Quality King
The U.S. Supreme Court partly addressed section 109(a)'s reach in Quality King Distributors, Inc. v. L'anza Research International, Inc., 523 U.S. 135 (1998). In Quality King, the copyrighted works (shampoo and conditioner bottle labels) were manufactured in the United States but first sold abroad at prices 35 percent to 40 percent less than identical U.S. products. Some of the discounted foreign products were then imported back into the United States and sold to unauthorized retailers. L'anza Research International, the copyright owner, sued, alleging violation of the Copyright Act's importation provision, 17 U.S.C. § 602(a)(1) (then §602(a)), which makes importation of a copyrighted work into the United States without the authority of the copyright owner an infringement of the distribution right:
Importation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside of the United States is an infringement of the exclusive rights to distribute copies . . . under section 106. . . .
Because section 602(a)(1) refers to section 106, which is, in turn, limited by section 109(a), the Supreme Court found that the first-sale doctrine exhausts the copyright owner's right to prohibit importation of U.S.-produced works first sold abroad. In other words, under Quality King, the owner of a copy of a U.S.-produced copyrighted work acquired abroad is free to bring that copy into the United States without fear of retribution from the copyright holder.
Because Quality King involved only U.S.-produced copyrighted works—and so were unquestionably "lawfully made under" the Copyright Act—the Court had no need to consider any broader implications of section 109(a). Still, the Court noted in passing that "presumably only those [copies] made [by an authorized party in the United States] . . . would be 'lawfully made under this title' within the meaning of §109(a)." Quality King, 523 U.S. at 148 (emphasis added).
And so, the reach of the first-sale doctrine in connection with works manufactured abroad remained in doubt after Quality King.
An Enterprising Young Man
Supap Kirtsaeng was a mathematics graduate student at the University of Southern California when he discovered that textbook publishers often sell their books in the United States for substantially more than the identical book in his home country of Thailand. Seeing an opportunity, Kirtsaeng had family and friends purchase textbooks in Thailand and mail them to the United States, where he sold them on eBay for a handsome profit. By this simple but enterprising arbitrage, Kirtsaeng was able to generate roughly $900,000 in revenue before one of the publishers, John Wiley & Sons, Inc., sued.
Like L'anza in Quality King, Wiley claimed that Kirtsaeng's unauthorized importation of the foreign-produced textbooks violated Wiley's distribution right via the importation prohibition in section 602(a)(1) of the Copyright Act. Unlike L'anza in Quality King, however, Wiley produced and distributed its foreign version textbooks entirely outside the United States. Accordingly, argued Wiley, the first-sale doctrine did not exhaust its rights (as it did L'anza's in Quality King), because its foreign produced books were not "lawfully made under [the U.S. Copyright Act]," as required by section 109(a).
Kirtsaeng countered that "lawfully made under this title" contains no geographic limitation. Rather, the wording merely means "made in accordance with U.S. copyright law," that is, made without infringing copyright. According to Kirtsaeng, because Wiley had authorized the production and distribution of its foreign produced textbooks, they were "lawfully made under [U.S. copyright law]"; thus, the first-sale doctrine applied. In other words, Kirtsaeng argued, section 109(a) works a global exhaustion of the copyright holder's distribution right.
Wiley won in both the district court and the Second Circuit Court of Appeals. In each case, the court determined that the "first sale" exception was inapplicable because it applies only to copyrighted works made in the United States.
The Supreme Court: The First-Sale Doctrine Goes Global
Despite suggestions to the contrary in the Quality King decision, the Kirtsaeng Court found—after considerable discussion of statutory construction, including linguistics, and the common-law history of the "first sale" doctrine—that the phrase "lawfully made under this title" has no geographic significance. Rather, the Court found that the first-sale doctrine applies to copies of copyrighted works that are lawfully made anywhere in the world. Thus, section 109(a) effects a global exhaustion of the Copyright Act's distribution right, and the lawful owner of any lawfully made copy, wherever produced and wherever acquired, is free to bring that copy into the United States and dispose of it as he or she wishes.
