As we noted late last year in
Kirtsaeng v. John Wiley & Sons: How the Supreme Court Will
Decide the Fate of eBay, Libraries, and Yard Sales, the Supreme
Court is presently considering Kirtseng v. Wiley, a case
that is expected to resolve the decades old tension between
copyright law's first sale doctrine, codified at 17 U.S.C.
§109(a), and the importation restriction found in 17 U.S.C.
§602(a). However, this won't be the first time
that the Court has been confronted this issue – the
intersection of these provisions has twice appeared before the
Court in the past fifteen years alone.
As background, the first sale doctrine provides that the owner of
a particular copy of a work "lawfully made under this
title" is entitled to sell or otherwise dispose of the
possession of that copy of the work. The first sale
doctrine is the reason why people can loan books or DVDs to friends
or sell those books and movies at a garage sale – it means
that once a person lawfully acquires a copy of a work, the
copyright owner is powerless to prevent the buyer from further
distributing that work. Meanwhile, the importation
restriction set forth in §602(a) states that the importation
of a copyrighted work acquired outside the U.S. constitutes an
infringement of the work (although there are exceptions to that
rule for the importation of a single copy for strictly personal
use, among other things).
The source of the tension is that, in many cases, a lawful sale
will have occurred prior to the importation; that is, the person
attempting to import the goods will have already lawfully purchased
them from an authorized distributor outside the U.S. Such
goods, once imported, are called gray market goods. Gray
market goods hinder a copyright owner's ability to
commercialize its work in the U.S. because the importer can often
sell the gray market goods at prices far below what the copyright
owner would otherwise charge in the U.S. after having purchased the
goods at prices scaled for foreign markets. If the first sale
doctrine trumps the importation restriction, copyright owners have
no remedy in copyright law for the importation of gray market
goods.
The Supreme Court addressed this conflict fifteen years ago in a
case called Quality King Distributors, Inc. v L'Anza
Research International, 523 U.S. 135 (1998). In that
case, a beauty products manufacturer made products in the U.S. and
sold them to distributors abroad for re-sale outside the U.S.
The defendant lawfully purchased them outside the U.S. and brought
them back into the country where they ended up for sale at local
drug stores. The plaintiff sued for infringement under the
importation restriction in §602(a) and the defendant claimed
that it was protected by the first sale doctrine. The
Supreme Court ultimately ruled in favor of the defendant, finding
that the first sale doctrine applies when the imported goods were
originally made in the U.S., or so-called "round trip"
importation. However, in her concurring opinion,
Justice Ginsberg foretold the need for at least one more case,
stating "we do not today resolve cases in which the allegedly
infringing imports were manufactured abroad." 523 U.S.
at 154.
It took just over a decade for the issue flagged by Justice
Ginsberg to come before the Court in Costco Wholesale Corp. v.
Omega S.A., 131 S.Ct. 565 (2010). This case involved
Omega watches that were manufactured outside the U.S., in
Switzerland, then sold to distributors around the globe and
ultimately imported to the U.S. Costco came up
through the Ninth Circuit where, building on prior circuit caselaw,
the court held that the first sale doctrine did not apply because,
unlike in Quality King, the goods at issue were made and
sold abroad. Goods manufactured and sold entirely outside the
U.S., the Court reasoned, are not "lawfully made under this
title" as required by the first sale doctrine because they are
not made subject to U.S. law. However, the Ninth Circuit went
on to clarify that the first sale doctrine would apply to goods
made overseas if an authorized first sale occurred in the
U.S.
The defendant appealed that case to the Supreme Court, which would
have given the Court an opportunity to resolve this issue but for a
procedural hiccup: Justice Kagan recused herself because she
had worked on the case as Solicitor General, urging the Court to
uphold the Ninth Circuit's ruling. With her recusal, the
Court split 4-4 without an opinion, which technically affirms the
lower court's decision but does not create national
precedent. The case was remanded, was subsequently dismissed
for copyright misuse and is currently on appeal again in the Ninth
Circuit.
Finally, a full fifteen years after Quality King, we may
be on the verge of resolution of the tension between these two
provisions thanks to Kirtsaeng v. John Wiley.
[insert hyperlink to earlier article] In the case below, the
Second Circuit adopted the Ninth Circuit's ruling from
Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th
Cir. 2008) insofar as it held that the first sale doctrine does not
apply to copyrighted works made outside of the United States, but
it expressly rejected the Ninth Circuit's exception to that
rule pertaining to goods manufactured abroad but first sold in the
U.S. Because the books at issue in Kirtsaeng were
manufactured and sold abroad by a U.S.-based publisher, the
Court's ruling is likely to address this split.
The Supreme Court heard arguments in Kirtsaeng this past
October and a decision will come sometime this term. If the
Court finds that the first sale doctrine does not apply to goods
made abroad, manufacturers of such goods will have to rely on their
distribution contracts to prevent gray market goods from entering
the domestic market. If the Court rules in favor of the
publishers, online merchants and lending institutions may have to
seek licenses for thousands of works in their inventories or risk
liability for infringement. Whatever the outcome, this
case is likely to have a lasting effect on the business practices
of companies that participate in the manufacture, production or
distribution of products on an international scale.
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