On August 15, the Second Circuit Court of Appeals issued a decision regarding the copyright “first sale doctrine” that may have far-reaching influence on the activities of U.S. copyrights owners, possibly causing the largest and most prestigious of them to move offshore their manufacturing and publishing operations. See John Wiley & Sons, Inc. v. Kirtsaeng, (2d Cir. Aug. 15, 2011).

17 USC § 109(a) – The Statutory Foundation for the First Sale Doctrine Section 106(3) of the Copyright Act of 1976 (the “Copyright Act”) grants certain exclusive rights to the owner of a copyright in a copyrighted work, including the exclusive right to distribute (and authorize others to distribute) copies of the work. 17 U.S.C. § 106 (“Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: … (3) to distribute copies … of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; …”). Under Section 602(a) of the Copyright Act, unauthorized importation into the U.S. of a copyrighted work acquired outside the U.S. is an act of copyright infringement because it violates the copyright owner’s exclusive right of distribution. 17 U.S.C. § 602(a) (“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 the United States is an infringement of the exclusive right to distribute copies … under section 106, actionable [for infringement] under section 501.”).

The exclusive rights of the copyright owner, including the exclusive right of distribution, are, however, expressly limited by sections 107 through 120 of the Copyright Act. 17 U.S.C. § 106 (“Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: …”). One such express limitation is the so-called first sale doctrine codified in section 109(a), which entitles the “owner of a particular copy” of a copyrighted work that is “lawfully made under this title” to sell or otherwise dispose of that copy without the authorization of the copyright owner. 17 USC § 109(a) (“the owner of a particular copy … lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy …”).1

When a copyrighted work is made in the U.S. and sold in the U.S. by or under the authority of the copyright owner, the first sale doctrine clearly kicks in, and under section 109(a) the purchaser may, without the authority of the copyright owner, sell or otherwise dispose of that copy of the work. But that was easy. Consider the situation in which the copyrighted work is made abroad by or under the authority of the copyright owner, and sold to a purchaser outside the U.S. Does the first sale doctrine apply when the work is re-sold in the U.S. by the purchaser? Or consider the situation in which the copyrighted work is made in the U.S. by or under the authority of the copyright owner, and then sold to a purchaser outside the U.S. Does the first sale doctrine apply when the work is re-sold in the U.S. by the purchaser? Would your answer to these questions depend on whether the purchaser was authorized by the copyright owner to re-sell the work in the U.S.? In each of those circumstances, the breadth of the first sale doctrine is far from crystal clear. If the work is deemed to have been “lawfully made under this title” within the meaning of that phrase in section 109(a) – even though it was made outside the U.S. or was made in the U.S. but purchased outside the U.S. – then the first sale doctrine allows the purchaser to import the work into the U.S. and sell the work in the U.S. But if not, such importation and sale without the authority of the copyright owner is an act of copyright infringement.

The subject of this writing are the most recent legal authorities on the issue of the proper interpretation of the “lawfully made under this title” clause of section 109(a).

Quality King – The U.S. Supreme Court Application of the First Sale Doctrine

In Quality King Distributors Inc. v. L'anza Research Intl., Inc., 523 U.S. 135, 118 S. Ct. 1125, 140 L. Ed. 2d 254 (1998), the Supreme Court considered whether the first sale doctrine applied to copies of a work manufactured in the U.S., sold outside the U.S. with the authority of the copyright owner, and then imported into the U.S. without authority of the copyright owner. More specifically, hair care products bearing a copyrighted label were manufactured in the U.S. by the copyright owner, exported to an authorized foreign distributor, sold to unidentified third parties overseas, shipped back into the U.S. without the copyright owner’s permission, and then sold in California by unauthorized retailers. Id., 523 U.S. at 138-139, 140 L. Ed. 2d at 260-61.

