Kyle St. Romain | APPS | 10.16.2012 @ 1:00 pm
(Every week, Kyle St. Romain will talk about the business and legal side of the app world. While his opinions don’t always reflect those of Rocksauce Studios, you should hear him out…the guy knows his stuff!)
Back in law school, I spent a good bit of time on an uncommon area of copyright law known as the First Sale Doctrine. While this is a murky area of law, even for the Appellate Courts, the Ninth Circuit (which I consider authority on this particular matter) has decided that the First Sale Doctrine is inapplicable to copyrighted goods manufactured and sold abroad that are subsequently imported into the United States without the copyright owner’s permission. Let’s discuss.
The First Sale Doctrine Demystified (kind of)
Under 17 U.S.C. § 106(3) of the U.S. Copyright Act, copyright owners have the exclusive right to distribution of their goods. Section 602(a) expands this right and gives copyright owners the power to control the importation of their goods. So if your company published a book (printed in the United States) and shipped it (but didn’t sell it) over to England to sell it, the buyers in England wouldn’t have the right to reimport the books back into the United States and sell them. No sale had occurred, so you’re exclusive right to distribution remains in tact. However, the First Sale Doctrine limits those rights after a copyrighted good has been sold.
Under The First Sale Doctrine, 17 U.S.C. § 109(a), subsequent lawful owners are permitted to resell (and reimport) copyrighted works after they have entered the stream of commerce via a “first sale”. This issue gets tricky when no sale has technically occurred, or when you’re dealing with overseas manufacturing and foreign companies. The courts have only had a handful of opportunities to consider such instances.
Omega v. Costco: A Foregone Opportunity to Opine
Omega v. Costco, a case that went before the Supreme Court a couple years ago (the most recent case on this issue), tested the applicability of the First Sale Doctrine to goods that were made and sold abroad, and then reimported back into the United States without the copyright owner’s permission. Basically, Omega makes high-end watches in Switzerland and distributes them throughout the world. It does, however, limit how its distributors price and sell these watches. Costco found a distributor who was willing to color outside the lines, and purchased a number of these watches to sell in its United States stores at a discount. As a loss leader, Costco hopes to lure you into its stores on the prospect of discounted Swiss watches banking on the fact that you’d probably buy a bunch of other items that it can profit from. Omega did not like this, as it spends a lot of time and money marketing its products to what it perceives as a higher-end clientele (which evidently doesn’t include Costco watch shoppers). Omega sued (after it included a copyrighted logo on the caseback of its watches – a darn clever move), and the two companies litigated the case all the way up to the Supreme Court.
The question hinged on the language of the First Sale Doctrine, which requires the copyrighted goods be “lawfully made under [the Copyright Act].” “Lawfully made under this title” (the exact language from the statute) has been equivocated by the Supreme Court to mean “manufactured in the United States.” Since the watches weren’t made in the U.S., the First Sale Doctrine did not protect Costco, and Omega had no extinguished its exclusive right to control its goods – let me Google commentary about extraterritorial application of U.S. law for you. Still with me? Don’t worry if I lost you somewhere back there: the Supreme Court’s opinion was split (Kagan recused herself), and the question remains unanswered.
Similar Stuff, Different Day: Kirtsaeng v. John Wiley & Sons, Inc.
Presently, a similar case is before the Supreme Court: Kirtsaeng v. John Wiley & Sons, Inc., and it’s already making waves. The likes of eBay and IP trade organizations (among others), have already filed amicus briefs pleading for the Court to rule one way or another on this case. For eBay, an adverse ruling could result in the loss of hundreds of thousands in revenue, as its sellers would be barred from selling goods not protected by the First Sale Doctrine. It could also mean you’ll have trouble selling your international release of Pink Floyd domestically (if you don’t want to get sued for it).
As was the case in Omega, the present issue hinges on whether the copies were lawfully made in the United States – a very loaded phrase. Here, however, while the textbooks were not made in the United States, they were made by a U.S. company, a distinguishing fact from Omega. The jury from the lower court awarded John Wiley $75,000 in damages for each of Kirtsaeng’s eight alleged instances of copyright infringement (a handsome award if you ask me). Kirtsaegn appealed, and the Court granted cert.
The Supreme Court is scheduled to hear oral arguments on the case on Oct. 29.
Also of note, it’s estimated that Kirtsaeng earned almost $1,000,000 selling foreign textbooks in the United States. I’d like to know how he did it; I always took a wash selling my textbooks back. I digress.
The Future
This case is anything but clear-cut. It seems the right thing to do, would be to hold that any sale (either domestic or abroad) extinguishes the copyright owner’s exclusive right to distribution. Contract law provides a better alternative to supply chain issues than anything – or why not price your books equally throughout the world (see, Student Loan Bubble).
So, on one hand, you have American courts deciding something that is important to protect (and restrict) an important area of U.S. intellectual property rights, and on the other you have the argument for free markets. If the court rules in favor of John Wiley, Inc., would such restrictions actually do anything to protect the U.S. economy? What would be the motivation for U.S. companies to manufacture anything domestically if the sales of foreign made goods can be controlled indefinitely?!? Maybe it’s an issue better left for Congress to decide. After all, the judicial branch is here to interpret and clarify laws, not to make new ones, and the statutes are anything but clear.
Whether decided by the Court or Congress, this issue will have a potentially dramatic impact on how we transact second-hand copyrighted goods within the growingly international marketplaces.
How do you think the First Sale Doctrine applies to Kirtsaeng, or other situations? Share your thoughts in the comments below; they’re always welcomed!
For more reading, consider this well-written article from the Pepperdine Journal of Business, Entrepreneurship & the Law; Ronald Mann’s recent article: Is the New Economy Driving the Court’s Docket?; and my inspiration for this post: Thai student’s money-making effort at centre of US Supreme Court copyright case.