Supreme Court: Copyright "First Sale" Doctrine Applies to Copies Lawfully Made Abroad

Practical Law Legal Update 5-525-2882 (Approx. 6 pages)

Supreme Court: Copyright "First Sale" Doctrine Applies to Copies Lawfully Made Abroad

by PLC Intellectual Property & Technology

Key Litigated Issue

In Kirtsaeng, the Supreme Court revisited the issue that came before it in 2010, when it issued a 4-4 split decision in Costco Wholesale Corp. v. Omega, SA, with Justice Kagan recusing herself. Specifically, whether the sale in the US of a copy of a copyrighted work published and purchased lawfully outside the US is either:

Protected under Section 109(a), known as the first sale doctrine, which gives the owner of a particular copy of a copyrighted work lawfully made under the Copyright Act the right to sell or otherwise dispose of the copy without the copyright owner's permission.
A violation of Section 602(a)(1) of the Copyright Act, which permits a copyright owner to prohibit the importation of copies of its work without its authorization, and therefore infringes the copyright owner's exclusive right of distribution under Section 106(3) of the Copyright Act.

In its 1998 decision in Quality King Distributors, Inc. v. L'anza Research International, Inc., the Supreme Court held that the scope of Section 602(a)(1) is limited by the first sale doctrine and the doctrine applies to so-called "round-trip copies" (exported copies of works made in the US that are re-imported back to the US for sale without the copyright owner's authorization).

Background

Wiley publishes books for sale in the US and international markets. It prints books for sale in certain foreign countries using a wholly-owned subsidiary, John Wiley & Sons (Asia) Pte Ltd. While the written content of its domestic and foreign editions is similar, the books intended for foreign markets may have different designs, supplemental content (such as CD-ROMS) or type and quality of materials (such as thinner paper). The foreign editions include a legend stating that they are to be sold only in particular countries or geographic regions.

Kirtsaeng is a Thailand native who came to the US to attend college. To finance his graduate school education, he had family and friends in Thailand purchase textbooks and ship them to him in the US. He then profited by reselling the textbooks online to buyers in the US. Among the books sold by Kirtsaeng were eight textbooks printed in Asia by John Wiley & Sons (Asia) Pte Ltd.

Wiley sued Kirtsaeng in the District Court for the Southern District of New York for, among other claims, copyright infringement. It asserted that Kirtsaeng's importation and sale in the US of textbooks printed and intended for sale outside the US:

Violated Section 602(a)'s prohibition on the importation of goods without the authorization of the copyright owner.
Therefore infringed Wiley's exclusive right to distribute the books under its US copyrights in the works.

Kirtsaeng sought to rely on the first sale doctrine as a defense to copyright infringement, claiming that the doctrine applied to his importation and resale in the US of books that were lawfully made and acquired abroad. However, in a pre-trial order, the SDNY ruled as a matter of law that Kirtsaeng was prohibited from raising the first sale doctrine as a defense. The SDNY recognized this issue presents a "relatively close jurisprudential question" and expressed reservations about "a bright-line rule in the application of Section 109(a)" to foreign-made goods.

Following trial, the jury found that Kirtsaeng had infringed Wiley's copyrights in eight works. It awarded Wiley $75,000 in damages for each work, for a total of $600,000.

On appeal, a divided Court of Appeals for the Second Circuit affirmed, finding that:

The language "lawfully made under this title" refers solely to copies manufactured where the Copyright Act is law.
Therefore, the first sale doctrine does not apply to copies of copyrighted works manufactured outside the US.

Although supported by the US as amici curiae, the Second Circuit's decision contrasted with:

The Court of Appeals for the Ninth Circuit's modified geographic view in Costco that the first sale doctrine applies to a foreign-made copy once that copy has been sold at least once in the US.
The Court of Appeals for the Third Circuit's uneasiness with limiting the first sale doctrine to copies made in the US, as expressed in dicta in Sebastian International v. Consumer Contacts.

The Supreme Court granted certiorari to resolve this conflict among the Circuits.

