The Supreme Court decided this week the case of Kirtsaeng v. John Wiley & Sons. The opinion will undoubtedly have a large impact on intellectual property law.
This case deals with a Thai national who was subsidizing his college tuition in the U.S. by having his relatives in Thailand buy textbooks for cheap, shipping them to him in the US, and then selling the text books to Americans on sites such as eBay. He made about a $100,000 profit off this enterprise. Eventually, the publisher caught wind, and sued.
This enterprise is known as the “gray market”. Exploiting the price differential between the US and overseas can be quite profitable. The legality of this practice differs depending on the type of good being sold. Prior to this ruling, on copyrighted goods purchased overseas, most judges were ruling against the gray marketeers.
Kirtsaeng argued that the ‘first sale doctrine’ creates an exception that validates his actions. The “first sale doctrine” in copyright law permits the owner of a lawfully purchased copy of a copyrighted work to resell it. Once you buy a copy of something, you own that copy. You can do as you wish with it. This is codified at 17 U.S.C. § 109(a) of the Copyright Act of 1976. However, Congress also enacted 17 U.S.C. § 602(a)(1).That section provides that importing goods into the United States without the authority of the copyright holder is illegal. The Supreme Court has now decided that §109(a), does in fact, limit the scope of §602(a)(1), and ruled for Kirtsaeng.
Previously, the Supreme Court opinion which was most influential in ‘gray market’ dealings was Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135, (1998). In Quality King, L’anza Research International, a California shampoo company, sold to foreign distributors at rates which were 35% to 40% lower than the prices charged to its domestic distributors. Quality King Distributors, Inc. purchased shipments of L’anza’s products from one of L’anza’s foreign distributors and then reimported the products into the United States for resale. L’anza sued, alleging that Quality King’s actions violated its “exclusive rights under 17 U.S.C. §§ 602. The Supreme Court heard the case to decide the question of “whether the `first sale’ doctrine endorsed in § 109(a) is applicable to imported copies.” The Supreme Court held that § 109(a), limits the scope of § 602(a), and ruled for Quality King.
While this may seem like it is the exact same facts as Kirtsaeng, there was a key difference. In Quality King, the copyrighted items in question had all been manufactured in the United States. In Kirtsaeng, the books were printed overseas. Since these books were intended to be sold in Thailand, it was cheaper and easier for Wiley to print them over there.
With the opinion in Kirtsaeng, the Supreme Court has overruled Omega S.A. v. Costco Wholesale Corp, 541 F.3d 982 (9th Cir. 2008).That case involved the importation into the United States of Omega-brand watches. The watches were ultimately purchased and resold by Costco Wholesale Corporation. The Ninth Circuit had held that § 109(a) (First Sale Doctrine) does not apply to items manufactured outside of the United States. But, the Court’s ruling was 4-4 (with Justice Kagan recused), and therefore the opinion of the Ninth Circuit stood.
The ruling in Kirtsaeng will legitimize the ‘gray market’. Now, copyrighted materials which are sold overseas for cheap, can be purchased, imported into the U.S., and sold for close to market value. This could mean that American consumers can soon purchase high quality, copyrighted goods for the price of cheap foreign knock offs. It will also mean that until the market adjusts, quite a few entrepreneurs will follow in Kirtsaeng’s footsteps and start searching overseas markets for good value without the fear of copyright infringement lawsuits. Places such as Costco, Walmart, and other large retailers will also likely scour foreign markets for cheap sources of goods. Once these practices become widespread, either manufacturers will lower their prices, or pull out of foreign markets all together. Until this happens, the next time you are on vacation overseas, it might just be worth it to pop your head into the local bookstore and pick up a few copies of whatever English texts they have.
The Supreme Court has recently heard arguments in the case of Kirtsaeng v. John Wiley & Sons. The opinion is expected soon, and regardless of how the court rules, it will have a large impact on intellectual property law.
This case deals with a Thai national who was subsidizing his college tuition in the U.S. by having his relatives in Thailand buy textbooks for cheap, shipping them to him in the US, and then selling the text books to Americans on sites such as eBay. He made about a $100,000 profit off this enterprise. Eventually, the publisher caught wind, and sued.
This enterprise is known as the “grey market”. Exploiting the price differential between the US and overseas can be quite profitable. The legality of this practice differs depending on the type of good being sold.
At trial, and on appeal to the 2nd Circuit, John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210, (2d Cir. 2011), Kirtsaeng argued that the ‘first sale doctrine’ makes his actions legal. The “first sale doctrine” in copyright law permits the owner of a lawfully purchased copy of a copyrighted work to resell it. Once you buy a copy of something, you own that copy. You can do as you wish with it. This is codified at 17 U.S.C. § 109(a) of the Copyright Act of 1976. However, Congress also enacted 17 U.S.C. § 602(a)(1).That section provides that importing goods into the United States without the authority of the copyright holder is illegal. The Supreme Court will have to decide, as it often does, how these two contradictory laws interact.
