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Supreme Court Reviews Re-Sale in the U.S. of Lawfully-Manufactured Works Purchased Abroad

Client Advisory

April 16, 2013

In Kirtsaeng v. John Wiley & Sons, Inc., the Supreme Court recently held that U.S. copyright law’s “first-sale doctrine” permits re-sale in the United States of copies made worldwide, and is not limited to simply those copies printed and offered here. No. 11-697, slip op. (U.S. March 19, 2013). 

Under U.S. copyright law, a copyright owner has the exclusive right to distribute copies of a copyrighted work, 17 U. S. C. §106(3). That right is limited by the “first sale” doctrine, which provides that “the owner of a particular copy or phonorecord lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord,” 17 U. S. C. §109(a) (emphasis added). Librarians, eBay sellers and others rely on this rule to lend and sell previously-owned books. Publishers and authors, on the other hand, have looked to foreign markets as opportunities to sell identical or stripped-down English-language books at discount. 

The Supreme Court decision ultimately turned on five words from Section 109 of the Copyright Act. To the Court, this was the question: Does “lawfully made under this title” have geographic limitations? John Wiley and Sons (“Wiley”) argued that the English-language books printed in Thailand were not “lawfully made under this title," as “lawfully made” should refer only to books made in the United States and protected under U.S. copyright law, not for copies produced internationally for exclusive distribution abroad . Supap Kirtsaeng (“Kirtsaeng”), on the other hand, countered that the books were “lawfully made” under the Act as they were sold and printed with Wiley’s permission. 

Kirtsaeng was a student from Thailand who obtained his undergraduate degree at Cornell and successfully completed a Ph.D. program in mathematics at the University of Southern California. To earn money while in school, his family and friends in Thailand bought English-language textbooks that were legally printed with the permission of the copyright holders and sold at discount in Thailand. Kirtsaeng then re-sold over 600 copies of those copyrighted textbooks at a profit on eBay and other websites in the United States. 

Kirtsaeng’s actions soon caught the attention of publisher Wiley. Wiley sued in the United States District Court for the Southern District of New York, arguing that the first-sale doctrine should not apply to works offered internationally. Wiley based its claims on Section 602 of the Copyright Act (the prohibition on importation without permission) and Section 106 (the prohibition of distribution without permission). The district court ruled for Wiley and awarded $600,000 in damages. The U.S. Court of Appeals for the Second Circuit agreed, holding that the unauthorized importation of textbooks produced under foreign law for foreign markets, and acquired outside the U.S., infringed Wiley’s rights. 

Justice Breyer, writing on behalf of the majority of the Supreme Court in a 6-3 decision, disagreed with Wiley’s attempt to impose a geographic limitation on “lawfully made.” Kirtsaeng, slip op. 7-8.  “Lawfully made,” according to the Court, refers simply to infringing versus non-infringing, with no geographical limits.  Id.  The first-sale doctrine, Justice Breyer explained, applies to copies made anywhere in the world "as long as their manufacture met the requirements of American copyright law."  Id. In Justice Breyer’s words, “the Constitution’s language nowhere suggests that its limited exclusive right should include a right to divide markets or a concomitant right to charge different purchasers different prices for the same book." Id. at 32.

Who are the losers and winners? 

This decision currently pertains only to printed books, not digital, as the first-sale doctrine only applies to works actually sold – and today’s digital books or e-books are licensed, not sold. On the one hand, publishers and authors could suffer loss of profits and royalties for printed books, and consumers may see increased prices down the road. On the other hand, unless Congress enacts legislation to overturn this decision, libraries can exhale, knowing that they may continue to legally purchase and lend books lawfully-manufactured internationally, and re-sellers on eBay and other websites can operate without fear of suit. Likewise, big box wholesalers can continue the practice of buying discounted copyrighted items abroad for resale in the United States. 

Ripple Effect?

Open questions are whether, and how, this decision will affect the “first-sale” or “patent exhaustion” doctrine at patent law, and the sale of “gray market” goods, or “parallel imports,” under trademark law. 

Under patent law, the “first sale” or “patent exhaustion” doctrine allows re-sale of a U.S.-purchased product, and exhaustion of the patent in products and methods by the patent-holder after the “first sale.” The exhaustion doctrine does not currently apply to products that are manufactured and sold in a foreign country and is likely to stay as is for the time being. On March 25, 2013, the Supreme Court denied a petition for a writ of certiorari in Ninestar Tech. Co. v. U.S. Int’l Trade Comm’n for review of the Federal Circuit’s ruling that United States patent rights are not exhausted by the first foreign sale of foreign-made products. Ninestar Tech. Co. v. U.S. Int’l Trade Comm’n, 667 F.3d 1373 (Fed. Cir. 2012). 

Similarly, as U.S. trademark law now stands, goods that are genuine branded products, not counterfeit, and legally manufactured for purchase outside the U.S. for an international market only, may be considered unlawful when re-sold in the U.S. in competition with the same domestic trademarked product. Policies behind this law include not only pricing for an international market, and competition with U.S. distributors, but also the erosion of goodwill and the potential for physical injury to consumers here, especially if products are imported that are not made under U.S. safety requirements. 

Conclusion

With Kirtsaeng, the Supreme Court applied the first-sale doctrine to copyrighted works lawfully manufactured abroad for sale in U.S. markets. We will see whether the Court’s holding affects related doctrines under patent and trademark law. Consumers appear to be the beneficiaries of this immediate ruling, as libraries, museums, schools and other institutions can continue operation without fear of suit, and re-sellers and big box retailers can continue to offer copyrighted works at lower cost.


For questions regarding Kirtsaeng, “first sale” or “gray market” doctrines, or any other intellectual property issues, please contact the author Scott M. Sisun (212-238-8728, sisun@clm.com) or Rose Auslander (212-238-8601, auslander@clm.com), H. Thomas Davis, Jr. (212-238-8850, davis@clm.com) or your regular CL&M attorney.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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