Like the Hatfields and the McCoys, copyright owners and distributors in the United States have a long-standing feud over the right to sell authentic copyrighted goods that had been acquired overseas. Copyright holders say they control the importation of such goods. Distributors in turn seek refuge in the “first-sale doctrine,” which provides that a legally made copyrighted work may be resold without the copyright holder’s permission once it enters the marketplace.
On Aug. 15, the copyright owners scored a victory when the U.S. Court of Appeals for the 2d Circuit handed down its decision in John Wiley & Sons v. Kirtsaeng, 2011 WL 3560003 (2011). In a matter of first impression, the court ruled in favor of a publisher that had sued a California man for reselling in the United States less expensive versions of its copyrighted textbooks produced in Asia. The decision, which is in alignment with the highly publicized Omega v. Costco decision of the 9th Circuit, stands to significantly affect modern commerce.
The issue stems from ambiguity in the U.S. Copyright Act, which does not specifically state whether the first-sale doctrine applies to foreign-made works subject to copyright protection that are later imported into the United States. The act affords a copyright holder the exclusive right to distribute its works commercially. 17 U.S.C. 106(3). By virtue of the distribution right, the copyright owner can control the public distribution of authorized copies of its works and prevent the dissemination of illegal copies. Section 602(a) further addresses the distribution right. Under this section, importing for distribution, absent the copyright holder’s consent, copies of a copyrighted work that had been acquired overseas is a violation of the § 106 distribution right.
Copyright owners invoke § 602(a) to combat the importation of goods that are legally manufactured in foreign countries for sale there. Even though the copyright holder authorized the making of the goods, the holder might not want them sold in the United States. Such goods typically are of lesser quality than their U.S. counterparts. Unauthorized distributors can offer them at cheaper prices than domestically made goods, thus undercutting the authorized distributors who had borne the direct advertising and promotion costs. Moreover, reselling affects the exclusivity of the brands; a consumer may think twice about spending top dollar for an item at a high-end boutique when it is being sold at discount stores.
Although a copyright owner may avail itself of § 602′s ban on importing goods acquired overseas, the section has no effect on copyrighted goods originally made in the United States, then exported and subsequently imported back again for resale. Sales of such “round-trip imports” are permissible under the first-sale doctrine, codified at 17 U.S.C. 109(a). Under § 109(a), anyone who owns authorized copies of copyrighted works “lawfully made under this title” may sell or otherwise dispose of the copies without having to get prior approval from the copyright owner.
Unfortunately, the act does not define the phrase “lawfully made under this title” or refer to the site of manufacture of such copyrighted goods. Due to this ambiguity, it is unclear whether the first-sale doctrine applies to goods manufactured abroad and imported into the United States, known as “one-way imports.”
In Quality King Distributors Inc. v. L’anza Research Int’l Inc., 523 U.S. 135 (1998), the U.S. Supreme Court suggested that the first-sale doctrine “presumably” would not. This was in dicta, however, and Justice Ruth Bader Ginsburg noted in her concurrence that the Court had not decided whether the first-sale doctrine bars the importation of foreign-made works.
The Court nearly reached this issue when it granted certiorari in Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008). In Omega, the 9th Circuit held that a luxury watch bearing a copyrighted design that had been manufactured abroad could not be imported into the United States and resold without the copyright owner’s permission. To apply § 109 to foreign-made copies, the court held, would constitute an impermissible expansion of the Copyright Act, which does not reach conduct beyond U.S. borders. Although the Supreme Court took the case, the 9th Circuit’s opinion was affirmed by default due to a split 4-4-1 vote. Thus, the question remained for the lower courts to decide.
The 2d Circuit took on this issue in John Wiley. Publisher John Wiley & Sons Inc. obtained the right to publish textbooks in both the international and national markets. For its foreign editions, the publisher relied upon its wholly owned subsidiary to manufacture the books. The subsidiary did so using thinner paper and lower-quality photographs.
According to the allegations, Supap Kirtsaeng moved from Thailand to the United States to pursue his education. To help defray the costs, his family and friends sent him foreign editions of the John Wiley textbooks. He then sold the textbooks on commercial Web sites such as eBay. Using the revenues generated from the sales, he reimbursed his family and friends for the costs that they incurred during the process of acquiring and shipping the books and then kept any remaining profits. Doing this, he earned revenues of approximately $1 million.
John Wiley sued Kirtsaeng for copyright infringement. In his defense he invoked the first-sale doctrine.
The 2d Circuit affirmed the district court’s finding that the first-sale doctrine was inapplicable. In reaching this conclusion, the 2d Circuit acknowledged the tension between §§ 109 and 602 and the ambiguity of the former. “Lawfully made under this title,” noted the court, could mean pretty much anything — “manufactured in the United States,” “any work made that is subject to protection under this title” or “lawfully made under this title had this title been applicable.”
Read in conjunction with § 602, however, the court decided to narrowly interpret § 109 to apply only to domestically made copyrighted works; a broader reading would render § 602 of no force, because it would cover too many copies. The court found support for its interpretation in the dicta in Quality King, which noted that the scope of § 602(a) was more encompassing than that of § 109 because the former applied to works “lawfully made” under the laws of other countries.
The 2d Circuit acknowledged that it had confronted a “particularly difficult question” and that the outcome was “perhaps a close call.” In his dissent, District Judge J. Garvan Murtha stated his disagreement with the majority’s analysis of the Copyright Act and its interpretation of Quality King. Because § 106 on its face says nothing about where a copyrighted work is made, Murtha posited that the site is irrelevant; rather, the emphasis is on whether the work is made lawfully, e.g., with the permission of the copyright holder. Had Congress meant otherwise, § 109 would read “lawfully manufactured in the United States under this title.” Because John Wiley had authorized its foreign subsidiary to produce the textbooks, they were thus “lawfully made” under the Copyright Act.
Murtha is not alone in his view. In Pearson Educ. Inc. v. Liu, 656 F. Supp. 2d 407 (S.D.N.Y. 2009), Judge Richard Holwell stated that he agreed with the reasoning of the 3d Circuit in Sebastian Int’l Inc. v. Consumer Contracts (Pty.) Ltd., 847 F.2d 1093 (3d Cir. 1988), which expressed “uneasiness” with the proposition that to be “lawfully made,” a good was required to have been made in the United States; the 3d Circuit further noted that Congress likely would have been more explicit had it intended the site of manufacture to be a critical factor. Nevertheless, Holwell felt compelled to rule in favor of the copyright holder, given the dicta in Quality King.
If Kirtsaeng seeks certiorari, the case would provide another opportunity for the Supreme Court to decide this issue. Absent a decision by the Court or an amendment to the Copyright Act, there remains a real and present risk of inconsistent applications of the first-sale doctrine.
Nancy Morgan is an associate in the intellectual property group at Rutter Hobbs & Davidoff in Los Angeles, where she handles copyright, trademark, false advertising and unfair competition cases and Trademark Trial and Appeal Board proceedings. She can be reached at email@example.com.