SCOTUS Redefines the First Sale Doctrine in Kirtsaeng
Last week’s Supreme Court decision in Kirtsaeng v. John Wiley & Sons, Inc. left many IP geeks like myself scratching our heads. On Tuesday, the Court, led by Justice Breyer, held that the first sale doctrine applies to copyrighted goods “lawfully made” abroad.
For some background, Supap Kirtsaeng was a student from Thailand who moved to the United States to pursue his college education and graduate school. While in the United States, in order to fund his studies, he had friends and family purchase foreign editions of American textbooks and ship them to him. He noticed that in Thailand, these overseas editions were sold at a substantially lower cost than the American editions of the same books, and engaged in arbitrage, reselling the foreign books domestically at a price point between the cost of the Asian edition and the American edition and keeping the profit. However, the publishing company John Wiley & Sons, Inc. viewed this practice as an infringement of its copyright. When sued by John Wiley & Sons, Kirtsaeng raised the first sale doctrine as a defense, which is the subject of this case.
As I discussed in depth in the note I published with IPLJ last summer, the first sale doctrine is an affirmative defense to a copyright infringement action under the distribution right provided to copyright holders by 17 U.S.C. § 106(3). Under the Copyright Act of 1976, however, this right, like all the rights statutorily granted to copyright holders, is limited by the defenses and other qualifications contained in Sections 107-122. One of these defenses is the first sale doctrine, codified in Section 109.
The first sale doctrine was first codified in the Copyright Act of 1976’s predecessor, the 1909 Act, in response to a Supreme Court case, Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908). In that case, a publishing company had sued the partners behind Macy’s for selling a book, The Castaway, for a retail price of less than $1, when a notice in each individual copy restricted resellers from selling the book at such a low price. The Court held, on the basis of principles such as privity and the copyright law of the time, that a copyright holder could not impose these types of restraints on resellers. From there, the first sale doctrine was born. It was added to the Copyright Act of 1909 one year later.
In 1976, Congress passed the current version of the Copyright Act, which contains the first sale doctrine as Section 109(a), written in the infamous language we know it in today:
“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.”
17 U.S.C. 109(a)
It was those five italicized words, “lawfully made under this title,” that spurred litigation culminating in Kirtsaeng. This is because the Copyright Act also contains a separate importation provision, Section 602(a)(1), which specifically states that:
“[i]mportation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies . . . under section 106.”
17 U.S.C. 602(a)(1)
This importation provision explains that an importer infringes the distribution right whenever she brings into the United States an individual copy of a copyrighted work without the copyright holder’s permission. Although it would seem that this provision and the first sale doctrine should refer to two different scenarios, dicta in a more recent Supreme Court decision, Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., postulated that because Section 602(a)(1) references the distribution right described in Section 106(3), the limiting Sections 107-122 should therefore also apply to 602(a)(1). Under the Quality King dicta, the first sale doctrine, as Professor Grimmelman explains, is a complete defense to unauthorized importation. Because Quality King dealt with goods manufactured domestically, the Court did not interpret the statutory language at issue (“lawfully made under this title”) in Kirtsaeng. Using a series of hypotheticals, the Court in dicta discussed a very similar scenario to the fact pattern in Kirtsaeng–namely, where a foreign subsidiary has distribution rights to a foreign territory, presumably only copies “made by the United States edition would be lawfully made under this title.’” (Majority Opinion p. 31). Justice Ginsburg, in her Quality King concurrence stressed this point. Citing Patry on Copyright, her concurrence highlights that because the provisions of Title 17 do not apply extraterritorially unless expressly stated, “lawfully made under this title” refers only to goods manufactured in the United States. 523 U.S. 135, 174.
However, in Kirtsaeng, the Supreme Court held that this phrase has nothing to do with geography and origin of manufacture. Instead, Justice Breyer writes that the phrase merely distinguishes piratical and non-piratical copies. In Kirtsaeng, because the textbooks manufactured by John Wiley Asia had been printed by an Asian subsidiary of the American parent company, they were made in accordance with U.S. copyright law. Therefore, it did not matter that these books were manufactured abroad. Their status as legal copies created by an Asian subsidiary of the American parent company meant that they were, indeed, “lawfully made under this title.” Thus, Mr. Kirtsaeng’s importation and resale of the books was permissible under the first sale doctrine.
I have come to find, as Justice Kagan explains in her Kirtsaeng concurrence, that perhaps Quality King provided an incorrect reading of Section 109(a) in tandem with Section 602(a), which led the court to this week’s decision. Justice Kagan suggests that “if Congress views the shrinking of § 602(a)(1) as a problem, it should recognize Quality King–not [Kirtsaeng]–as the culprit.” (Concurrence, p. 2). However, unlike Justice Kagan, I am of the opinion that maybe the Supreme Court got it wrong this week. Quality King probably should have been overturned through a holding that the importation restriction in 602(a)(1) is not subject to the defenses in Sections 107-122. Therefore, the court should have found that as the statute is written Section 109(a)’s application is limited to goods manufactured domestically and not subject to an importation. As Justice Ginsburg makes clear, the Court’s decision this week renders Section 602(a)(1) useless as it allows for international exhaustion and thereby removes the ability of copyright holders to take advantage of price discrimination among markets. It ignores legislative history as well as its own prior discussion on the same subject in Quality King, flawed as it might have been.
In addition, the Supreme Court lists a “parade of horribles” that would have inevitably come to pass had they decided the case in any other way. When I wrote my note, I was mainly concerned that a statutory interpretation prohibiting Section 109 from applying to foreign-made goods would further incentivize copyright holders to send manufacturing overseas, which would be especially detrimental to the U.S. economy in a time when we need more domestic jobs. However, I could not reconcile this potential last straw with a reading of the statute that distorts legislative intent, the Court’s own prior considerations, and the statutory text itself. Moreover, as Professor Hansen pointed out in his amicus brief, similar statutory import restrictions have been in effect since the eighteenth century without producing the harms the Court and amici have considered.
To its credit, the Supreme Court acknowledges that “a copyright law that can work in practice only if unenforced is not a sound copyright law.” (main opinion, p. 24). Echoing the Court on this sentiment, on March 20th, Register of Copyrights Maria Pallante gave a statement before Congress calling for an update to U.S. copyright law, given the increasingly global economy and the ubiquity of the internet as the primary medium for transmitting content. As evidenced by Kirtsaeng, and by much of the copyright litigation over the past few years, the Copyright Act of 1976 no longer fully meets the needs of intellectual property holders and content users.
And given the increasing digitalization of copyrightable subject matter, perhaps it’s also a good time, as I wrote last year, to turn issues of gray market goods and parallel imports over to international trade regulations.