The copyright owner (L’anza) sued the unauthorized importers for copyright infringement, alleging that the importation and subsequent sale of hair care products bearing the copyrighted labels violated its exclusive rights under §§ 106(3) (distribution) and 602(a) (importation as an act of distribution). The district court rejected the importers’ defense based on the first sale doctrine of section 109(a) and entered summary judgment in favor of the copyright owner. The Ninth Circuit Court of Appeals affirmed. 98 F. 3d 1109, 1114 (9th Cir. 1996). “Because its decision created a conflict with the Third Circuit, see Sebastian Int'l, Inc. v. Consumer Contacts (PTY) Ltd., 847 F. 2d 1093 (3rd Cir. 1988), we granted the petition for certiorari. 520 U. S. 1250 (1997).” Quality King, 523 U.S. at 139-140, 140 L. Ed. 2d at 261.

The Supreme Court reversed and held that the copies imported into the U.S. were subject to the first sale doctrine and thus immune from a charge of infringement because the copies were made in the U.S. and thus were “lawfully made under this title” within the meaning of section 109(a). In reaching that conclusion the Court rejected the argument that importation into the U.S. was not a sale or other disposition of the copyrighted work protected under the first sale doctrine of Section 109(a), which allows the owner of the copy of the work “to sell or otherwise dispose of the possession of that copy”. Quality King, 523 U.S. at 151-52, 140 L. Ed. 2d at 268-69. The Court concluded, “[a]n ordinary interpretation of the statement that a person is entitled ‘to sell or otherwise dispose of the possession’ of an item surely includes the right to ship it to another person in another country.” Id., 523 U.S. at 152, 140 L. Ed. 2d at 269.

Thus, we have one of our answers. The first sale doctrine applies to any copyrighted work made in the U.S. by or with the authority of the copyright owner. That work is “lawfully made under this title” within the meaning of section 109(a). The purchaser, and downstream purchasers, are thus free to sell or otherwise dispose of that copy of the work without the authorization of the copyright owner. If the work is then sold or transferred to a location outside the U.S., it can then be imported back into the U.S. without being subject to a copyright infringement claim. The work was still “lawfully made under this title” and it does not lose that preferred status regardless of how many times it changes hands or where it travels.

Omega – The 9th Circuit’s Post-Quality King Application of the First Sale Doctrine

In Omega S.A. v. Costco Wholesale Corporation, 541 F.3d 982 (9th Cir. 2008), the issue was whether Omega could prevent Costco from reselling watches that incorporated Omega’s copyrighted design. Omega manufactured the watches outside the U.S., and then sold the watches to authorized distributors outside the U.S. Those foreign distributors sold the watches to unidentified third party purchasers outside the U.S. who sold them to a New York company who in turn sold them to Costco in the U.S. for sale in the U.S. Thus, the salient facts are that the watches (copyrighted work) were made by Omega (the copyright owner) outside the U.S. and all sales by Omega and its authorized distributors were made outside the U.S. The first importation into and sale in the U.S. was by an unrelated purchaser and was not an authorized transaction. Id., at 984. Omega sued Costco for copyright infringement – infringement under §§ 106(3) (distribution) and 602(a) (importation as an act of distribution).

The district court granted summary judgment in favor of Costco on the basis of the first sale doctrine. Omega appealed. The Ninth Circuit reversed ruling the first sale doctrine inapplicable to the facts at hand. The Ninth Circuit applied its “general rule,” developed pre-Quality King (e.g., BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991)), but consistent with Quality King, that the statutory phrase “lawfully made under this title” applies only to copies manufactured in the U.S. Id., at 990 (“In summary, our general rule that § 109(a) refers ‘only to copies legally made . . . in the United States’ … is not clearly irreconcilable with Quality King, and, therefore, remains binding precedent.”) “Under this rule, the first sale doctrine is unavailable as a defense to the claims under §§ 106(3) and 602(a) because there is no genuine dispute that Omega manufactured the watches bearing the Omega Globe Design in Switzerland.” Id.

That much of the decision is pretty vanilla and we have another one of our answers. The first sale doctrine does not apply to any copyrighted work made outside the U.S. by or with the authority of the copyright owner, but imported into the U.S. without the authority of the copyright owner. The work was not “lawfully made under this title” and it does not acquire that preferred status when it is imported into the U.S. without the authority of the copyright owner.

