June 2013: Patent Litigation Update - First Sale Doctrine Applies to Copyrighted Works Made Abroad.

In a recent 6-3 decision with potentially significant implications for the functionally analogous patent exhaustion doctrine, the Supreme Court held in Kirtsaeng v. John Wiley & Sons, Inc. that the first sale doctrine applies to copyrighted works that are lawfully made abroad. 133 S. Ct. 1351 (2013).

In Kirtsaeng, academic textbook publisher John Wiley & Sons, Inc. filed suit for copyright infringement under 17 U.S.C. §§ 106(3) and 602 against Kirtstaeng, a student whose friends and family in Thailand bought and sent him copies of foreign edition English-language textbooks, lawfully made and sold abroad, so that he could sell them at a profit in the United States. Kirtsaeng, 133 S. Ct. at 1356. Kirstaeng argued that his operation was permissible under the first sale doctrine, which provides that once a copyrighted work is lawfully sold, the copyright owner’s interest in that particular copy of the work is exhausted, and the new owner may lawfully resell that copy without permission from the copyright holder. Id. at 1357 (discussing 17 U.S.C. § 109(a)). Rejecting this argument, the district court held that the first sale doctrine did not apply to “foreign-manufactured goods (even if made abroad with the copyright owner’s permission),” and the Second Circuit affirmed, concluding that a geographical limit on the first sale doctrine existed because the phrase “lawfully made under this title” in § 109 did not include “American copyrighted works manufactured abroad.” Id.

The Supreme Court reversed the Second Circuit, holding that § 109 did not support geographical limits on the first sale doctrine. Id. at 1371. Specifically, it noted that “§ 109(a)’s language, its context, and the common-law history of the ‘first sale’ doctrine, taken together, favor[ed] a non-geographical interpretation.” Id. at 1358. It further doubted that Congress would have intended to geographically limit the scope of the first sale doctrine in a way that would “threaten ordinary scholarly, artistic, commercial, and consumer activities.” Id. As such, the Supreme Court ruled that the first sale doctrine “applies to copies of a copyrighted work lawfully made abroad.” Id. at 1356-57.

While Kirtsaeng may lead to wider availability of less expensive copyrighted materials from global markets, the decision may ultimately have more of an impact in the patent litigation context. The patent exhaustion doctrine is functionally analogous to the first sale doctrine—i.e., when a patented item is “lawfully made and sold,” the new owner may lawfully resell the item without the patent holder’s permission. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 618 (2008). Extending the reasoning in Kirtsaeng to the patent context, consumers (or competitors) could conceivably purchase and re-import lawfully produced foreign products without infringing domestic patents, resulting in far-reaching consequences for patent holders and licensees, particularly companies that price their foreign products at substantially reduced prices. For example, pharmaceutical companies have traditionally charged Americans higher prices than foreign consumers, partly due to the need to recover research and development costs. See, e.g, Paul Roderick Gregory, Obama Care Will End Drug Advances and Europe’s Free Ride (Unless China Steps in), Forbes Economics (July 1, 2012, 1:57 PM), http://www.forbes.com/sites/paulroderickgregory/2012/07/01/obama-care-will-end-drug-advances-and-europes-free-ride-unless-china-steps-in/ (estimating that “average prices for prescription drugs in the United States are 50 to 100 percent higher than in other industrialized nations . . . .”). Under the Kirtsaeng rationale, consumers (or competitors) could lawfully purchase foreign-produced pharmaceuticals, then re-import them into the United States for use or resale at lower prices. The net result could be lower prices for consumers, but likely also significant reductions in net profits for manufacturers, licensees, and developers of pharmaceuticals.