First Sale Copyright Exhaustion Applying to Goods Manufactured Abroad and Imported into the United States
Last month I attended a Licensing Executives Society Silicon Valley chapter meeting about the potential impacts of a copyright case for which the Supreme Court had recently heard oral arguments. Kenyon and Kenyon attorneys Frank Bernstein and Mimi Rupp went through the history of what the event description called one of the most important copyright cases in a decade. Now that the Supreme Court has ruled in favor of Kirtsaeng, I would like to share the history of the case, the reasoning behind the majority and dissent opinions, and the potential impacts on the future market.
The case reached the Supreme Court because of a conflict between the first sale provision of copyright law and a section of copyright dealing with importation. Supap Kirtsaeng traveled from Thailand to the United States to study at Cornell and later USC. He discovered that he could get his family to purchase English language textbooks in Thailand and send them to him so that he could resell them on eBay as user Bluechristine99 (whom I could not find while searching on eBay). The Asian region textbooks were cheaper than the United States textbooks with the same content, so Kirtsaeng compensated his family for the importation fees and spent the rest towards his education. Publishing firm John Wiley & Sons, Inc. caught wind of the scheme and in 2008 sued Kirtsaeng in the Southern District of New York. Because the Asia textbooks contained a notice that the books were for use in the Asian market and that unauthorized use outside the listed regions were forbidden, Kirtsaeng was found guilty of willful copyright infringement. The district court rejected Kirtsaeng’s request to instruct the jury about first sale exhaustion because they did not think the purchase of the textbook in Asia prevented Wiley from exercising their rights as a copyright holder in the United States market. Since the copyright holder of the Asia textbooks was Wiley Asia, a subsidiary of Wiley, § 602(a)(1) dealing with importation of works acquired outside the United States without the copyright holder’s authorization prevents § 109(a), the codification of the first sale doctrine, from shielding a defendant from copyright infringement. The 2nd Circuit Appeals court affirmed the order, but the Supreme Court in a 6-3 decision reversed it.
The decision is a significant change in precedent when dealing with imported goods. Most recently in Costco Wholesale Corp. v. Omega, S.A. (131 S. Ct 565), the Supreme Court ended up affirming the 9th Circuit decision that Costco could not purchase Omega-brand watches from the third party outside the United States and resell the watches domestically without Omega’s permission. The Supreme Court had a 4-4 split decision because Justice Kagan needed to recuse herself as she was solicitor general and therefore submitted the United States government position to the appeals court. The Omega decision distinguished itself from Quality King Distributors, Inc. v. L’anza Research International, Inc. (523 U.S. 135). In Quality King, the Supreme Court held that the plaintiff could not prevent unauthorized importation of goods manufactured in the United States but originally sold abroad. In the dicta (not binding precedent but still persuasive) the Supreme Court mentioned that importation provision applies to copies not subject to the first sale defense because the copies are made under the laws of another country. Therefore, the decision needed to reach the Supreme Court before we could get a ruling reversing the importance of the first sale and importation provisions of United States copyright law.
The majority opinion first cites grammatical concerns as to why the first sale provision should apply to imported products after they are resold. The first sale section applies to any copy “lawfully made under this title.” The word “under” is subject to different meanings according to context, so the lower courts looked to the dicta to find that “under this title” meant according to the United States copyright laws, not the laws of a foreign country. Just because a copy was made according to a foreign law does not mean it is in line with US law. This interpretation was broader than what Wiley and the US government preferred, that “under this title” meant the copy must be produced domestically. The Supreme Court majority opinion rejected this definition of “under” because they could not find a definition of “under” that implied a geographical restriction unlike Kirtsaeng’s suggestion of the word meaning in general accordance with the title. Furthermore, even if a copy was produced abroad, that doesn’t mean the United States copyright law is inapplicable to it. Confusing as both rationales sound, the Supreme Court majority adopted Kirtsaeng’s interpretation on a linguistic basis due to “considerations of simplicity and coherence.” Kirtsaeng Slip Op at 12.
The Supreme Court pointed to Congressional intent as another reason to favor the first sale defense for imported copies. Wiley argued that even if the reasoning for not applying first sale to imported copies does not make sense, Congress could just rewrite the law if they wanted to fix it. The appeals court pointed out that the importation clause would be meaningless to the majority of cases if first sale applied to foreign-produced goods as well as domestically produced ones. On the other hand, the first sale defense predates its inclusion into statute, and the Supreme Court notes that statutes codifying common law doctrine should retain the principles in the common law. Slip Op at 17. First sale allows consumers to more freely engage in commerce after the initial sale because the original copyright holder cannot restrict redistribution favorable to a functioning economy. While the dissent points to other ways the statute could be read to favor another interpretation, the majority still believes that the alternative readings do not preclude their own. The opinion may be borne out of skepticism that Congress would have done anything to change the copyright law to be make the first sale defense easier, but skepticism is healthy when considering the impacts of the decision.
Finally, the Supreme Court majority opinion cited the adverse policy effects of ruling in favor of Wiley on the first sale defense. Kirtsaeng and others argued that if the Supreme Court allowed copyright holders to sue resellers for materials imported without the copyright owner’s authorization, resellers like eBay would carry a much higher burden in relation to accepting secondhand goods. The market could see a chilling effect as just about every product on the market has a component made outside of the United States and potentially not covered under United States copyright laws. Wiley and the dissent reject this reasoning because there is no evidence of unreasonably litigious behavior even as copyright holders try to expand their powers through more Congressional legislation and international trade agreements. Furthermore, Wiley does not see the advantage of businesses taking extreme measures to stop secondhand sales, including taking people to court like Wiley did with Kirtsaeng. The statute even allows for limited exceptions so that libraries can hold up to five copies of a book to lend out without violating the book’s copyright. The majority suggests that companies were waiting for this specific case to resolve in favor of copyright holders before taking action. Additionally, even if companies would not necessarily wield the powers granted under the new precedent, the Supreme Court wants to avoid the selective enforcement that would inevitably result from the copyright holder’s discretion. Wiley also argued that a stronger international secondhand market prevented publishers from selling books at lower prices to regions with lower income availability. The majority did not find the argument persuasive because the copyright holder has no right to charge different prices for a product sold in different regions. Therefore, the Supreme Court justices’ beliefs guide the policy questions in this case.
The Kirtsaeng v. Wiley decision the Supreme Court handed down last week is a landmark case in copyright law. It changes precedent so that any lawfully obtained copy, regardless of its origin, may be resold in the United States. Wiley had a winning argument until the Supreme Court could change its opinion on the strength of the first sale defense. While Wiley and other copyright holders may lobby to change copyright law to supersede the new precedent, consumers should breathe easy knowing that the secondhand market, including local Silicon Valley auction site eBay, is not expected to contract following new copyright rules.
Notwithstanding the provisions of section 106(3) [of the Copyright Act], the owner of a particular copy…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
17 U.S.C. § 109(a)
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.
17 U.S.C § 602(a)(1)
Example of Foreign Edition Notice:
Authorized for sale in Europe, Asia, Africa and the Middle East Only.
This book is authorized for sale in Europe, Asia, Africa and the Middle East only [and] may not be exported. Exportation from or importation of this book to another region without the Publisher’s authorization is illegal and is a violation of the Publisher’s rights. The Publisher may take legal action to enforce its rights. The Publisher may recover damages and costs, including but not limited to lost profits and attorney’s fees, in the event legal action is required.