. Again, I don't think that this qualifies, and therefore the exception doesn't help us.
6) So, it now hinges on whether the digital recording function as discussed above, is designed and marketed for making digital audio copied recordings. That's a reproduction of a digital music recording, in a digital format. Well, whatever the music is being stored as (mp3, wav, flac, etc.) I think we can expect that it's a digital format. So are the CDs digital music recordings?
They're material objects -- like CDs -- in which are fixed, in a digital recording format, only sounds and incidental material, and from which the sounds can be perceived with the aid of a device.
So yes, CDs appear to qualify.
7) We've got a couple of last-ditch exceptions; if none of these apply, we're in trouble. Are the CDs only spoken word recordings? Well, some CDs are, but I doubt that the functionality or even the marketing only involved that. Do the CDs include computer programs beyond the 'incidental material' level discussed above? Likely not; we're basically looking at music CDs.
So that's it: Because the relevant function of the device makes digital copies of CDs, and is designed or marketed with that as the primary purpose, and is commonly sold to individuals, for use by individuals, notwithstanding the fact that it's part of a larger device and a car, the devices at issue are digital audio recording devices. And it's illegal to make, import, or distribute them unless you comply with certain copy protection schemes and pay royalties.
We can even leave the questions about a digital audio interface device (probably not), and digital audio recording medium (very probably not; it's almost certain to be a generic hard drive) as exercises for the reader.
But wait, you say -- didn't the RIAA v. Diamond Multimedia case say that this was allowed?
Well, no, actually; it didn't.
If you're unfamiliar with the Diamond Rio music player that was at issue in the case, just think of the older iPods that really only played music. The Rio had no ripping function; it could only copy mp3 files from an ordinary personal computer equipped with the correct software. The business of ripping CDs happened entirely on the personal computer side of things.
This meant that the Rio had no ability to directly (a requirement in the statute; look for it in the definition of a digital audio copied recording) make copies of a digital music recording, since the Rio copied files from the computer's hard disk, and a computer's hard disk doesn't qualify as a digital music recording. (It's not the physical medium that matters so much as that there's lots of stuff on the disk, such as computer software, beyond the merely incidental level)
This is what saved it -- the lack of a ripping feature. But the doohickey in the cars does have a ripping feature.
Further, the computers used to rip did not fall under the AHRA because they're general purpose computers, and their digital recording function was not their primary purpose. Even things like Apple's old 'Rip, Mix, Burn' ad campaign didn't make it the primary purpose.
Fair use is a fine argument, but it's functionally a defense against copyright infringement. The AHRA, despite being in the Copyright Act, is treated (like the DMCA) as something different. So fair use won't help here; the plaintiffs aren't alleging (AFAIK) infringement, but failure to comply with the AHRA.
The reason that fair use came up with the Rio was because the Rio didn't fall under the AHRA, and contributory copyright infringement was an alternate attempt to go after it, which also didn't work. The same argument as for the Rio would likely work just as well here -- if the plaintiffs were making a claim to which fair use applied. Too bad that they don't seem to be doing that.
Some people might also remember 17 USC 1008, the part of the AHRA that limits certain actions. Sadly, it's of no use. That section limits infringement actions, and this is not an infringement action. It's an action under the AHRA (sections 1009, 1002, and 1003 -- infringement is sections 501 and 106).
So as I said, I think that the plaintiffs here have a solid argument. There's a reason why mp3 players that did their own ripping were few and far between. The defendants here would've been wise to notice that, and to ask their lawyers to check to see if they could offer a ripping feature along with storage and playback, on a specific-purpose device.
I'd rather see the law changed to make this thoroughly legal without the stupid copy protection, restrictions, royalties, etc., but right now, it is what it is.