U.S. Supreme Court Allows Wily Gray-Market Imports

by Akerman LLP

The U.S. Supreme Court has settled the long-open question of whether U.S. copyright holders can prevent the importation of gray market products in Tuesday's decision Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. _____, No. 11-697, 2013 WL 1104736 (Mar. 19, 2013). In a 6-3 decision, the Court held that U.S. copyright owners may not stop the importation and re-selling of copyrighted content lawfully sold abroad. The decision has far-reaching implications for consumers, and a host of industries.

The case turned on Section 109(a) of the Copyright Act, 17 U.S.C. § 109(a), which codifies the “first sale doctrine.” The first-sale doctrine recognizes that a copyright owner should not be permitted to exercise perpetual control over the distribution of copies of a copyrighted work. The copyright owner's exclusive right to distribute and sell that particular copy is therefore exhausted at the time of the first commercial sale. Used books can be resold at garage sales without running afoul of the Copyright Act because of the first-sale doctrine.

The countervailing provision of the Copyright Act is Section 602(a)(1), which provides that importation into the United States, without the authority of the copyright owner, of copies of a work that have been acquired outside the United States is an infringement.

The defendant in this case was Supap Kirtsaeng, a Thai student studying in the United States. Mr. Kirtsaeng noticed that some of his textbooks were essentially identical to those sold for considerably less money back home in Thailand. Seeing an opportunity, he asked his friends and family to send him textbooks from Thailand, for him to sell in the United States for a profit. All in all, Mr. Kirtsaeng sold several hundred thousand dollars' worth of textbooks imported this way. Eventually, John Wiley & Sons, Inc. (“Wiley”), a publisher of certain of the books Mr. Kirtsaeng imported and sold, sued for copyright infringement. The district court found for Wiley and imposed statutory damages of $600,000. The Second Circuit affirmed.

This subject has closely divided the Supreme Court for years. In Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135 (1998), the Court's opinion contained strong dicta suggesting that the first-sale doctrine would not protect a gray market importer of copyrighted goods. Id. At 148.  More recently, in Costco Wholesale Corp. v. Omega, S.A., 131 S. Ct. 565 (2010), an equally divided Supreme Court affirmed the Ninth Circuit's holding that the first sale doctrine applies only to copyrighted items that are made and distributed in the United States. However, the Court's order in Costco established no precedent.  
The Court's analysis in Kirtsaeng focused on the meaning text of Section 109(a), which provides that the owner of a particular copy of a work “lawfully made under this title” is entitled to sell that copy. Wiley argued that its books, which were printed abroad and intended solely for foreign sale, were not works “lawfully made under this title.” Wiley argued that the proper interpretation of “lawfully made under this title” should be “in conformance with the Copyright Act where the Copyright Act is applicable.” Thus, argued Wiley, the books, which were printed abroad and intended solely for foreign sale, were not works “lawfully made under this title.” Mr. Kirtsaeng, on the other hand, argued that the books were lawfully made, because they were lawfully made under license from Wiley, albeit for foreign markets.

Justice Breyer's opinion accepted Mr. Kirtsaeng's argument noting several reasons for doing so. First, the language of Section 109(a) plainly contains no geographic limitations. Second, the Court found that historical and contemporary context indicated that Congress intended no geographic limitation to Section 109(a). Third, the Court noted that, under common law, the first-sale doctrine contained no geographic limitations. As a matter of statutory interpretation, when a statute covers an issue previously governed by the common law, it is presumed that Congress intended to retain the substance of the common law. The Court's opinion disposed of the importation ban contained in Section 602(a)(1) by saying that it exists subject to the first-sale doctrine.

What was possibly the most important factor in the Court's decision was the concern about enforcing a prohibition against the sale of lawfully made goods that are obtained from abroad. At the oral argument, Justice Breyer noted the folly of thinking that libraries must obtain licenses to allow the lending of books printed overseas, or that owners of foreign-made telephones, computers, and tablets must obtain consent from software publishers to resell them. The Court's opinion lists the concerns of the American Library Association, used book dealers, the Retail Litigation Center, the Association of Art Museum Directors, among others, at length. A dramatic change in the first-sale doctrine would require these institutions or businesses to engage in a complex permission-verifying process because the copyright owner would be permitted to exercise downstream control over its copyrighted products even where it authorized the import or first sale.

Justices Ginsburg, Scalia and Kennedy dissented from the Court’s decision. Writing for the three, Justice Ginsburg wrote that the majority opinion was ignoring an explicit goal of the Copyright Act, namely, “to protect copyright owners against the unauthorized importation of low-priced, foreign-made copies of their copyrighted works.” The dissenting justices sought to protect market differentiation, allowing copyright holders to treat domestic and foreign markets differently. Thus, the dissenting justices held that since the Copyright Act does not apply outside the United States, goods made outside the United States are not “lawfully made under this title.” The dissent criticized the majority opinion for rendering the importation-ban of Section 602(a)(1) all but completely superfluous.

Finally, the concurring opinion of Justices Kagan and Alito invited Congress to change the law if it thinks that copyright holders need more protection against gray market importations.

Kirtsaeng and its predecessors seek to balance the needs of consumers who may purchase something abroad and later resell it in the United States, and who cannot reasonably be held liable for copyright infringement, with the need of copyright holders' right to differentiate among markets and their various local demands. The U.S. Supreme Court resolved the balancing test in favor of consumers – finding that the needs of the consumers outweighed the needs of the copyright holders. U.S. copyright holders will need to use other methods – such as contractual limitations – to prevent the importation of copies of copyrighted works that are lawfully made abroad, as they can no longer rely upon importation being a potential infringement under U.S. copyright law. However, regardless of the contractual limitations placed on manufacturers or distributors, once the first sale occurs, the copyright holder’s distribution rights will be exhausted and it will no longer have control over the further distribution and sale of the copyrighted product under the Copyright Act. Some commentators have already criticized the Kirtsaeng decision, claiming that without the ability to control the copies of its copyrighted works that are distributed in domestic and foreign markets, U.S. copyright holders will merely offer goods on an all-or-nothing basis, without competitive pricing, and in limited markets.

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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