Outcome

In its March 19, 2013, 6-3 decision, the US Supreme Court reversed the decision of the Second Circuit and remanded the case for further proceedings.

Majority Opinion

Justice Breyer's majority opinion embraces a non-geographical interpretation of the first sale doctrine based on:

The plain language of Section 109(a).
That language's statutory context within the Copyright Act of 1976 and its predecessor acts.
The common-law and legislative history of the first sale doctrine.

From a policy standpoint, the opinion also emphasizes that a contrary interpretation would threaten both constitutional copyright objectives of furthering scholarly and artistic pursuits and commonplace commercial and consumer resale activities.

Language of Section 109(a)

The majority opinion notes that a plain reading of the phrase "lawfully made under this title" means "in accordance with" or "in compliance with" the Copyright Act. The statutory language itself makes no mention of geography and makes linguistic sense without imposing a geographic limitation.

By contrast, the majority reasoned, Wiley's proposed geographical interpretations of the first sale doctrine introduce more problems than they resolve. The Court pointed to various ways in which introducing a geographical requirement necessitates a strained reading of the statutory language, such as construing the term "under" to mean "where the Copyright Act is applicable" and requiring that the statute be only "applicable" in the US.

The opinion also rejects the Ninth Circuit's "half-geographical/half-non-geographical" reading of Section 109(a) in Costco as being irreconcilable with the statute's language.

Statutory Context of Section 109(a)

The opinion next discusses Section 109(a)'s legislative history. Comparing Section 109(a) to its statutory predecessor, the Court found that Congress's revision of the language of this section from the "possession of [any copy] lawfully obtained" to the "owner of a particular copy . . . lawfully made under this title" did not have any geographic import. Rather, the new language was intended to narrow the class of persons entitled to invoke the resale and redistribution privileges of the first sale doctrine to actual owners of a lawfully made copy of a copyrighted work, as distinguished from parties who merely enjoy a right of lawful possession (such as movie theater owners during the 1970s who often leased films from movie distributors or filmmakers).

The Court also highlighted the "equal treatment" principle underlying Congress's removal of the manufacturing clause in the Copyright Act. The removal of this clause, which limited importation of many copies outside the US before July 1, 1982, accorded equal treatment to domestically manufactured copies and those made abroad, and would be difficult to square with a geographic limitation in Section 109(a).

Last, the court observed that the ordinary presumption that words used once in a statute generally carry the same meaning when they appear in separate but related sections is untenable when applied to the term "lawfully made under this title." In the court's view, the phrase "under this title" cannot properly be accorded a geographically restrictive meaning when used, for example, in Section 106 of the Act, which lays out the exclusive rights of an "owner of a copyright under this title."

The Common-law History of First Sale Doctrine

The court next noted that the first sale doctrine originated as a common law doctrine later codified by statute and that, as a matter of interpretation, Congress is presumed to have retained the common law's substance. Reviewing the common-law history, Justice Breyer found the common law, including the court's first application of the first sale doctrine in Bobbs-Merrill Co. v Straus, never included a geographic limitation.

Constitutional Copyright Objectives

The opinion also highlighted the significant impact that a geographic interpretation would have on parties whose practices are reliant on the first sale doctrine. The opinion emphasized the views of various amici that Wiley's interpretation would fail to further copyright's constitutional objectives of promoting "the Progress of Science and useful Arts." Specifically:

Libraries noted that they would likely have to obtain permission before lending the millions of foreign made works in their collections.
Used bookstores noted that they routinely purchased books made abroad and are unable to determine whether the copy was made domestically or abroad.
Technology companies noted that cars, microwaves, calculators, mobile phones, tablets, and personal computers contain copyrightable software that would prevent their resale without the permission the copyright owners.
Retailers noted that over $2.3 trillion worth of foreign produced goods were imported in the United States in 2011, many of which may contain copyrighted packaging and over $220 billion of which were books, recorded music and other traditional copyrighted works.
Museums noted that Wiley's interpretation would impede their ability to display foreign-made works.

