Supreme Court Grants Certiorari in Case Regarding First Sale Doctrine

April 16, 2012. The Supreme Court of the U.S. granted certiorari in Kirtsaeng v. John Wiley & Sons, a case regarding whether the first sale doctrine of the Copyright Act applies to goods made abroad. See, April 16, 2012, Orders List [21 pages in PDF] at page 2.

Introduction. The Supreme Court's prior actions indicated that it would likely grant certiorari in this case, and that the Court is divided on this issue. It heard a similar case 2010, and affirmed in a one page order by an evenly divided vote 4 to 4. Justice Kagan recused herself.

That case was Omega v. Costco. See, story titled "Supreme Court Affirms in Costco v. Omega on 4-4 Vote" in TLJ Daily E-Mail Alert No. 2,178, December 14, 2010.

That order affirmed the September 3, 2008, opinion [17 pages in PDF] of the U.S. Court of Appeals (9thCir), which held that the first sale doctrine does not apply to imported goods manufactured abroad. It applies "only where the disputed copies of a copyrighted work were either made or previously sold in the United States with the authority of the copyright owner".

These cases involve construing jointly Sections 109 and 602 of the Copyright Act.

At issue for book publishers is their ability to charge different prices in different national markets. Secondary markets, and particularly online sales sites that enable third party sellers, undermine publishers ability to engage in such price discrimination.

Since publishers tend to charge more in the US market, there is an opportunity for intermediaries, such as Supap Kirtsaeng, to purchase books outside the US at the publishers' lower prices, import them into the US, and then resell them via internet platforms such as eBay's auction web site at a profit to consumers in the US.

At issue for US book consumers is the ability to purchase lower priced foreign printed books online from intermediaries like Kirtsaeng. At issue for companies like eBay is the fees that they collect from online sellers like Kirtsaeng.

There is also perhaps a bigger issue. Sections 109 and 602 apply to works, not merely to hardcopy books. Hence, if Wiley were to prevail, the Supreme Court would write an opinion that applies to works subject to copyright. Other copyright industries might then attempt to avail themselves of the ruling to curtail Section 109 rights by increasing their manufacturing operations outside of the US.

Statutes. 17 U.S.C. § 106 lists the exclusive rights of copyright. Subsection 106(3) 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". However, the Copyright Act then provides numerous exceptions to the exclusive rights of copyright.

The first sale doctrine, which is codified at 17 U.S.C. § 109, provides, in part, that "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."

However, 17 U.S.C. § 602(a)(1) provides in part that "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."

Section 109 allows book purchasers to resell the copies that they have purchased. However, the phrase "lawfully made under this title" gives rise to the interpretation that since US copyright law applies only in the US, and other nations' copyright laws apply in their nations, the Section 109 resale exception does not apply to works made in other nations. Section 602 is also in tension with the interpretation that Section 109 applies to works made outside the US and imported into the US. Hence, these two sections, taken together, do not provide clarity for the courts.

Moreover, this issue has been in the courts for many years, and the Congress could pass legislation that would clarify this issue, but it has not done so.

Proceedings Below. In the present case, John Wiley & Sons, is the plaintiff in the District Court, appellee in the Court of Appeals, and respondent in the Supreme Court. It publishes academic, scientific, and educational journals and books, including textbooks, for sale in domestic and international markets.

It makes outside of the US those copies for sale outside of the US. It makes in the US those copies for sale inside the US. Wiley's books for non-US sale include statements such as "Authorized for sale in Europe, Asia, Africa and the Middle East Only" and "This book ... may not be exported."

Supap Kirtsaeng is the defendant in the District Court, appellant in the Court of Appeals, and petitioner in the Supreme Court. He imported into the US Wiley books published outside the US, and sold them on websites such as eBay.

Wiley filed a complaint in the U.S. District Court (SDNY) against Kirtsaeng, alleging copyright infringement, trademark infringement, and violation of the state of New York's unfair competition statute. Later, Wiley dropped all but the copyright claim.

The District Court ruled that the first sale doctrine is not an available defense in the circumstances, and did not give the jury a first sale doctrine instruction.

Kirtsaeng appealed the first sale doctrine ruling. Wiley also appealed on the issue of damages.

On August 15, 2011, the U.S. Court of Appeals (2ndCir) issued its divided opinion [28 pages in PDF] affirming the judgment of the District Court. It is published at 654 F.3d 210. See also, story titled "2nd Circuit Holds First Sale Doctrine Does Not Apply to Works Made Abroad" in TLJ Daily E-Mail Alert No. 2,295, August 28, 2011.

The Court of Appeals wrote that "There is at least some tension between § 602(a)(1), which seemingly seeks to give copyright holders broad control over the circumstances in which their copyrighted material may be imported (directly or indirectly) into the United States, and § 109(a), which limits the extent to which the copyright holder may limit distribution following an initial sale." (Parentheses in original.)

However, it held, based upon its interpretation of the two sections, and dicta in the Supreme Court's 1998 opinion in Quality King Distributors v. L'anza Research International, 523 U.S. 135, that the first sale doctrine does not apply to works manufactured outside of the US.

In Quality King, the defendant purchased copies that had been made in the US by the plaintiff, and sold outside the US by one of the plaintiff's foreign distributors. The defendant purchased and reimported these copies back into the US and resold them. This was profitable for the defendant because the plaintiff sold copies to foreign distributors at lower prices than it charged domestic distributors.

The Supreme Court held that Section 109 imposes a limit on Section 602, and that the defendant's resale of copies in the US is allowed under the first sale doctrine. However, in that case, unlike the present case, the copies were made in the US.