In reaching this conclusion, the Court found that a non-geographic reading of "lawfully made under this title" was the least complicated interpretation while still promoting the traditional copyright objective of combating piracy.
The language of § 109(a) says nothing about geography. The word "under" can mean "[i]n accordance with." [Citations omitted.] And a nongeographical interpretation provides each word of the five-word phrase with a distinct purpose. The first two words of the phrase, "lawfully made," suggest an effort to distinguish those copies that were made lawfully from those that were not, and the last three words, "under this title," set forth the standard of "lawful[ness]." Thus, the nongeographical reading is simple, it promotes a traditional copyright objective (combatting piracy), and it makes word-by-word linguistic sense. The geographical interpretation, however, bristles with linguistic difficulties. It gives the word "lawfully" little, if any, linguistic work to do. (How could a book be unlawfully "made under this title"?) It imports geography into a statutory provision that says nothing explicitly about it. And it is far more complex than may at first appear.
Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697, slip op. at 8–9 (2013).
It also reasoned that, because the immediate predecessor to section 109(a) in the 1909 Copyright Act did not contain a geographical limitation, Congress could not have intended to incorporate such a limitation into the current statute by adding the geographically ambiguous phrase "lawfully made under this title." Rather, according to the majority, Congress's intent in adding the phrase was to separate authorized copies from pirated ones:
The predecessor [statutory language] says that the "first-sale" doctrine protects "the transfer of any copy the possession of which has been lawfully obtained." The present version says that "the owner of a particular copy or phonorecord lawfully made under this title is entitled to sell or otherwise dispose of the possession of that copy or phonorecord." What does this change in language accomplish? The language of the former version referred to those who are not owners of a copy, but mere possessors who "lawfully obtained" a copy. The present version covers only those who are owners of a "lawfully made" copy. Whom does the change leave out? Who might have lawfully obtained a copy of a copyrighted work but not owned that copy? One answer is owners of movie theaters, who during the 1970's (and before) often leased films from movie distributors or filmmakers. [Citations omitted.] Because the theater owners had "lawfully obtained" their copies, the earlier version could be read as allowing them to sell that copy, i.e., it might have given them "first sale" protection. Because the theater owners were lessees, not owners, of their copies, the change in language makes clear that they (like bailees and other lessees) cannot take advantage of the "first sale" doctrine. This objective perfectly well explains the new language of the present version, including the five words here at issue. Section 109(a) now makes clear that a lessee of a copy will not receive "first sale" protection but one who owns a copy will receive "first-sale" protection, provided, of course, that the copy was "lawfully made" and not pirated.
Id. at 13.
Finally, the Court leaned on a canon of statutory interpretation. According to the majority, when a statute codifies a concept derived from the common law, the Court presumes that Congress intended to retain the substance of the common law unless the statute clearly indicates otherwise. Because the common-law concept of the first-sale doctrine contained no geographical limitation, neither does the statute:
The common-law doctrine makes no geographical distinctions; nor can we find any in Bobbs-Merrill (where this Court first applied the "first sale" doctrine) or in § 109(a)'s predecessor provision, which Congress enacted a year later...Rather, as the Solicitor General acknowledges, "a straightforward application of Bobbs-Merrill" would not preclude the "first sale" defense from applying to authorized copies made overseas. Brief for United States 27. And we can find no language, context, purpose, or history that would rebut a "straightforward application" of that doctrine here.
Id.
And what of Quality King? As noted, the Court remarked in that case that "presumably only those [copies] made [by an authorized party in the United States] . . . would be 'lawfully made under this title' within the meaning of §109(a)." Quality King, 523 U.S. at 148. In Wiley's view (and not an unreasonable one), that statement already gave effect to its geographically limited interpretation of what it means to be "lawfully made under this title. . . ." Not so in the Court's view because, among other reasons, the prior remark was dictum:
We cannot, however, give the Quality King statement the legal weight for which Wiley argues. The language "lawfully made under this title" was not at issue in Quality King; the point before us now was not then fully argued; we did not canvas the considerations we have here set forth; we there said nothing to suggest that the example assumes a "first sale"; and we there hedged our statement with the word "presumably." Most importantly, the statement is pure dictum. It is dictum contained in a rebuttal to a counterargument. And it is unnecessary dictum even in that respect. Is the Court having once written dicta calling a tomato a vegetable bound to deny that it is a fruit forever after?
