To the Chagrin of Copyright Holders, Consumers Win the Right to Resell Imported Books

Sharona H. Sternberg

By Sharona Sternberg. A member of our Litigation Practice Group

May 2013 IP Update

Just over a century ago, when buying a book for a dollar still seemed expensive, the Supreme Court first recognized the “first sale doctrine,” a basic exception to a copyright owner’s distribution rights.  Once a consumer buys a copyrighted product, like a book, the copyright holder—whether it be the author or a publisher—has exhausted all rights to control the product’s downstream distribution.

As long as the legitimate buyer does not make any copies, he is free to give away, lend, or discard his book as he pleases.  Most significantly, the buyer can resell the book at any price, potentially undercutting the demand for new books sold at prices set by the original copyright owner or publisher.

Following the 1908 Bobbs-Merrill decision and subsequent cases, the first sale doctrine was codified as § 109(a) of the Copyright Act.  In 1998, the U.S. Supreme Court in Quality King revisited the right of resale, holding that a copyrighted item manufactured in the United States but sold abroad could be legally imported and resold in the U.S.  The court held that the copyright owner’s importation right [§ 602(a)(1)] is subject to the general distribution right, which is expressly limited by the first sale doctrine.  Goods can thus make the round-trip to Malta and back without the permission of the copyright holder.

The Quality King court, however, did not resolve the more common scenario in which a copyrighted product is manufactured abroad and sold abroad (often at a price lower than  for the same product in the United States), and is later resold in the U.S. at a discount.

Without committing itself, the court implied that the sale into the United States of these “gray market” goods would not be protected by the first sale doctrine.  In a 2010 case, Costco v. Omega, the court addressed this exact quandary.  However, because of Justice Kagan’s recusal due to her participation in the case as Solicitor General, the court was deadlocked at 4-4 and the debate continued.

In March 2013, the Supreme Court finally provided an answer, in Kirtsaeng v. John Wiley and Sons. Supap Kirtsaeng, a citizen of Thailand, moved to the United States in 1997 to study at Cornell University.  Noting the discrepancy in the price of textbooks between the U.S. and Thailand, Kirtsaeng asked family and friends back home to buy foreign editions of English-language texts in Thailand at the lower prices and ship them to the U.S.  Kirtsaeng would then resell them, reimburse his family and friends, and keep the profit.  Kirtsaeng reportedly pocketed hundreds of thousands of dollars using this business model.

In 2008, Wiley, one of the publishers of the textbooks, sued Kirtsaeng for copyright infringement.  The Second Circuit ruled that Kirtsaeng could not assert the first sale defense because the doctrine does not apply to “foreign-manufactured goods,” even if they were made with the copyright owner’s permission and acquired lawfully.  The jury assessed statutory damages of $600,000 ($75,000 per work).

The Supreme Court’s review hinged on the interpretation of a single clause within § 109(a), which states that the first sale doctrine applies only to “the owner of a particular copy… lawfully made under this title.”  The Second Circuit had agreed with Wiley that the highlighted clause does not cover copies of American works manufactured abroad.

The Supreme Court, however, held that § 109(a) could not be read as a geographical limitation.  Rather, Justice Breyer wrote, the first sale doctrine applies to all copyrighted works – anywhere in the world – as long as their manufacture is in compliance with American copyright law.

The court was concerned with the potentially absurd consequences that could result from a territorial reading.  Libraries, used-book dealers, technology companies, museums, and art galleries that have acquired countless works manufactured abroad would suddenly be afflicted with the task of tracking down the copyright owners of every single one of those works to obtain permission to lend, display, or resell the items.  Resale of a foreign manufactured car, Justice Breyer warned, could theoretically require permission of the countless copyright holders who contributed some component of automobile software.

For these reasons, the importation provision does not prohibit someone from sending gray market goods back to the U.S. and reselling without the copyright owner’s permission.  The court rejected any language from Quality King that suggested otherwise as mere dictum, that is, as an incidental remark that is non-binding.

Dismissing the majority’s “parade of horribles” as “largely imaginary,” the dissent, written by Justice Ginsburg and joined by two other justices, worried that the holding restricts the rights of copyright holders to engage in price discrimination on a nation-by-nation basis.  Before Kirtsaeng, publishers like Wiley were able to distinguish between foreign and domestic markets, pricing their goods at rates commensurate with the cost of production and the competitive conditions in each country.  Kirtsaeng shrinks the copyright owner’s exclusive importation right under § 602(a) to limited circumstances such as copies made abroad without the authorization of the copyright owner.

The majority conceded that market segmentation is now difficult, if not impossible, but the court could “find no basic principle of copyright law that suggests that publishers are especially entitled to such rights.”  Ultimately, the court determined that it is up to Congress to protect copyright owners from the importation of authorized copies made abroad.

The practical ramifications of Kirtsaeng are considerable.  While certainly a win for libraries and museums, the decision may also lead to a price reduction of copyrighted goods in America (good for consumers, bad for publishers) and/or a price increase in foreign markets, thereby limiting the accessibility of goods to individuals in less affluent countries.  Varying prices on a country-by-country basis had allowed publishers to charge less in less prosperous markets.  Without the protection previously afforded by the exclusive right to import, publishers may now elect to avoid low-cost markets entirely, to the detriment of consumers in those markets.

Even so, the first sale doctrine has become increasingly less useful to consumers in the past few decades as publishers have taken advantage of technology to inhibit further distribution of copyrighted goods.  For example, software and digital content publishers use end-user license agreements to contract around the first sale doctrine through various click-wrap, shrink-wrap, and other license agreements prohibiting downstream transfer or resale.

In fact, the right of resale may not apply to digital goods at all, so consumers could never resell or transfer digital music, e-books, or downloaded computer software.   This constraint on the first sale doctrine is illustrated by a very recent decision, Capitol Records v. ReDigi, where a New York federal judge considered a startup, ReDigi, that had been selling used songs where the uploader would lose access to the music after the file was transferred to the new buyer’s computer.

The court held that ReDigi was liable for copyright infringement since “the first sale defense is limited to material items.” Unless the law recognizes a “digital first sale” doctrine, copyright holders will be increasingly incentivized to go digital.

To further combat the importation of gray market goods, publishers can offer different version of products abroad that would be less interesting to Americans, such as Thai-language textbooks, or continually produce new editions of textbooks to offset the used-book market.  Publishers can also press Congress to statutorily reverse the Kirstaeng opinion, or they can turn to international treaties or free trade agreements.

In the short term at least, consumers can expect a rise in cheap, authentic products sold on venues such as eBay. Trademark law cannot capture these gray market goods because they were made under the authority of the trademark holder and there is no substantial difference between the goods sold abroad and those sold in the United States.

Interestingly, just two days after the Kirtsaeng decision, the Supreme Court declined to review Ninestar v. ITC – a patent infringement suit holding that U.S. patent rights are not exhausted by sales abroad.  Though the first sale rule applies to both copyright and patent law, it is actually codified in the Copyright Act but developed only through common law as applied to patents.

For now, the Federal Circuit’s Ninestar decision remains good law, but in light of Kirtsaeng, the applicability to patents of the first sale doctrine is certain to resurface.