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Supreme Court Holds First Sale Doctrine Applies Regardless of Location

March 19, 2013. The Supreme Court issued its opinion [74 pages in PDF] in Kirtsaeng v. John Wiley & Sons, holding that the first sale doctrine of the Copyright Act applies to goods that are made abroad, legally acquired abroad, and imported into the US for resale. This is a serious setback for large book, movie, record and software companies, and a victory for eBay and other e-commerce companies.

Outline of this article:

Introduction and Summary. The Copyright Act provides that a copyright holder has the exclusive right to sell copies. The Act also codifies the first sale doctrine, which provides that anyone who has lawfully obtained a copy of the copyright work is free to resell that copy. The Act also includes language that gives rise to the argument that the Act's first sale doctrine does not apply to works made abroad and imported into the US. However, the Act lacks clarity on this point.

Book publishers, such as John Wiley & Sons, as well as movie, record, and software companies have long relied upon this language to enforce their business strategies of setting different prices, using different distributors, and releasing works at different times, in different countries.

See, amicus curiae brief of the Motion Picture Association of America (MPAA) and Recording Industry Association of America (RIAA), brief of the Business Software Alliance (BSA), and brief of the Software and Information Industry Association (SIIA). See also, story titled "Amicus Briefs Filed in First Sale Doctrine Case" in TLJ Daily E-Mail Alert No. 2,449, September 17, 2012.

The widespread availability of internet access, and the development of online secondary markets, such as eBay, now make businesses that engage in online arbitrage a greater threat to the business models of rights holder companies.

The Office of the Solicitor General noted in its brief in support of Wiley that "This case exemplifies one potential benefit of allowing such market segmentation. Book publishers, like respondent, often offer cheaper editions of their works in other (particularly less-developed) countries to consumers who might otherwise be unable to afford them. ... Publishers' willingness to continue that practice might be reduced if the foreign editions could be imported into this country and resold in competition with the publisher’s U.S. editions." (Parentheses in original.)

In the present case a book publisher, Wiley, sued an arbitrageur, Kirstaeng, who bought Wiley textbooks made outside the US, importing them into the US, and resold them via online markets such as eBay.

Wiley prevailed in the U.S. District Court (SDNY) and the U.S. Court of Appeals (2ndCir). Moreover, the Office of the U.S. Trade Representative (OUSTR) has taken the position of the rights holder companies in trade negotiations with other countries.

Yet, the Supreme Court reversed the Court of Appeals.

This decision is a defeat for large publishers of books, movie companies, record companies, and software companies. The main loss to them will be in undermining their ability to charge different prices in different national markets.

This decision is a victory for resellers of copyrighted works such as Kirstaeng. It is also a victory for the web site operators such as eBay that provide the platform for such transactions. See, joint brief of eBay, Computer and Communications Industry Association (CCIA), NetCoalition, TechAmerica, and others.

Acquirers of foreign made works also sided with Kirtsaeng, including library groups, some book stores, and some other retailers. See, brief of library groups.

Numerous opponents of Wiley went to great lengths to recite hypothetical scenarios in which the holding of the Court of Appeals might result in absurd harm to innocents. While this "parade of horribles" (as Justice Ginsburg called them in dissent) has existed solely in the imagination and legal briefs of Wiley's opponents, Justice Breyer labeled them as "serious".

At bottom, however, this case has been a conflict between two sets of industry groups -- one set that relies upon US copyright and markets their products globally, and a second set comprised of e-commerce companies and resellers and redistributors of these products.

The Association of American Publishers (AAP), of which Wiley is a member, stated in its reaction that this decision "will discourage the active export of US copyrighted works. It will also reduce the ability of educators and students in foreign countries to have access to US-produced educational materials, widely considered the world's gold standard." See also, brief of the AAP.

Wiley's P/CEO Stephen Smith stated in a release that it is "disappointed", and that this "is a loss for the U.S. economy, and students and authors in the U.S. and around the world."

