Copyhype

On October 29th the Supreme Court will hear oral arguments in Kirtsaeng v John Wiley and Sons, Inc. The case concerns the US Copyright Act’s importation provisions in 17 USC § 602 and the first sale doctrine. Since it’s a copyright case, that means it’s never too early to start overreacting. Jennifer Waters of MarketWatch leads the pack with her article, Your right to resell your own stuff is in peril, appearing last week. Waters writes, “Tucked into the U.S. Supreme Court’s busy agenda this fall is a little-known case that could upend your ability to resell everything from your grandmother’s antique furniture to your iPhone 4.”

Could it? Let’s take a look at Kirtsaeng in more detail.

First Sale and § 602

Among the rights given to copyright owners is the exclusive right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” ¹17 USC § 106(3). This right is limited by the “first sale doctrine”, first recognized by the Supreme Court in 1908 ²Bobbs-Merrill Co v Straus, 210 US 339. and then codified in the Copyright Act of 1909. Since the Copyright Act of 1976, the first sale doctrine has resided in 17 USC § 109(a), which reads:

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.

Put another way, a copyright owner’s exclusive right to distribute a particular copy of a work (but not her right to reproduce, display, perform, etc. it) ends at the first sale.

The Copyright Act of 1976 also included provisions that made unauthorized importation of copyrighted works an infringement of the distribution right, codified at 17 USC § 602(a)(1):

Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501.

While the provision that follows this prohibits the importation of copies “the making of which either constituted an infringement of copyright, or which would have constituted an infringement of copyright if this title had been applicable,” ³17 USC § 602(a)(2). § 602(a)(1) applies to both “piratical” and “nonpiratical” copies; so long as they have been “acquired outside the United States”, only the copyright owner of the work can import or authorize their importation.

The motive behind § 602 was to give copyright owners more protection against the “grey market.” Like most other businesses and industries, copyright owners engage in market segmentation to decrease risk and maximize revenues. Many copyright holders practice geographic market segmentation, contracting with distributors in local markets who provide works adapted to the particular needs of that market. Prior to the 1976 Copyright Act, US copyright law only prohibited the importation of piratical goods, with the understanding that copyright owners could still segment markets through exclusive contracts with their foreign distributors. But this was seen as inadequate, as it didn’t prevent third parties from acquiring works in other countries and importing them into the US, since there would be no privity between these third parties and the original copyright owner. So, Congress expanded the importation provisions to also include nonpiratical works.

The first sale doctrine and § 602 are fine in isolation, but put together and things get tricky. If a copy is sold in a foreign country and then imported to the US without the copyright owner’s permission, does the first sale doctrine apply, effectively rendering § 602 superfluous?

Grey Market Case Law

Since the enactment of the 1976 Copyright Act, courts have wrestled with this interplay between § 602 and the first sale doctrine. The results have actually been very consistent.

The first line of cases, of which Kirtsaeng would fall under, involves copies manufactured outside the US under the authority of the copyright owner, but imported into the US without authorization.

One of the first cases to raise this issue and reach the appellate level came just a few years after the Copyright Act of 1976 went into effect. In Columbia Broadcasting v Scorpio Music Distributors, Scorpio had bought approximately 6,000 copies of recordings copyrighted by Columbia from an importer who had acquired them from a company in the Philippines acting as the exclusive manufacturer and distributor of the recordings in that country. ⁴569 F.Supp. 47 (ED Pa, 1983). Scorpio argued that it was protected by the first sale doctrine because, even though the recordings were manufactured outside the US, they had already been sold, thus exhausting the copyright owner’s exclusive right to distribution, including the § 602 bar on importation.

The District Court disagreed with Scorpio, holding that the first sale doctrine only “grants first sale protection to the third party buyer of copies which have been legally manufactured and sold within the United States and not to purchasers of imports such as are involved here.” The Third Circuit affirmed the court’s decision on appeal, without opinion. ⁵738 F.2d 421 (1984).