The Supreme Court wrote that "Even in the absence of a market allocation agreement between, for example, a publisher of the United States edition and a publisher of the British edition of the same work, each such publisher could make lawful copies. If the author of the work gave the exclusive United States distribution rights enforceable under the Act-to the publisher of the United States edition and the exclusive British distribution rights to the publisher of the British edition, however, presumably only those made by the publisher of the United States edition would be ‘lawfully made under this title’ within the meaning of § 109(a). The first sale doctrine would not provide the publisher of the British edition who decided to sell in the American market with a defense to an action under § 602(a)".

Also, Justice Ginsburg wrote in her concurring opinion that "This case involves a 'round trip' journey, travel of the copies in question from the United States to places abroad, then back again. I join the Court's opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad."

In the present case, the Court also interpreted the meaning of the two sections at issue. "Section 602(a)(1) prohibits the importation into the United States of copyrighted works acquired abroad without the authorization of the copyright holder. This provision is obviously intended to allow copyright holders some flexibility to divide or treat differently the international and domestic markets for the particular copyrighted item. If the first sale doctrine codified in § 109(a) only applies to copyrighted copies manufactured domestically, copyright holders would still have a free hand -- subject, of course, to other relevant exceptions enumerated in Title 17, such as those in §§ 107, 108, and 602(a)(3) -- to control the circumstances in which copies manufactured abroad could be legally imported into the United States."

The Court wrote the the meaning of the phrase "lawfully made under this title" is key. If it were to mean "lawfully made in the US", then Wiley would prevail. The Court noted that the Copyright Act primarily applies only territorially. On the other hand, if it were to mean "any work subject to protection under the Copyright Act", then Kirtsaeng would prevail.

In the end, the Court concluded that "the phrase ``lawfully made under this Title´´ in § 109(a) refers specifically and exclusively to works that are made in territories in which the Copyright Act is law, and not to foreign-manufactured works."

The Court added that "We freely acknowledge that this is a particularly difficult question of statutory construction in light of the ambiguous language of § 109(a), but our holding is supported by the structure of Title 17 as well as the Supreme Court’s opinion in Quality King. If we have misunderstood Congressional purpose in enacting the first sale doctrine, or if our decision leads to policy consequences that were not foreseen by Congress or which Congress now finds unpalatable, Congress is of course able to correct our judgment."

Certiorari Briefs. Kirstsaeng argued in his brief that his book selling activities were protected by the first sale doctrine, that the Court of Appeals incorrectly interpreted the statutes, and that the Supreme Court should grant certiorari.

Kirtsaeng is represented by Joshua Rosenkranz and others in the New York City office of the law firm of Orrick Herrington & Sutliffe.

Wiley argued in its brief the the Court of Appeals correctly interpreted the statutes, that there is no circuit split, and that certiorari should therefore be denied.

Wiley is represented by Ted Olson, a former Solicitor General, and other attorneys in the Washington DC office of the law firm of Gibson Dunn & Crutcher.

eBay is not a party to this case. However, it filed an amicus curiae brief, along with the Computer and Communications Industry Association (CCIA), Internet Commerce Coalition (ICC), Net Coaltion, NetChoice, Tech America, and Technology Network. They argued that the Supreme Court should grant certiorari.

They wrote that the Court of Appeals "imposed a place of manufacturing requirement on the first sale doctrine that lacks support in the text, structure, history or purposes of the Copyright Act."Also, "The Second Circuit’s rule also dangerously expands beyond the Ninth Circuit’s requirement" in Omega v. Costco.

These tech sector amici argued that "In stark tension with the policy against restraints on alienation, the Second Circuit’s rule affords copyright owners the ability to control the downstream sales of goods for which they have already been paid. The Second Circuit’s rule not only is inconsistent with the terms, structure, history and purpose of the copyright act, but it also allows for significant adverse consequences for trade, ecommerce, secondary markets, small businesses, consumers, and jobs in the United States."

"Reading section 109(a) to impose a place of manufacturing requirement on the first sale doctrine would negatively impact commerce in the United States. A place of manufacturing requirement will create incentives for off-shore manufacturing, stifle secondary markets, stifle e-commerce, and harm small businesses". They added that "The Second Circuit’s rule substantially threatens the increasingly important e-commerce sector of the economy, particularly secondary market e-commerce."

The Public Knowledge (PK), Electronic Frontier Foundation (EFF), and U.S. Public Interest Research Group also filed an amicus curiae brief urging the Court to grant certiorari. They argued that the Court of Appeals' opinion "threatens significant harm to consumers and businesses engaged in legitimate commerce involving goods manufactured abroad".

They cautioned that "The decision below could also encourage copyright owners to deliberately foreclose secondary markets by moving their manufacturing operations abroad."

The PK's Jodie Griffin wrote in a short piece on April 16 that the Court of Appeals' "ruling could cripple markets for used books, movies, CDs, toys, and any other goods that contain copyrighted works. For example, many cars contain copyrighted computer programs, so used car sales for foreign-manufactured would become illegal (without the copyright owner's permission)." (Parentheses in original.)

This case is Supap Kirtsaeng v. John Wiley & Sons, Inc., Supreme Court of the U.S., Sup. Ct. No. 11-697, a petition for writ of certiorari to the U.S. Court of Appeals for the 2nd Circuit, App. Ct. No. 09-4896-cv. Judge Jose Cabranes wrote the opinion of the Court of Appeals, in which Judge Katzmann joined. Judge Garvan Murtha (USDC/DVermont, sitting by designation) wrote a dissent. The Court of Appeals heard an appeal from the U.S. District Court for the Southern District of News York, Judge Donald Pogue (U.S. Court of International Trade, sitting by designation) presiding.