The Ninth Circuit did, however, leave one interesting issue unresolved. Its pre-Quality King precedent also provided an exception wherein section 109(a) would apply to copyrighted works manufactured abroad. Where, as in Omega, the work was made outside the U.S. and imported into the U.S. without authority of the copyright owner, section 109(a) would not apply. See BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991). An exception was made, however, for copyrighted works made abroad and brought into the U.S. by the copyright owner or with its authority. See Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d 477 (9th Cir. 1994), and Denbicare U.S.A. Inc. v. Toys “R” Us, Inc., 84 F.3d 1143 (9th Cir. 1996). That is, “§ 109(a) can apply to copies not made in the United States so long as an authorized first sale occurs here.” Omega, 541 F.3d at 986 (citing Drug Emporium, 38 F.3d at 481). In Denbicare, 84 F.3d at 1149-50, the Ninth Circuit held that “in light of § 109(a) and Drug Emporium, the copyright owner’s voluntary sale of the copies within the United States exhausted the exclusive right of distribution.” Id.

The Ninth Circuit’s rationale for this exception is that that works made outside the U.S. and brought into the U.S. by (or with the authority of) the copyright owner should not be afforded greater copyright protection than works made in the U.S. by (or with the authority of) the copyright owner. Id. That reasoning is suspect at best as it is not founded in the statutory language, legislative history, or anything other than the Ninth Circuit’s opinion as to what should be the law. Nevertheless, in Omega the Ninth Circuit concluded that because the exception was not relevant to the case under consideration, it would not decide whether the exception survives after the Supreme Court’s decision in Quality King:

We need not decide whether Drug Emporium’s and Denbicare’s exception to the rule in BMG Music also survives Quality King. There is no genuine dispute that the copies of the Omega Globe Design were sold in the United States without Omega’s authority. The exception, therefore, does not apply in this case. See Denbicare, 84 F.3d at 1145-46 (“[Section] 109 applies to copies made abroad only if the copies have been sold in the United States by the copyright owner or with its authority.”). Because the exception does not apply, the question of its continuing viability cannot affect our conclusion that § 109(a) provides no defense to Omega’s claims. (Omega, 541 F.3d at 990).

We thus do not have a definitive answer to one of our inquiries. The first sale doctrine may or may not apply to a copyrighted work made outside the U.S. by or with the authority of the copyright owner and then imported into the U.S. with the authority of the copyright owner.

Omega – The Supreme Court’s Failed Attempt to Review the 9th Circuit’s Decision

The Supreme Court granted certiorari in Costco Wholesale Corp. v. Omega, S.A., No. 08-1423, to decide whether the first sale doctrine applies to imported goods that are manufactured outside the U.S. Unfortunately, in Costco Wholesale Corp. v. Omega, S.A., 131 S. Ct. 565, 178 L. Ed. 2d 470 (2010) (per curiam), the Supreme Court split 4-4, with Justice Kagan taking no part in the consideration or decision of the case. This “tie vote” creates no Supreme Court precedent, leaving the lower court decision undisturbed (i.e., the lower court judgment is affirmed), as though the justices had never considered the matter and voted. Thus, the Ninth Circuit decision was affirmed, per curiam.

John Wiley – The 2nd Circuit Follows the 9th (Sort of) & Invites Congress (or the Supreme Court) to Step In

