Supreme Court Holds that the “First Sale” Doctrine Protects Importation and Sale of Books and Recordings Lawfully Manufactured and Acquired Abroad

On March 19, 2013, in a 6-3 decision, the Supreme Court of the United States decided Kirtsaeng v. John Wiley & Sons, Inc., holding that the “first sale” doctrine gives owners of books or recordings that were “lawfully made” in foreign countries the right to import those works and sell them in the United States without the permission or consent of the copyright holder, even when the publisher sells the work with a restriction on importing the work to the United States. In essence, the Court held that copyright holders get protection only for a first sale, and not any protection against works being resold in the United States, regardless of where the first sale occurred.

Background

Until recently, lower courts had interpreted the Copyright Act in such a way that copyright holders could prevent the importation of their works made abroad into the United States. As a result, publishers have manufactured and sold books and recordings in foreign countries at prices far below those available in the United States without fear that the United States market would be flooded by cheap imports. The Supreme Court’s holding in Kirtsaeng will certainly change that practice. Now, anyone purchasing a lawfully made work in a foreign country will likely argue that they may import it into the United States and sell it for a profit, potentially undercutting the prices demanded in this country.

The Copyright Act (Title 17 of the United States Code) provides that, subject to certain exceptions, a copyright owner “has the exclusive rights . . . 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.” Section 106(3). The key exception here is Section 109(a), commonly referred to as the “first use” doctrine. It provides that “Notwithstanding the provisions of 106(3), the owner of a particular copy or phonorecord lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.”

The question that the Supreme Court addressed in Kirtsaeng is whether the phrase “lawfully made under this title” in the “first sale” doctrine applies to works manufactured outside of the United States exclusively for sale outside of the United States. The Supreme Court held that it does, thus legitimizing “grey market” sales of copyrighted materials.

Facts of the Case

Supap Kirtsaeng is a Thai citizen who moved to the United States in 1997 to study mathematics. He completed his undergraduate work at Cornell University and a Ph.D. program at the University of Southern California. While studying in the United States, Kirtsaeng found that the textbooks for sale in at university bookstores were also available in Thailand for much lower prices. He asked his friends and family to purchase books in Thailand and send them to him in the United States, where he sold them for a profit.

John Wiley & Sons, Inc. (“Wiley”) publishes and holds the copyrights of textbooks. Its wholly owned subsidiary in Asia publishes the same English language textbooks for use abroad. The books published by the foreign subsidiary include a warning that:

This book is authorized for sale in Europe, Asia, Africa, and the Middle East only and may not be exported out of these territories. Exportation from or importation of this book to another reason without the Publisher’s authorization is illegal and is a violation of the Publisher’s rights. The Publisher may take legal action to enforce its rights.

In 2008, Wiley sued Kirtsaeng for copyright infringement in New York. Kirtsaeng defended the suit, arguing that the “first use” doctrine applies because the books were “lawfully made” and he had acquired them legitimately. The District Court rejected that argument, holding that Section 602(a)(1), which restricts importation of copyrighted materials without the copyright owner’s consent, meant that the “first sale” doctrine did not apply to “foreign-manufactured goods.” The jury then found that Kirtsaeng had willfully violated Wiley’s copyright, and assessed damages in the amount of $600,000.

On appeal, the Second Circuit held that the words “lawfully made under this title” in Section 109(a) meant lawfully “made in territories in which the Copyright Act is law.” Thus, according to that court, the “first sale” doctrine did not apply to books manufactured in foreign countries. The dissent argued that there was no geographic limitation to that phrase, and it should be interpreted to mean that the copy was manufactured lawfully under the Copyright Act, regardless of where it was manufactured.

The Ninth Circuit had previous held that the “first sale” doctrine applied to copies lawfully made in the United States as well as copies lawfully made outside of the United States but initially sold in the United States with the copyright owner’s permission. See Denbicare U.S.A. Inc. v. Toys “R” Us, Inc., 84 F.3d 1143 (9th Cir. 1996).

The Supreme Court held that the phrase “lawfully made under this title” in Section 109(a) says nothing about geography. The Court further reasoned that if works made outside of the United States were not works made under the Copyright Act, then the Act would provide no protection to foreign-printed pirated copies of works. This is further supported by Section 104 of the Act, which states that it applies to works first published in any one of the nearly 180 nations that have signed a copyright treaty with the United States. The Supreme Court also rejected the Ninth Circuit’s “half-geographical/half-nongeographical interpretation of the phrase,” holding that either it applies to foreign made works or it does not. It also rejected the interpretation of Section 602(a), holding that section, by its terms, applies only to protect rights under Section 106, to which the “first sale” doctrine under Section 109(a) is an exception.

Conclusion

The Kirtsaeng decision is being widely hailed as a “landmark win” for consumers and online resellers, such as eBay and auction.com; Bingham had filed an amicus brief in the case on behalf of eBay. Some content producers, however, such as motion picture and recording industries, as well as publishers, who previously embraced the more restrictive reading of the Copyright Act, reacted to the decision with concern that the ruling will cut into the profitability of American content producers who rely upon differential pricing for their products overseas and differential timing of product releases. Ultimately, the decision clears the way for a robust expansion of the resale market for Copyright protected works.

The expanded resale market permitted under Kirtsaeng has the potential to lead to increased piracy of intellectual property. This is because it may not always be clear to resellers and consumers in the United States whether they are purchasing a lawfully made work manufactured for sale in a foreign market or an unauthorized pirated copy. The “first sale” doctrine does not apply pirated copies, and nothing in the Court’s opinion in Kirtsaeng changes the restrictions on selling such unauthorized works.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: