Kirtsaeng v. John Wiley & Sons, Inc. continues to make controlling copyright law, visiting the U.S. Supreme Court for the second time on an issue of great importance to copyright owners and litigants. This time, the issued raised for consideration was whether the lower court properly exercised its discretion in denying a $2 million fee application by Kirtsaeng who had been the prevailing party on the novel and, at that time, undecided issue of copyright law raised before the U.S. Supreme Court the first go-around – of whether the first sale-doctrine applied to works manufactured abroad. 

Round One: The First-Sale Doctrine Applies To Foreign-Manufactured Works

In the underlying case, Supap Kirtsaeng discovered that John Wiley & Sons, Inc., an academic publishing company, sold virtually identical English-language textbooks as those sold in the United States in Thailand, but that in Thailand they were sold for much less. Kirtsaeng started purchasing foreign textbooks from Thailand and reselling them to American students for a “tidy profit.”

Wiley sued Kirtsaeng in for copyright infringement, claiming that his activities violated Wiley’s exclusive right to distribute the textbooks. Kirtsaeng raised the first-sale doctrine as a defense, which allows the owner of a copy “lawfully made under this title” to sell or otherwise dispose of the copy without the copyright owner’s permission. See 17 U.S.C. §109(a).  Wiley contended that the first-sale doctrine did not apply when a book was manufactured abroad.  The courts were in conflict on whether the first-sale doctrine applied to goods that were manufactured in a foreign country.

The district court held that the first-sale doctrine was not applicable to goods that were manufactured in a foreign country. The Second Circuit, with a divided panel, held that the first-sale doctrine did not apply to works manufactured abroad because § 109(a), which codifies that doctrine, specifically refers to works that are made in the United States. The Supreme Court reversed,  holding that the first-sale doctrine protects the resale of foreign-made books just as it does domestic-made books.

Round Two: In Deciding Whether To Award Fees to a Prevailing Party, Substantial Weight Must Be Given To Objective Reasonableness, But Other Factors Should Be Taken Into Account

After returning to the district court following his victory, Kirtsaeng applied for an award of more than $2 million attorneys’ fees from Wiley under Section 505 of the Copyright Act. The district court denied Kirtsaeng’s application because Wiley’s positions were objectively reasonable.  Additionally, the district court found that no other circumstance overrode that objective reasonableness so as to warrant fee-shifting.  The Second Circuit affirmed, and certiorari was granted.

The question before the Supreme Court was whether a court, in exercising its discretion to award fees to a prevailing party under the Copyright Act, should give substantial weight to the objective reasonableness of the losing party’s position. The Supreme Court held that a district court, in exercising its discretion under the Copyright Act to award a reasonable attorney’s fee to the prevailing party, should give substantial weight to the objective reasonableness of the losing party’s position, but cautioned that the district court must also take into account other relevant factors.

Background Of Fee Awards Under The Copyright Act

The Copyright Act provides that a district court has discretion to award fees to a prevailing party in civil copyright litigation. Specifically, Section 505 provides:

In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof.  Except as otherwise provided by this title, the court may also award a reasonable attorney’s fee to the prevailing party as part of the costs.

Recognizing the broad leeway §505 gives to district courts, the Supreme Court provided several principles and criteria for courts to consider in deciding fee applications in its earlier decision in Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994).  In Fogerty, the Supreme Court first articulated restrictions on fee awards.  First, a court may not award attorney’s fees as a matter of course, but rather a more particularized, case-by-case assessment must be undertaken.  Second, a court may not treat prevailing plaintiffs and prevailing defendants differently because defendants should be “encouraged to litigate [meritorious copyright defenses] to the same extent that plaintiffs are encouraged to litigate meritorious claims of infringement.”

The Supreme Court also set forth “several nonexclusive factors” to inform a court’s fee-shifting decisions, including: (1) the frivolousness of the non-prevailing party’s claims or defenses; (2) the party’s motivation; (3) whether the claims or defenses were objectively unreasonable; and (4) compensation and deterrence. The Court’s decision in Fogerty, however, “left open the possibility of providing further guidance in the future, in response to (and grounded on) lower courts’ evolving experience.”

Following Fogerty, disagreement emerged in the lower courts on the application of the Fogerty factors.  For example,

• the Second Circuit adopted an approach that gave substantial weight to objective unreasonableness;
• the Fourth Circuit endorsed a totality-of-the-circumstances approach without according special significance to any factor; and
• the Fifth Circuit essentially adopted a presumption that a prevailing party was entitled to fees.

Kirtsaeng Round Two

Both Kirtsaeng and Wiley agreed in their arguments to the Supreme Court that §505 grants courts wide discretion to award attorneys’ fees based on the totality of the circumstances in a case and that the district court’s discretion should be channeled towards the purposes of the Copyright Act. Wiley argued, however, that giving substantial weight to the reasonableness of a losing party’s position will best serve the objectives of the Copyright Act and, by contrast, Kirtsaeng favored an approach that gave special consideration to whether a lawsuit resolved an important and close legal issue that meaningfully clarifying copyright law.

The Supreme Court observed that the objectives of Copyright Act are well settled – “copyright law ultimately serves the purpose of enriching the general public through access to creative works”. The Supreme Court also explained that “[t]he statute achieves that end by striking a balance between two subsidiary aims:  encouraging and rewarding authors’ creations while enabling others to build on that work.”

The Supreme Court reasoned that the approach argued for by Wiley, which places substantial weight on objective unreasonableness of the parties’ positions, did, as Wiley argued, favor the goals of the Copyright Act “because it both encourages parties with strong legal positions to stand on their rights and deters those with weak ones from proceeding with litigation.” The Court’s analysis was that such a standard would encourage both parties to carefully weigh the merits of their respective claims and defenses before committing to, and pursuing to the end, a potentially protracted and costly litigation:

When a litigant – whether plaintiff or defendant – is clearly correct, the likelihood that he will recover fees from the opposing (i.e., unreasonable) party gives him an incentive to litigate the case all the way to the end.  The holder of a copyright that has obviously been infringed has good reason to bring and maintain a suit even if the damages at stake are small; and likewise, a person defending against a patently meritless copyright claim has every incentive to keep fighting, no matter that attorney’s fees in a protracted suit might be as or more costly than a settlement.  Conversely, when a person (again, whether plaintiff or defendant) has an unreasonable litigating position, the likelihood that he will have to pay two sets of fees discourages legal action.  The copyright holder with no reasonable infringement claim has good reason not to bring suit in the first instance (knowing he cannot force a settlement and will have to proceed to judgment); and the infringer with no reasonable defense has every reason to give in quickly, before each side’s litigation costs mount. All of those results promote the Copyright Act’s purposes, by enhancing the probability that both creators and users (i.e., potential plaintiffs and defendants) will enjoy the substantive rights the statute provides.

The Supreme Court rejected Kirtsaeng’s approach – which gave special consideration to whether a lawsuit resolved an important and close legal issue that meaningfully clarifying copyright law – because such a standard would not produce any sure benefits. Fee-shifting would not necessarily encourage parties to litigate close cases to judgment because in the hallmark of hard cases no party can be confident if he will win or lose.  Such an approach would, therefore, act merely to raise the stakes of a suit.  Those stakes could act as either an incentive or a disincentive for litigants to pursue a case to its end.

The Court also noted that Wiley’s approach was more administrable than Kirtsaeng’s as a district court that has just ruled on the merits of a copyright case can easily access whether the losing party advanced an unreasonable claim or defense. The Court recognized that placing substantial weight on objective unreasonableness would treat plaintiffs and defendants even-handedly, as no matter which side wins, the court must assess whether the other side’s position was reasonable.

Nonetheless, in adopting a standard which focused on objective reasonableness, the Court counseled that objective reasonableness “can be only an important factor in assessing fee applications – not the controlling one.” In deciding to shift fees, the district court must take into account a range of considerations beyond the reasonableness of the parties’ litigating positions.  In any given case, a court may award fees even though the losing party offered reasonable arguments or deny fees even though the losing party made unreasonable ones.  For example, a court may order fee-shifting because of the party’s litigation misconduct or to deter repeated instances of copyright infringement or overaggressive assertions of copyright claims, whatever the reasonableness of his claims or defenses.

Because the lower court may not have understood the full scope of its discretion in deciding Kirtsaeng’s fee application, the Supreme Court, in its unanimous decision, remanded Kirtsaeng for further consideration of Kirtsaeng’s fee application.

The Supreme Court’s additional guidance brings clarity and direction to the application of a district court’s discretion.  The greater scrutiny required as to all relevant circumstances and the emphasis on objective unreasonableness should make fee awards for some prevailing parties harder to obtain.