The Ninth Circuit has consistently held the same through a series of cases. First, in 1991, in BMG Music v Perez, the court held that “the words ‘lawfully made under this title’ in § 109(a) grant first sale protection only to copies legally made and sold in the United States.” ⁶952 F.2d 318 (9th Cir. 1991). The court also rejected a First Amendment defense raised by Perez. Three years later, the Circuit declined to overturn or distinguish BMG Music in Parfums Givenchy v Drug Emporium. ⁷38 F.3d 477 (9th Cir. 1994). Then again in Denbicare USA v Toys ‘R’ Us, the court reiterated that the first sale doctrine “applies to copies made abroad only if the copies have been sold in the United States by the copyright owner or with its authority.” ⁸84 F.3d 1143 (9th Cir. 1996).

A number of district courts have also held that the first sale doctrine is not a defense for unauthorized importation when copies are made lawfully outside the US. ⁹Pearson Education v Liu, 656 F.Supp. 2d 407 (SDNY 2009); Microsoft v Big Boy Distribution, 589 F.Supp.2d 1308 (SD Fla. 2008); Swatch SA v New City, 454 F.Supp.2d 1245 (SD Fla 2006); TB Harms v Jem Records, 655 F.Supp. 1575 (D.NJ 1987); Hearst Corp. v Stark, 639 F.Supp. 970 (ND. Cali 1986) (the court also rejected defendant’s argument that § 602 violated the First Amendment).

In 1998, the Supreme Court resolved a different line of cases dealing with the interplay between § 602(a) and the first sale doctrine in Quality King Distributors v L’anza Research. ¹⁰523 US 135 (1998). There, the question was whether § 602(a) barred the importation of goods that had originally been manufactured in the US — making a “round trip” journey. The Court held, in a unanimous decision, that it did not, overturning the Ninth Circuit’s earlier decision, but consistent with other courts that had faced the issue. ¹¹See, for example, Sebastian Intern. v Consumer Contacts (PTY), 847 F.2d 1093 (3rd. Cir. 1988; Summit Technology v High-Line Medical Instruments, 922 F.Supp. 299, 312 (CD Cali 1996).

However, in dicta, the Court said, “§ 602(a) applies to a category of copies that are neither piratical nor ‘lawfully made under this title.’ That category encompasses copies that were ‘lawfully made’ not under the United States Copyright Act, but instead, under the law of some other country.” In addition, Justice Ginsburg concurred, adding, “we do not today resolve cases in which the allegedly infringing imports were manufactured abroad.”

The Ninth Circuit revisited the situation where copyrighted works are first manufactured abroad in 2008, in Omega v Costco. ¹²541 F.3d 982 (9th Cir. 2008). Costco, which had sold Omega watches originally obtained from overseas distributors, argued that the Quality King decision overturned the 9th Circuit’s precedent regarding the first sale doctrine’s application to § 602(a) when the goods are not manufactured in the US. The court disagreed.

The case was appealed, and the Supreme Court granted cert. But rather than weigh in, the Court, with Justice Kagan recused, came to a tie, affirming the Ninth Circuit’s decision by default without issuing an opinion. ¹³131 S.Ct. 565 (2010). Many had expressed concerns that Omega was benefiting from the Copyright Act’s importation provisions by affixing a tiny copyrighted logo on the back of ordinarily uncopyrightable watches. It should be noted that Omega eventually lost on this point; after the case returned from the Supreme Court to the District Court, the court granted Costco’s motion for summary judgment, saying, “Omega misused its copyright of the Omega Globe Design by leveraging its limited monopoly in being able to control the importation of that design to control the importation of its Seamaster watches.”

In short, considering the above and the Second Circuit’s decision in Kirtsaeng, every court that has interpreted § 602(a) since it was enacted over 30 years ago has come to the same conclusion: the first sale doctrine does not extinguish the exclusive right to import copyrighted works that have been manufactured in foreign countries. ¹⁴I’ve been unable to find a case holding otherwise. See also Summit Technology v High-Line Medical Instruments, 922 F.Supp. 299, 312 (CD Cali 1996): “Reviewing the case law, the courts appear to be in agreement in one respect: ‘sales abroad of foreign manufactured United States copyrighted materials do not terminate the United States copyright holder’s exclusive distribution rights in the United States under §§ 106 and 602(a).'”