District Court. John Wiley & Sons is the plaintiff in the District Court (and 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. It sells its books at different prices in different nations.

Supap Kirtsaeng, an individual from Thailand, is the defendant in the District Court (and appellant in the Court of Appeals, and petitioner in the Supreme Court). He ran a business in which he imported into the US books published by Wiley 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.

Court of Appeals. 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 imported 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 in 1998 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 in Quality King 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, in 2011, the Court of Appeals 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 of Appeals 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."

However, the Congress has taken no action. Instead, Kirtsaeng, backed by numerous amici curiae, petitioned the Supreme Court for writ of certiorari. The Supreme Court granted certiorari on April 16, 2012. See, story titled "Supreme Court Grants Certiorari in Case Regarding First Sale Doctrine" in TLJ Daily E-Mail Alert No. 2,372, April 16, 2012.

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.

Majority Opinion of Justice Breyer. Justice Stephen Breyer wrote the opinion of the Court, in which Justices Thomas, Roberts, Alito, Sotomayor, and Kagan joined.

The Court did not break down along partisan or ideological lines. Instead, it divided along age and seniority lines. The three oldest members of the Court dissented. Three of the four members with the longest tenure on the Court dissented.

Stephen Breyer

Breyer (at left) wrote that the issue is "whether the ``first sale´´ doctrine applies to protect a buyer or other lawful owner of a copy (of a copyrighted work) lawfully manufactured abroad. Can that buyer bring that copy into the United States (and sell it or give it away) without obtaining permission to do so from the copyright owner? Can, for example, someone who purchases, say at a used bookstore, a book printed abroad subsequently resell it without the copyright owner’s permission?" (Parentheses in original.)

He concluded that "the answers to these questions are, yes. We hold that the ``first sale´´ doctrine applies to copies of a copyrighted work lawfully made abroad."

He expounded at length on the meaning of "lawfully made under this title", and concluded that "§109(a)'s language, its context, and the common-law history of the ``first sale´´ doctrine, taken together, favor a non-geographical interpretation."

He also stated that "We also doubt that Congress would have intended to create the practical copyright-related harms with which a geographical interpretation would threaten ordinary scholarly, artistic, commercial, and consumer activities."

For example, he noted that libraries have millions of books, subject to a US copyright, but printed abroad. Libraries, under the Second Circuit's interpretation might need to get permissions for all these books before circulating them. Museums might not be able to display certain foreign paintings. Retailers might not be able to sell foreign made goods because the packaging is copyrighted.

Breyer concluded that these "horribles" are "too serious, too extensive, and too likely to come about for us to dismiss them as insignificant".

He also argued at length that relevant legislative history supports Kirtsaeng, and that the historical events addressed in the dissent are "inconclusive".

Dissenting Opinion of Justice Ginsburg. Justice Ginsburg wrote a 33 pages dissent, in which Justices Kennedy and Scalia joined.

Ruth GinsburgGinsburg (at right) began by summarizing the issue. "Because economic conditions and demand for particular goods vary across the globe, copyright owners have a financial incentive to charge different prices for copies of their works in different geographic regions. Their ability to engage in such price discrimination, however, is undermined if arbitrageurs are permitted to import copies from low-price regions and sell them in high-price regions. The question in this case is whether the unauthorized importation of foreign-made copies constitutes copyright infringement under U. S. law."

She then challenged the reasoning of the majority on numerous grounds.

First, she wrote that "The Court's parade of horribles, however, is largely imaginary."

"Most telling in this regard, no court, it appears, has been called upon to answer any of the Court’s ``horribles´´ in an actual case." She continued that "Yet Kirtsaeng and his supporting amici cite not a single case in which the owner of a consumer good authorized for sale in the United States has been sued for copyright infringement after reselling the item or giving it away as a gift or to charity. The absence of such lawsuits is unsurprising. Routinely suing one’s customers is hardly a best business practice." (Footnote omitted.)