Id. at 27.
Observations and Conclusions
The Court's non-geographical interpretation of the first-sale doctrine likely will have far-reaching effects.
On the one hand, organizations such as libraries, used book dealers, and museums view the Court's ruling in Kirtsaeng as a victory. They see Kirtsaeng as clarifying that they will not have to find and seek permission from copyright holders to lend or sell their books or display their artwork acquired from foreign sources. In addition, the Court's majority believes its holding will protect the right of American consumers to resell a broad range of foreign produced products such as automobiles, microwaves, mobile phones, and computers that contain copyrighted software.
On the other hand, the Court's ruling will certainly make it much more difficult for copyright holders to divide foreign and domestic markets. In the digital age, where it is easy to shop for, purchase, and ship products globally, the Kirtsaeng ruling will greatly limit a copyright holder's ability to maintain geographic price disparities, as historically necessitated by regional economics. Consequently, one effect of Kirtsaeng may be a trend toward global price equilibration, at least for internationally interchangeable products, such as books. Some goods, however, may be less affected by Kirtsaeng. For example, technology companies may still be able to maintain a degree of regional price differentiation, where various regulations outside of copyright law tend to make their products less internationally fungible.
Kirtsaeng may also foretell a rise in leases or rentals, rather than outright sales of certain copyrighted works. By its terms, section 109(a) extends first sale protection to the "owner of a particular copy." Lessees, by definition, are unprotected. So, a copyright holder can circumvent the effects of section 109(a) by renting works to its customers. In the Internet age—where products such as books, magazines, newspapers, music, video games, and motion pictures can be delivered, consumed, and deleted digitally—rental rather than sale of such products may be an attractive way for some industries to protect current regional pricing structures.
Moreover, the Kirtsaeng decision may have implications for the exhaustion doctrine under U.S. patent law. Similar to the first-sale doctrine, the exhaustion doctrine limits a patent owner's exclusive rights in a particular item upon the first authorized sale. In Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 394 F.3d 1368 (Fed. Cir. 2005), the Federal Circuit Court of Appeals explained that "[t]he patentee's authorization of an international first sale does not affect exhaustion of that patentee's rights in the United States . . . because the United States patent system does not provide for extraterritorial effect." Id. at 1376. In the wake of Kirtsaeng, that reasoning is in doubt. Nonetheless, on March 25th, just a week after deciding Kirtsaeng, the Supreme Court denied certiorari in Ninestar Technology Co. v. U.S. International Trade Commission. That case presented the same issue, albeit from a patent perspective; namely, whether the authorized sale of a patented item outside the United States exhausts the patentee's rights. Still it is widely expected that the Federal Circuit will at some point revisit the issue in light of Kirtsaeng.
Finally, given the impact that Kirtsaeng will have on many businesses, one would expect certain rights holders to pressure Congress to rewrite section 109(a). Copyright holders in fact did pressure Congress after the Court's Quality King decision and were successful in getting the House to pass a proposed amendment to section 109(a) as part of the Digital Millennium Copyright Act. Under that amendment, the first-sale doctrine would have been limited to copies "distributed in the United States by the authority of the copyright owner." H.R. 2281, 105th Cong. § 417 (1998). This proposed "domestic exhaustion" amendment, however, ultimately died in reconciliation with the Senate's version of the bill. Only time will tell whether copyright holders could prevail to blunt the impact of Kirtsaeng. Of course, the Copyright Act is nothing if not an amalgamation of special interest legislation. The odds, it would seem, may be in their favor.
Keywords: litigation, intellectual property, copyright, first-sale doctrine, exhaustion doctrine, importation, Kirtsaeng v. John Wiley & Sons, Inc., non-geographic interpretation