Supreme Court Clarifies the Parameters of the “First Sale” Doctrine in the Cross-Border Context

by Smith Anderson

First Sale Doctrine

Under the Copyright Act, the exclusive right of a copyright owner “to distribute copies . . . of [a] copyrighted work,” 17 U.S.C. § 106(3) is limited, in part, by the “first sale” doctrine. The first sale doctrine, which forms the basis of the secondary market for copyrighted material, provides that “the owner of a copy or phonorecord lawfully made under this title . . .  is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the copy or phonorecord.”  § 109(a). That is, the copyright owner’s rights are exhausted upon the “first sale” of a lawfully made copyrighted work. Following this first sale, the new owner and subsequent owner can use or dispose of that copy as she or he sees fit without permission from the copyright owner.

Kirtsaeng (First sale doctrine in cross-border context)

The United States Supreme Court recently determined that the first sale doctrine extends to copyrighted material that was lawfully produced and purchased overseas, then imported and sold in the United States. In Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. ____ (2013), Supap Kirtsaeng, a citizen of Thailand, moved to the United States in 1997 to study mathematics. While he was studying in the United States, Kirtsaeng asked his family and friends to buy English-language textbooks (including textbooks produced by affiliates of Wiley & Sons, Inc.) at Thai book shops, where they sold at low prices, and send them to him. Kirtsaeng would then sell the textbooks in the United States, reimburse those who sent them and keep the profits. Wiley brought a lawsuit for copyright infringement, arguing that Kirtsaeng’s importation and sale of the textbooks violated Wiley’s exclusive distribution rights as well as a separate provision of the Copyright Act, § 602(a)(1), which restricts importation of copyrighted works without the authority of the copyright owner.  

The Supreme Court held that copies of copyrighted works manufactured abroad with authorization from the copyright holder are "lawfully made under" the Act. Consequently, these works fall under the first sale doctrine, 17 U.S.C. § 109, and because they were manufactured abroad, they do not fall under § 602(a)(1)’s prohibition against “[i]importation into the United States, without the authority of the owner of copyright . . . of copies . . . of a work that have been acquired outside the United States.” The Court essentially restricted the prohibition of § 602(a)(1) to copyrighted works that were produced in the United States, exported, sold abroad and then imported for re-sale.  Because the works at issue were manufactured abroad, Kirtsaeng’s activities were protected by the first sale doctrine. In sum, the Court concluded that “lawfully made under” in § 109 means “in accordance with” or “in compliance with” the Copyright Act, regardless of the location in which the manufacturing takes place; Section 109 does not contain a geographical limitation. 

Reactions to Kirtsaeng

The Motion Picture Association of America and the Recording Industry Association of America have argued that the ruling in favor of Kirtsaeng will hinder their ability to control their global markets and territorial licensing methods. The Software & Information Industry Association, a software-maker and digital-content trade group, was also critical of the decision. “The ruling for Kirtsaeng will send a tremor through the publishing industries, harming both U.S. businesses and students around the world,” the group’s general counsel said in a statement. “Today’s decision will create a strong disincentive for publishers to market different versions and sell copies at different prices in different regions. The practical result may very well be that consumers and students abroad will see dramatic price increases or entirely lose their access to valuable U.S. educational resources created specifically for them.” In dissent, Justice Ruth Bader Ginsburg essentially agreed: “Because economic conditions and demand for particular goods vary across the globe, copyright owners have a financial incentive to charge different prices for copies of their works in different geographic regions,” she wrote. “Their ability to engage in such price discrimination, however, is undermined if arbitrageurs are permitted to import copies from low-price regions and sell them in high-price regions.” The decision was also a blow to the Obama administration, whose position is that the Copyright Act does not apply outside the United States.

A variety of interests applauded the decision. Used book sellers, libraries, video rental stores, eBay and groups, such as Public Knowledge, who feared too tight a control on copyright laws would harm human progress, favored the outcome. “The fact that these arguments made it to the Supreme Court is unsettling. We were almost in a situation where anyone that held a garage sale or loaned a book to a friend could be in violation of copyright law,” said Sherwin Siy, a vice president of the lobbying group Public Knowledge. “We believe this is evidence that a larger conversation about copyright reform is in order to restore the balance of the law between the interests of authors, copyright holders and the public.”

Practical Implications

By legitimizing the resale market for copies of copyrighted works manufactured outside of the United States, the Supreme Court’s Kirtsaeng decision limited copyright owners’ right to impose liability for the downstream sale of these works. Consequently, this decision has clear implications for copyright owners who might seek to charge different prices in different countries, making it more difficult to segment international markets. This decision will negatively affect the ability of copyright owners to use copyright law to prevent parallel importation of their copyrighted works, which may result in a price increase for these goods overseas. For textbook publishers, this decision may signal the end of offering foreign manufactured English-editions of copyrighted works that are intended for foreign use but have the same content as the editions made and sold in the United States.

The case may also have ramifications beyond copyright law, especially in the patent arena. Unlike copyrights, the first sale doctrine for patents is based on judge-made common law and is not codified in the patent statutes. Under domestic patent exhaustion, once a patent holder has sold his patented product, the patentee losses all rights under the patent to restrain further alien-ability. However, the first sale of a patented product outside of the United States, the Federal Circuit has held, does not terminate a patent owner’s exclusive U.S. patent rights to that product. Currently, then, there is no international patent exhaustion. But the Supreme Court has never ruled on the issue, and, should it do so, Kirtsaeng may provide guidance. Should the Supreme Court determine that, like copyrighted works under Kirtsaeng, patented works produced and sold overseas exhausted a patent owner’s rights to restrain alien-ability, the implications would be significant. In that context, patented manufactured goods produced and sold abroad could be re-imported to the United States and sold without violation of any patent rights.

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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