Second, she argued that the majority incorrectly interpreted the statutes. She reasoned that "Section 109(a), properly read, affords Kirtsaeng no defense against Wiley's claim of copyright infringement. The Copyright Act, it has been observed time and again, does not apply extraterritorially."

Hence, "The printing of Wiley’s foreign manufactured textbooks therefore was not governed by Title 17. The textbooks thus were not ``lawfully made under [Title 17],´´ the crucial precondition for application of §109(a). And if §109(a) does not apply, there is no dispute that Kirtsaeng’s conduct constituted copyright infringement under §602(a)(1)." (Brackets in original.)

Third, Ginsburg argued that the legislative history of the relevant statutory provisions also weighs against the majority's interpretation.

After a lengthy review, she concluded from this that "the legislative history of the Copyright Act of 1976 is hardly ``inconclusive.´´ ... To the contrary, it confirms what the plain text of the Act conveys: Congress intended §602(a)(1) to provide copyright owners with a remedy against the unauthorized importation of foreign-made copies of their works, even if those copies were made and sold abroad with the copyright owner’s authorization." (Footnote omitted.)

Justice Scalia, who interprets statutes by their text, while disregarding legislative history and intent, did not join in this part of Ginsburg's dissent.

Fourth, Ginsburg wrote that her argument is "consistent with the stance the United States has taken in international trade negotiations" regarding international exhaustion, and the economic interests of the U.S. publishing industry, and that the majority decision now "risks undermining the United States' credibility on the world stage".

She added that "While the Government has urged our trading partners to refrain from adopting international-exhaustion regimes that could benefit consumers within their borders but would impact adversely on intellectual-property producers in the United States, the Court embraces an international-exhaustion rule that could benefit U. S. consumers but would likely disadvantage foreign holders of U. S. copyrights. This dissonance scarcely enhances the United States' ``role as a trusted partner in multilateral endeavors.´´"

Ginsburg's opinion is only a dissent. Moreover, it is highly unlikely to ever be adopted by a majority. Ginsburg, Kennedy and Scalia are older members of the Court. The younger members joined the majority.

However, her thorough and vehement analysis might provide some support those who seek amendment to the Copyright Act by Congressional legislation.

Reaction. The AAP conceded that its hope now rests with the Congress. Tom Allen, head of the AAP, wrote in a release that the "AAP expects that Congress will likely consider whether the impact of the Court's divided ruling on the ability of US producers to effectively compete in global markets requires legislative clarification. AAP will be prepared to participate on behalf of publishers in whatever process Congress undertakes to consider and address these issues."

Matt Schruers of the Computer and Communications Industry Association (CCIA) stated in a release that "This was a case in which personal property rights had come into conflict with intellectual property rights. Until now lower courts had been applying the `first sale´ rule only to copyrighted goods manufactured inside the United States. The consequence of this interpretation was that the domestic resale, lending, or even gifting or donating of any copyrighted good made abroad would put owners in danger of legal consequences. This posed a substantial threat to a substantial amount of lawful e-commerce."

Sherwin Siy of the Public Knowledge (PK) stated in a release that "We are glad that the Supreme Court recognized and prevented the harm that could have been done by the decision of the lower court. This is a big win for the public interest, students, libraries, retailers, and consumers of all sorts who will be protected by this decision."

Siy added that "The fact that these arguments made it to the Supreme Court is unsettling. We were almost in a situation where anyone that held a garage sale or loaned a book to a friend could be in violation of copyright law. We believe that this is evidence that a larger conversation about copyright reform is in order, to restore the balance of the law between the interests of authors, copyright holders, and the public."

More Case Information. 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, D.C. No. 1:08–CV–7834–DCP, Judge Donald Pogue (U.S. Court of International Trade, sitting by designation) presiding.

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

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.

See also, Supreme Court docket.

(Published in TLJ Daily E-Mail Alert No. 2,536, March 19, 2013.)