While Wiley and its amici argued that there was no evidence of these consequences, the majority opined that they should be taken lightly. In particular:

The law on this issue has been unsettled and the recent Second Circuit decision in this case was the first to adopt a pure geographic interpretation.
Parties that rely on the first sale doctrine have established practices that would only be altered were the Court to adopt a geographical restriction of the first sale doctrine.
While copyright holders may have been reluctant thus far to assert geographically-based resale rights, they may begin to do so if the Court interprets the law in their favor.

Concurring Opinion

Justice Kagan wrote a concurring opinion, joined by Justice Alito, focusing on Quality King's holding that Section 602(a)(1)'s ban on unauthorized importation is subject to the first sale doctrine.

The concurrence notes that this Quality King holding, together with the majority's non-geographic interpretation of Section 109(a), constricts the scope of the Section 602(a)(1). However, in the concurrence's view, it would be inappropriate for the Court to force an interpretation of Section 109(a) that is necessary to restore the scope of 602(a)(1). Such an approach, instead of targeting unauthorized importers (the purpose of Section 602(a)(1)), would lead to broad downstream copyright liability for persons who purchase and sell works manufactured abroad. It would also condition copyright owners' ability to divide geographic markets on their decision to manufacture abroad.

Rather, the concurrence suggests that if Congress intended Section 602(a)(1) to permit geographic market segmentation, it should reverse Quality King. This approach would:

Make clear that a copyright owner may restrict imports regardless of the first sale doctrine, while not removing first sale protection to owners of copies of works lawfully made abroad.
Take the more sensible approach of focusing on the copyright owner's "intended market" for copies, rather than their "place of manufacture."

Dissent

Justice Ginsburg authored a dissenting opinion, joined by Justice Kennedy and in part by Justice Scalia.

The dissent argues that the court's interpretation undermines Congress's intent, under Section 601(a)(1), to protect copyright owners against the unauthorized importation of low-priced, foreign-made copies of copyrighted works. In the dissent's view, the text of the Copyright Act clearly applies to works that are governed by and made in compliance with the statute and, because the Copyright Act does not apply extraterritorially, copies of works manufactured outside the US are not made or governed "under" the Act. The dissent also argues that statutory exceptions to Section 602(a)(1), which permit importation without authorization from the copyright owner, are only meaningful if Section 109(a) is given a geographic limitation.

In the view of the Justice Ginsburg, the majority opinion conflicts with efforts of the US opposing international intellectual property exhaustion in international trade negotiations. While the US has sought to resist the adoption of a international-exhaustion framework to advance the economic interests of US, she noted the majority opinion would benefit US consumers, but to the detriment of foreign holders of US copyrights.

Justice Ginsburg also rejected the many unfavorable practical consequences resulting from a geographic reading that were forecast by the majority opinion. In particular, she noted that the principles of fair use and implied license may allow many such uses and that parties may also seek permission from the copyright owner to display or sell a work. She also remarked that manufacturers are unlikely to sue their own customers for downstream uses and that parties may choose to contract to bar such suits.

Practical Implications

The Supreme Court's decision in Kirtsaeng legitimizes the resale market for copies of copyrighted works manufactured outside the US, limiting copyright owners' ability to impose liability for the downstream sale or display of such works. The decision therefore has clear consequences for copyright owners who would seek to charge different prices for or offer different quality copies of copyrighted works in different countries.

In the court's majority opinion, Justice Breyer acknowledges that the court's ruling would make it more difficult for copyright owners to segment international markets. Noting that neither the Constitution nor Congress has given copyright owners the express right or ability to divide markets, he remarked that Congress may still choose to support their efforts to do. In light of the Court's decision, companies in copyright-intensive industries may seek to have Congress address these circumstances. In doing so, they may seek a more tailored solution suggested by Justice Kagan's concurrence, supporting their ability to control unauthorized imports, but without removing first sale protection for works manufactured abroad.

Supreme Court: Copyright "First Sale" Doctrine Applies to Copies Lawfully Made Abroad | Practical Law