Do you manufacture copyright-protected goods in the U.S. for distribution in the American market and abroad for distribution at lower cost elsewhere? The Supreme Court handed down a decision March 19 with the potential to make that a less-appealing strategy. The case is Kirtsaeng v. John Wiley & Sons, Inc., 2013 WL 1104736 (U.S.).
The U.S. Copyright Act grants copyright owners an exclusive distribution right with respect to their protected works. It reads, “[T]he owner of copyright under this title has the exclusive [right] … to distribute … the copyrighted work to the public by sale or other transfer of ownership … ” or to authorize others to do so. 17 U.S.C. § 106(3).
These and other exclusive rights guaranteed by law are not absolute. They are circumscribed by exemptions that make certain unauthorized third-party uses of copyrighted material noninfringing. The particular exemption at issue in Kirtsaeng is the so-called “first sale doctrine.” The statutory provision reads, “Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title … is entitled to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. § 109(a) (emphasis added).
In plainer English, if you own a copy of a copyrighted work, such as a book, sound recording or onboard software in a car, and it was “lawfully made” (not pirated), you can sell it freely to any person or commercial reseller without violating the copyright owner’s exclusive distribution right. Your ownership doesn’t grant you any other rights—you cannot reproduce the protected work without the copyright owner’s permission—but you can freely dispose of your copy. Why? Because the first sale to you or a preceding owner “exhausted” the copyright owner’s right in that copy.
At issue in Kirtsaeng was a more complicated set of circumstances. Plaintiff Wiley manufactures textbooks for distribution in the U.S. at one price and through a subsidiary for lower prices abroad. A printed legend inside some foreign editions reads, “This book is authorized for sale in Europe, Asia, Africa, and the Middle East only and may not be exported out of these territories.” This kind of attempted downstream control was declared illegal within the U.S. more than 100 years ago.
But does that strategy, unlawful within the U.S., apply to works made lawfully by or for U.S. companies abroad? Does the first sale doctrine apply to them? That was the issue in Kirtsaeng.
A young Thai mathematician in pursuit of an advanced academic degree in America, Kirtsaeng recognized an economic opportunity in Wiley’s market segmentation: buy cheap in Thailand, sell dear in the United States—on eBay, as it happens, where Kirtsaeng made a six-figure profit. In the world of finance, this is known as arbitrage.
Wiley sued, claiming Kirtsaeng had infringed its exclusive Section 106(3) distribution rights because the books Kirtsaeng sold were manufactured abroad and therefore not “lawfully made under this title”; that is, Wiley contended, the books Kirtsaeng sold were manufactured beyond the reach of the U.S. Copyright Act. Kirtsaeng defended his actions by invoking the first sale doctrine, arguing that the books were made under Wiley’s authority, subject to the U.S. Copyright Act regardless of their place of manufacture. On linguistic, historic and other grounds the Supreme Court agreed with Kirtsaeng, holding, among other things, that the phrase “lawfully made under this title” bears no geographic implication, domestic or foreign.
The upshot of this decision remains to be seen. Will US manufacturers abandon the practice of market segmentation, or are the risks tolerably small? That may depend on the nature and price of the works. Will prices remain unchanged at home but rise sufficiently abroad to make international arbitrage on a small scale an unattractive option? That may depend on the price sensitivity of foreign buyers. Will the principles sounded in Kirtsaeng reverberate in the patent context? The answer to that question is unlikely to be forthcoming soon. Less than a week after deciding Kirtsaeng, the Supreme Court refused to take a case involving the first sale of a patented printer cartridge made by an Epsom subsidiary in China.