Kirtsaeng

Let’s turn now to Kirtsaeng. Supap Kirtsaeng, originally from Thailand, attended college and graduate school in the US beginning in 1997. To help defray the costs of his education, he engaged his family back home to purchase Thai versions of English language textbooks, which were cheaper than US versions, and ship them to him, where he resold them on eBay. ¹⁵According to the Second Circuit, Kirtsaeng had “consulted ‘Google Answers’ … to ensure that he could legally resell the foreign editions in the United States.” Kirtsaeng later would testify that this venture netted him approximately $900,000 in revenue.

Among the books Kirtsaeng resold were several published by John Wiley & Sons. Wiley sued Kirtsaeng in 2008, claiming, among other things, infringement of its distribution right. The case went to trial, and a jury found Kirtsaeng liable for willful copyright infringement, awarding statutory damages of $600,000 to Wiley. Kirtsaeng appealed.

On appeal, the Second Circuit was tasked with the question of “whether the first sale doctrine, 17 U.S.C. § 109(a), applies to copies of copyrighted works produced outside of the United States but imported and resold in the United States.” Noting the tension between the first sale doctrine and § 602(a)(1), the court relied on the text of §109(a), the structure of the Copyright Act, and the Supreme Court’s opinion in Quality King.

The court found no help from the statute’s text, calling it “utterly ambiguous.” The Copyright Act’s structure and Quality King, however, convinced the court to hold that “the phrase ‘lawfully made under this Title’ in § 109(a) refers specifically and exclusively to copies that are made in territories in which the Copyright Act is law, and not to foreign-manufactured works.” It rejected Kirtsaeng’s alternative interpretations of the phrase, noting that § 602(a)(1) would be virtually meaningless “in the vast majority of cases if the first sale doctrine was interpreted to apply to every copy manufactured abroad that was either made ‘subject to protection under Title 17,’ or ‘consistent with the requirements of Title 17 had Title 17 been applicable.'” Since the books imported by Kirtsaeng had been manufactured outside the US, the Second Circuit upheld the district court’s decision that the first sale doctrine did not provide Kirtsaeng with a defense to his unauthorized importation.

Judge Garvan Murtha dissented from the Second Circuit’s decision, disagreeing with the court’s analysis. After engaging in his own analysis of the Copyright Act, as well as looking at the policy behind the first sale doctrine, he found that “Nothing in § 109(a) or the history, purposes, and policies of the first sale doctrine limits it to copies of a work manufactured in the United States,” concluding that the doctrine does apply to foreign manufactured copies.”

Now that the case is at the Supreme Court, one of the major issues is how to interpret the phrase “lawfully made under this title” in the first sale doctrine. Kirtsaeng argues that it means a copy had been made in accordance with the Copyright Act, meaning a sale in a foreign country counts as a “first sale”, exhausting the copyright owners authority to prohibit importation. Wiley argues that it instead means a copy has been made in the United States, since the Copyright Act does not apply extraterritorially.

I’ll refrain from predicting the outcome of the case so early on, but let’s take a look at some of the factors that favor each party.

Factors favoring John Wiley & Sons

Case law. As noted above, every court that has considered this question, including two other Circuit Courts, has reached the same result as Wiley seeks. In addition, the Supreme Court has indicated in dicta that it would agree with the result the Second Circuit reached.

Legislative history. The House Report on the Copyright Act of 1976, HR 94-1476, seems clear in its support of the interpretation embraced by the Second Circuit:

Section 602, which has nothing to do with the manufacturing requirements of section 601, deals with two separate situations: importation of “piratical” articles (that is, copies or phonorecords made without any authorization of the copyright owner), and unauthorized importation of copies or phonorecords that were lawfully made. The general approach of section 602 is to make unauthorized importation an act of infringement in both cases, but to permit the United States Customs Service to prohibit importation only of “piratical” articles.

The Copyright Office also agreed that this was the purpose of § 602 during its drafting, as the US points out in its brief:

The Copyright Office ultimately endorsed legislation that would expand the importation restrictions to encompass “foreign copies that were made under proper authority.” The Register explained that the provision would bar importation if, “for example, … the copyright owner had authorized the making of copies in a foreign country for distribution only in that country.”

Treatises. Legal treatises are given much weight by courts, and all the major copyright treatises today interpret the Copyright Act the same way as Wiley. Nimmer writes that the Act should be “interpreted to bar the importation of gray market goods that have been manufactured abroad.” ¹⁶2 Nimmer on Copyright § 8.12[B][6][c] at 8-134.34 to 8-134.35. Patry states that the Act prohibits the importation of copies that “were not ‘lawfully made under this title,’ i.e., were not made in the United States.” ¹⁷4 William F. Patry, Patry on Copyright § 13:44, at 13-98 (2012). Goldstein says, “the first sale defense is unavailable to importers who acquire ownership of gray market goods made abroad.” ¹⁸2 Paul Goldstein, Goldstein on Copyright § 7.6.1, at 7:144 (3d ed. Supp. 2012).

Factors favoring Kirtsaeng

Costco‘s 4-4 split. Though the Supreme Court did not issue an opinion in Costco, there was something that four of the Justices disagreed with in the Ninth Circuit’s opinion. That’s good news for Kirtsaeng, but whether that area of disagreement ultimately favors him remains to be seen. Oral arguments may shed some light on this.

Growing judicial discomfort? A review of the case law suggests, at least in some courts, increased skepticism with the accepted interpretation of § 602 and concern over its effect on the first sale doctrine (though the latter point has yet to be tested in court, as explained below). The most recent example is Judge Murtha’s dissent in this very case at the Second Circuit. In Pearson Education v Liu, the Southern District Court of New York flat out rejected the accepted interpretation, saying, “the Court provisionally is of the view that nothing in § 109(a) or the history, purposes, and policies of the first-sale doctrine, limits the doctrine to copies of a work manufactured in the United States.” But it deferred to the Supreme Court’s dicta in Quality Kings, saying, “While this Court would not limit the doctrine to copies manufactured in the United States, the case for this interpretation of § 109(a) is not so overwhelming as to justify disregarding the Supreme Court’s views.”

When does the first sale doctrine kick in?

What has attracted the most attention to this case, it seems, is the question of what happens, under the currently accepted interpretation of § 602, to “downstream” owners of copies manufactured abroad but imported without authorization. If the first sale doctrine only applies to works manufactured in the US, does that mean that copyright owners retain exclusive distribution rights over any goods manufactured abroad? Kirtsaeng, in fact, presents this question as the issue in front of the Supreme Court.

Warns Kirtsaeng:

“For goods made anywhere else, the panel majority granted copyright owners eternal control over all further sales, rentals, or gifts, all the way down the stream of commerce. This rule means that Random House could block resales of books and close down public libraries and flea markets and Paramount Pictures and Sony Records could prohibit resales of DVDs and CDs and shut down rental businesses like Netflix—so long as these manufacturers concentrate production abroad.

The ramifications extend far beyond publishers and other content providers. This rule applies with equal force to any product with a copyrightable component—a household product with a label, apparel with a fabric design, a watch with an insignia, a camera or microwave with software on the inside or packaging on the outside, a car with an on-board computer, and so on. Any producer who sends jobs overseas will be rewarded with the manufacturer’s Holy Grail—the power to lock up, extract exorbitant rents from, or discriminate in any secondary market, from multibillion dollar retailers of new products (like Costco and Target) to large dealers in used goods (like used car dealers, Goodwill, and the Salvation Army) to flea markets and garage sales and their modern-day online analogs (such as eBay).

