Copyright Owners Left Legally Jet Lagged? – The Supreme Court Embraces the International Exhaustion Doctrine

by Foley Hoag LLP - Trademark, Copyright & Unfair Competition
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A multi-year legal drama over the proper scope of certain sections of the U.S. Copyright Act, as applied to goods made and first sold outside the United States, has finally come to an end.  In a 6-3 decision issued yesterday, with dissents from Justices Ginsburg, Kennedy, and Scalia (strange bedfellows in many regards, judicially speaking), the Supreme Court, in the case of Kirtsaeng v. John Wiley & Sons, Inc., has embraced the concept of international exhaustion in relation to the copyright first-sale doctrine.  This decision has far-reaching implications for copyright and trademark owners alike. 

First-Sale Doctrine

Under the first-sale doctrine, intellectual property owners are generally allowed to control how their protected products will first be sold.  The purchaser of such goods, having benefitted from the “first sale,” is then free to resell or otherwise dispose of them without further interference from the intellectual property owner.  The first-sale doctrine is often referred to as the exhaustion rule, because an intellectual property owner exhausts its rights upon the first sale. 

National Exhaustion vs. International Exhaustion

Where the first sale of a copyrighted work takes place can make a difference.  In general, the national exhaustion rule, which is enforced in certain countries, requires that a sale take place in the local jurisdiction before the local intellectual property right is exhausted.  In regard to copyright in the United States, the interpretation of the law once leaned heavily in favor of national exhaustion.  Under this rule, if a U.S. copyright holder copied and sold a book overseas, it could prevent the purchaser from reselling it in the United States.  The Supreme Court has now reversed this trend and announced an interpretation of § 109 of the Copyright Act (which codifies the first-sale doctrine) that supports the international exhaustion rule.  According to the majority’s opinion, the purchaser of a copyrighted item “lawfully made under” the Copyright Act may now dispose of it without the authority of the copyright owner, even when the product was made and first sold outside the United States.

The Supreme Court’s Decision

The Supreme Court considered this same issue in the 2010 case of Costco v. Omega, but, as discussed previously on this blog here, a 4-4 split amongst the participating Justices left the issue undecided.  Kirtsaeng more than breaks the tie. 

The Underlying Facts

Central to the Supreme Court’s decision was the interpretation of the phrase “lawfully made under” as applied to goods subject to the Copyright Act.  The facts of the underlying case were simple.  Kirtsaeng, a student from Thailand living in the United States, asked friends and family to purchase and send him English-language copies of textbooks printed and sold in Thailand with the permission of the copyright owner, John Wiley & Sons.  Kirtsaeng was then able to take advantage of international arbitrage, the phenomenon by which similar goods are often sold at different price points in different areas of the world, and sell the text books at a profit in the United States.  Goods sold by this process (importing and selling outside of authorized channels of commerce) are often referred to as parallel imports or gray market goods.          

John Wiley & Sons sued for copyright infringement, arguing that the Copyright Act provided for national, rather than international, exhaustion in the United States.  Essentially, it claimed that Kirtsaeng was engaging in the impermissible parallel importation of its copyrighted foreign-made textbooks.  Kirtsaeng countered, arguing that the first-sale doctrine language of the Copyright Act was silent as to geography and urging that the international exhaustion rule be applied.  The federal district court and the Second Circuit Court of Appeals agreed with John Wiley & Sons.  The Supreme Court reversed. 

The Supreme Court’s Holding

The Supreme Court’s majority opinion is focused mainly on the issue of statutory interpretation, seeking to divine Congress’s intent in adopting the language “lawfully made under” in relation to the Copyright Act.  Did this turn of phrase favor national exhaustion, such that goods “lawfully made under” the Copyright Act must be literally made in the United States?  Or did it favor international exhaustion, such that goods “lawfully made under” the Act could be made anywhere, if authorized by the copyright owner?  Suffice it to say that Kirtsaeng persuaded the majority that Congressional intent supported an international exhaustion interpretation. 

To buoy this holding, the majority recited a “parade of horribles” (as described by the dissent) that might come to pass under a national exhaustion regime.  For example, the majority posited, libraries would be faced with the insurmountable task of getting permission from copyright holders to lend millions of books now residing in collections throughout the United States that were first printed and purchased abroad.  The first-sale doctrine allows not only for the resale but also for the display of a copyrighted work.  As such, the majority speculated, a U.S. resident who bought a poster while on vacation in Europe would infringe the U.S. copyright in the work by hanging it for display back at home.  The dissent criticized the majority for letting its imagination run wild, calling such hypothetical consequences absurd.    

Implications for Copyright and Trademark Owners

Direct Effect on Copyright Owners

The Kirtsaeng decision carries with it far-reaching implications, not only for copyright owners, but for trademark owners as well.  Obviously, copyright owners can no longer rely on the national exhaustion rule to exclude the U.S. resale of copyrighted items such as books, CDs, or DVDs made and sold abroad at prices below U.S. market value.  But there are other products that do not traditionally come to mind that can be afforded copyright protection.  For instance, shampoo with a copyrighted design on the label, or a watch with a copyrighted design stamped on the back, were once considered infringing if sold in the United States without consent, after being manufactured and first sold abroad.  This is now no longer the case. 

Indirect Effect on Trademark Owners

How might this decision affect a trademark owner?  Because copyright protection and trademark protection are codified under different statutes (the Copyright Act and the Lanham Act, respectively) and based upon different common-law doctrines, it is unlikely that Kirtsaeng will have any direct effect on how courts enforce parallel import exclusion under trademark law.  Nonetheless, options once available to trademark owners, at least as a back-up measure, now no longer exist. 

The exhaustion rule for trademarks is neither national, nor international, but a hybrid rule based upon the likelihood of consumer confusion.  Under trademark law, if a branded product is manufactured and first sold abroad, it can be freely resold in the United States without permission of the trademark owner, provided there are no material and/or physical differences between the imported goods and the goods authorized for sale in the United States.  Because the traditional function of a trademark is to act as an indicator of source and quality, a U.S. brand owner can exclude from U.S. commerce any parallel imports that are sufficiently different from the U.S. product (e.g., different formulation;  lack of English instructions; dosage information in metric units). 

Long-standing case law indicates that U.S. consumers have an expectation of quality associated with branded goods; and the sale of differing, extra-jurisdictional goods can cause, at a minimum, consumer confusion and disappointment.  Consumers can even be put at risk of physical harm by parallel imports, for example when medications or electronics are sufficiently different.  Kirtsaeng does not speak to this legal issue. 

However, before the Kirtsaeng decision, a brand owner could leverage copyright national exhaustion.  If branded goods manufactured and sold abroad were not materially different, the owner could affix a copyrighted image to the product or packaging and prevent parallel importation under copyright law.  At least one district court has taken the position that this practice can constitute copyright misuse; however, that case is currently on appeal to the Ninth Circuit and has not yet been resolved.  In any event, under Kirtsaeng, it would seem that this will no longer be possible.  Now, perhaps, copyright owners such as John Wiley & Sons will turn to trademark law.  U.S. copyright owners might now have to rely on material differences that exist in copyright-protected products made overseas, so that trademark law will fill the exhaustion void created by Kirtsaeng. 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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