The 2nd Circuit opinion in Kirtsaeng relied heavily on Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135, (1998). In Quality King, L’anza Research International, a California shampoo company, sold to foreign distributors at rates which were 35% to 40% lower than the prices charged to its domestic distributors. Quality King Distributors, Inc. purchased shipments of L’anza’s products from one of L’anza’s foreign distributors and then reimported the products into the United States for resale. L’anza sued, alleging that Quality King’s actions violated its “exclusive rights under 17 U.S.C. §§ 602. The Supreme Court heard the case to decide the question of “whether the `first sale’ doctrine endorsed in § 109(a) is applicable to imported copies.” The Supreme Court held that § 109(a), does in fact limit the scope of § 602(a), and ruled for Quality King.
While this may seem like it is the exact same facts as Kirtsaeng, there was a key difference. In Quality King, the copyrighted items in question had all been manufactured in the United States. In Kirtsaeng, the books were printed overseas. Since these books were intended to be sold in Thailand, it was cheaper and easier for Wiley to print them over there.
The Supreme Court intended to rule on this distinction when they heard the case of Omega S.A. v. Costco Wholesale Corp, 541 F.3d 982 (9th Cir. 2008).That case involved the importation into the United States of Omega-brand watches. The watches were ultimately purchased and resold by Costco Wholesale Corporation. The Ninth Circuit had held that § 109(a) (First Sale Doctrine) does not apply to items manufactured outside of the United States. But, the Court’s ruling was 4-4 (with Justice Kagan recused), and therefore the opinion of the Ninth Circuit stands.
What this case may come down to is what the phrase “lawfully made under this title” in §109(a) actually means. Does ‘made’ mean where the book is written? Or does this mean where the book was printed? Does ‘under’ mean in the territory that the Copyright Code reaches? Or does it apply to whatever works were copyrighted in the US? If that term is understood by the Court broadly, then §109(a) will subsume §602(a) and the ‘first sale doctrine’ should apply.
If the Court rules for Wiley, as expected, then copyright holders would be protected from their foreign manufacturing hurting business in the US. There could be effect on outsourcing, product manufacturing for copyright holders, if one does outsource the printing of foreign editions, they will enjoy protections that domestic goods do not, under Omega. For average consumers, this would mean that you might not be able to legally resell your property, if you purchased it from overseas. In the digital age of e-commerce, this is becoming more common. For sites such as eBay, they could see potentially significant decline in goods for sale. For import/export companies in the ‘grey market’ businesses, this would be devastating.
The Kirtsaeng case follows the Supreme Court’s December 2010 decision in Costco Wholesale Corp. v. Omega, which centered on the first-sale doctrine, which usually entitles the owner of a lawfully produced copyrighted work to resell it without permission from the copyright holder. The Supreme Court split 4-4, with Justice Elena Kagan not taking part. The court did not issue a written opinion, but held that the first-sale doctrine did not apply to foreign goods. The Second Circuit’s Kirtsaeng decision relied on the Supreme Court’s Costco ruling.
In the present case on appeal, Supap Kirtsaeng, a graduate student at the University of Southern California, sold John Wiley textbooks on eBay. The books were purchased in Asia by his family and friends and shipped into the U.S. to be sold on eBay. The Second Circuit upheld a verdict against Kirtsaeng and held that the first-sale doctrine only applied to goods manufactured in the U.S. The decision by the Second Circuit may have some strange implications that give foreign manufacturers greater control over their products than U.S. manufacturers. In particular, the Association of Art Museum Directors is concerned that museums may be barred from displaying foreign works of art.
According to the brief, the American museums believe they could lose their ability to acquire and display foreign-made, copyrighted pieces. Under the ruling, the museums argue, any gallery that displays a foreign work is potentially infringing on a copyright. The museums were long protected under Section 109, but would now have to rely on fair-use arguments with little precedent.
The museums also argue that any foreign works protected by copyright law should also be subject to the law’s limitations. Section 109 limits the protections under the Copyright Act by allowing owners to manage lawful copies of a copyrighted work without permission from the copyright holder. Normally, public performance without permission is a clear violation of copyright, but Section 109(C) provides an exception for owners of lawful copies:
(c) Notwithstanding the provisions of section 106 (5), the owner of a particular copy lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to display that copy publicly, either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.
This exception allows museums to display works publically without obtaining a license from the copyright holder, a practice that could be prohibitively expensive. The museums may have no choice when it comes to foreign art, however, since the Second Circuit ruled that Section 109 applies only to American-made works. In addition to being wildly expensive, licensing could be impossible for museums when the copyright holder is unknown or unavailable.