Kirtsaeng paints a powerful picture, but it ignores the fact that the Second Circuit’s decision is not novel, but consistent with every other court decision in the past 30 years, and none of the hypothetical horribles presented has occurred since the enactment of § 602 in 1978. Essentially the argument is: affirming three decades of practice and precedent will result in sudden and dramatic changes.

Nevertheless, courts have yet to resolve the issue of downstream distribution. Both Wiley and the United States, appearing as amicus, address the issue in their defense of the accepted interpretation of § 602.

In its brief, Wiley first points out that:

Kirtsaeng’s strategy appears designed to deflect attention away from his own conduct—the unauthorized importation of copies made abroad for distribution only in foreign countries—and instead onto a hypothetical scenario where the copyright owner makes the copy abroad but authorizes its sale in the United States. The experience of the last 30 years would seem to foreclose Kirtsaeng’s argument: Even though it has long been settled that Section 109(a) generally does not apply to foreign copies, Kirtsaeng has not identified a single manufacturer that has ever attempted to move its facilities abroad to avoid the first-sale doctrine.

Turning to the question of how the first sale doctrine applies to goods manufactured abroad, Wiley stops short of arguing that the Supreme Court needs to resolve that issue here. But it does admit that it could be a factor and seems open to the idea that once a copyrighted work is lawfully imported, the first sale doctrine applies to subsequent sales:

To be sure, the Ninth Circuit, in response to hypotheticals similar to those raised by Kirtsaeng, concluded that even foreign-made copies can be subject to Section 109(a) if the copyright holder has authorized their sale in the United States. It is unclear why the court needed to adopt this exception to Section 109(a): If the copyright owner authorizes a U.S. sale of a foreign-made copy, principles of implied license or estoppel would preclude it from asserting control over subsequent sales. But in any event, this Court can leave open whether (as one of Kirtsaeng’s own amici argues) “lawfully made under this title” could be read to include foreign-made copies that are subject to an authorized sale in the United States. The critical word is “made.” The right to “reproduce” a “cop[y]” is one of the exclusive rights granted to copyright owners under Section 106 of the Copyright Act. If Congress had intended “made” in Section 109(a) to mean “produced,” it could simply have said so; the words “produce” and “reproduce” appear throughout the Copyright Act. One reading of Section 109, therefore, is that to make a copy means not only to exercise the right to “produce” that copy, but also to exercise the right “to distribute copies . . . to the public.” “‘Lawfully made under this title’ would then mean either lawfully manufactured (caused to exist) or placed in commerce (caused to occur or appear) in the United States.” On that reading, a copy is “made under [Title 17]” when either the U.S. “produc[tion]” right is exercised—by making the copy in the United States—or the U.S. “distribut[ion]” right is exercised—by distributing the copy in the United States.

The United States, in its brief, also rejects the idea that barring the importation of nonpiratical works without authorization would result in the negation of the first sale doctrine for any copies made outside the US. Like Wiley, the US first notes that Kirtsaeng “identifies no instance in which a copyright owner has actually sought to exercise such control.” It then argues:

when a copyright holder has authorized goods to be imported into the United States and/or sold within this country, applying a “first sale” or “exhaustion” principle as an implicit limitation on the copyright holder’s exclusive right to “distribute” would be consistent with the current text of the Copyright Act and faithful to the doctrine’s historical underpinnings. By contrast, Congress enacted Section 602(a)(1) to ensure that an authorized sale outside the United States does not exhaust the copyright holder’s right to control subsequent importation.

This question will likely play a big role during oral arguments, but it remains to be seen whether the Supreme Court ultimately rules on it. It’s certainly a tough question, and the Court can’t rewrite the law to make it easier. I agree that a ruling from the Court that the first sale doctrine should apply once a copy has been lawfully imported would be beneficial, if only to confirm what has been the practice for the past three decades, but actually stating that in a way that gives effect to all the relevant provisions of the Copyright Act is something that would require a bit more thinking.