One argument made in the amicus brief is that Section 104 of the Copyright Act makes all eligible works subject all protections and limitations of the act. There is no distinction for works based on origin in the act; therefore, Section 109 limits the rights of every copyrighted work, regardless of where it was produced. The court below, according to the brief, erred by finding that the text of Section 109 was ambiguous. Instead of finding ambiguity and selectively interpreting the text of the Copyright Act, the court should have read Section 104 as establishing that all protections, remedies, and limitations of the entire Copyright Act apply to all works and all copies by extension.
The brief also argues that the broad interpretation of Section 109 does not conflict with Quality King Distribs., Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135, 150 (1998). In that case, the Supreme Court left open the possibility that all copies that receive protection under U.S. law are subject to the limitations of Section 109. The exception for foreign works, the museums argue, is a result of unnecessary judicial interpretation. The brief argues that no foreign work should receive more or less than a domestic work since there is no clear grant in the statute, since, in the few times Congress has prescribed special treatment for foreign works, they have done so with explicit language. For example, the brief argues that Congress could have chosen the words “lawfully made in the United States,” rather than “lawfully made under this title,” for Section 109. Therefore, there is no reason to interpret the statute differently for foreign made works than for domestic ones.
In its conclusion, the brief pleads for the Supreme Court to reverse the decision below. The museums believe that the court should find that if the copyright owner authorized the first distribution abroad, then imported foreign copies can be distributed or publicly displayed within the U.S. without permission. Doing so would preserve the statutory exception that allows museums across the country to display works of art without fear of unnecessary copyright litigation.
On July 3, the Library Copyright Alliance filed an amicus brief with the Supreme Court as a result of their decision to review the Second Circuit’s decision in John Wiley & Sons v. Kirtsaeng. The decision interpreted the first-sale doctrine, which allows legal owners to resell, lend, or dispose of copyrighted works after purchase, to apply only to works manufactured in the United States. As a result, foreign manufacturers have greater control over their products under U.S. law. Many organizations like libraries and museums have submitted amicus briefs urging the Supreme Court to reject this interpretation since they depend on the first-sale doctrine to operate.
In December 2010, the Supreme Court faced a similar issue in Costco Wholesale Corp. v. Omega. In that case, the Supreme Court held that the first-sale doctrine only applied to U.S. manufactured works. The unwritten ruling was based on a 4-4 split by the court. Justice Elena Kagan did not take part, since she was involved in the issue as the Solicitor General. When Kirtsaeng reaches the Supreme Court next year, however, she could be the deciding vote that finally determines the issue.
In the Kirtsaeng case, the Second Circuit upheld a jury award of statutory damages to John Wiley & Sons, after Supap Kirtsaeng sold foreign copies of their books on eBay. Kirtsaeng’s family and friends mailed him books purchased abroad, which he sold on eBay to U.S. customers. Relying heavily on the Supreme Court’s Costco ruling, the Second Circuit ruled that the first-sale doctrine did not apply since the books were manufactured abroad and that Kirtsaeng could be held liable.
While the outcome of the case certainly has important implications for public services like libraries and museums, many companies or businesses that deal in foreign-made goods, including CostCo Wholesale Corp. and the National Association of Chain Drug Stores, have also submitted briefs to the court urging them to overturn the decision. The Supreme Court’s decision has a great impact on the lawful, yet unofficial, sale and trade of goods. Also known as the gray market, these unofficial sales are a $63 billion industry. The court’s decision could cripple the industry’s ability to avoid liability for a variety of unauthorized transactions by the owners of legal copies. Much like the Library Copyright Alliance, these businesses could be exposed to litigation due to extra rights afforded to foreign manufacturers under the Second Circuit’s decision.
The libraries maintain that the decision effectively outlaws the way they operate by taking away their ability to lend any foreign books. It does not make sense, they argue, for the law to differentiate between owners’ rights merely based on the location their legitimate copies were produced. Under the Second Circuit’s interpretation, the law would also reward and incentivize sending publishing or production to other countries. The libraries believe Congress would never have intended this kind of reward for outsourcing.
According to a press release by the American Library Association, U.S. libraries currently contain over 200 million books from foreign publishers that would be in jeopardy if the decision is upheld. Even more books from U.S. publishers may have been printed elsewhere, and libraries would be in danger of copyright liability if they lent out any books that did not indicate they were printed in the U.S. While it’s unlikely that copyright holders would bring claims, the libraries do not want to engage in unlawful conduct just because the chances of getting caught are low.
The libraries would like the Supreme Court to overturn the decision and find that the “lawfully made” language in Section 109 of the Copyright Act applies to all works protected under it, but that would protect Kirtsaeng from liability under the first-sale doctrine. If the court chose not to accept this approach, the libraries urge them to adopt the Denbicare exception. The Denbicare exception, from a 1996 Ninth Circuit case, allows parties to assert a first-sale defense if foreign copies are authorized for domestic sale. This interpretation would likely result in liability for Kirtsaeng since he was not authorized to sell the books in question by John Wiley & Sons.