On August 15, 2011, the Second Circuit Court of Appeals followed the lead of the Ninth Circuit in John Wiley & Sons, Inc. v. Kirtsaeng, -- F.3d -- (2d Cir. Aug. 15, 2011). The background facts of the case are as follows. John Wiley & Sons, Inc. (“Wiley”) is a textbook publisher. Wiley’s wholly owned subsidiary in Asia (“Wiley Asia”) manufactures textbooks in Asia for sale in foreign countries. The foreign editions are less expensive (and supposedly of a lesser quality) than their U.S.-made counterparts, and marked with a legend to designate that they are to be sold only in a particular country or geographic region. Defendant Supap Kirtsaeng (“Kirtsaeng”) moved to the U.S. from Thailand to attend institutes of higher learning. To help subsidize the cost of his education, Kirtsaeng’s friends and family shipped him foreign edition textbooks printed abroad by Wiley Asia, which Kirtsaeng then sold on commercial websites such as eBay.com. Wiley sued Kirtsaeng for copyright infringement. The judge ruled that the first sale doctrine of section 109(a) was unavailable because the textbooks were made outside the U.S. The jury found for Wiley. On appeal, Kirtsaeng challenged the district court’s ruling on the inapplicability of the first sale doctrine.

The Second Circuit, in a 2-1 decision, affirmed. The Second Circuit ruled, as had the Ninth Circuit, that the first sale doctrine does not extend to copyrighted works manufactured outside the U.S. because those works are not “lawfully made under this title.” In reaching that conclusion, the Second Circuit first examined the language itself, but found it be ambiguous and subject to a number of different meanings, all of which were plausible:

  • The relevant text is simply unclear. “[L]awfully made under this title” could plausibly be interpreted to mean any number of things, including: (1) “manufactured in the United States,” (2) “any work made that is subject to protection under this title,” or (3) “lawfully made under this title had this title been applicable.” (John Wiley, slip. op. at 14-15).

Not surprisingly, the Second Circuit felt the need to look further:

Confronted with an utterly ambiguous text, we think it best to adopt an interpretation of § 109(a) that best comports with both § 602(a)(1) and the Supreme Court’s opinion in Quality King. (John Wiley, slip. op. at 15).

Looking further, the Second Circuit noted that section 602(a)(1) provides that “[i]mportation into the United States, without the authority of the owner of copyright under [the Copyright Act], of copies . . . of a work that have been acquired outside the United States is an infringement of the [owner’s] exclusive right to distribute copies”. 17 U.S.C. § 602(a)(1). The Second Circuit concluded that this language favored a conclusion that the first sale doctrine of section 109(a) only applies to copyrighted works manufactured in the U.S. That way, section 109(a) has its appropriate breadth as to copyrighted works made in the U.S. – under the first sale doctrine the copyright holder cannot prevent the further transfer of the works because they are “lawfully made under this title” within the meaning of section 109(a). And section 602(a)(1) has its equally appropriate reach as to copyrighted works made outside the U.S. – the first sale doctrine is inapplicable because the works are not “lawfully made under this title” within the meaning of section 109(a), and the copyright holder can prevent their “[i]mportation into the United States” under section 602(a)(1). On the other hand, if section 109(a) was construed as applying to copyrighted works “lawfully made” outside the U.S., section 602(a)(1) “would have no force in the vast majority of cases.” John Wiley, slip. op. at 15-16.

Regarding whether section 109(a) also applies to works made abroad and sold in the U.S. by the copyright owner or with its authority, an exception that the Ninth Circuit endorsed in its pre-Quality King decisions and left unresolved in Omega, the Second Circuit authorized no such exception:

This reading of the Copyright Act militates in favor of finding that § 109(a) only applies to domestically manufactured works. While the Ninth Circuit in Omega held that § 109(a) also applies to foreignproduced works sold in the United States with the permission of the copyright holder,2 that holding relied on Ninth Circuit precedents not adopted by other courts of appeals. Accordingly, while perhaps a close call, we think that, in light of its necessary interplay with § 602(a)(1), § 109(a) is best interpreted as applying only to works manufactured domestically. (John Wiley, slip. op. at 16).

In sum, we hold that the phrase “lawfully made under this Title” in § 109(a) refers specifically and exclusively to works that are made in territories in which the Copyright Act is law, and not to foreignmanufactured works. (John Wiley, slip. op. at 17).

To summarize, we hold that (1) the first sale doctrine does not apply to works manufactured outside of the United States; … (John Wiley, slip. op. at 20).

The majority, however, admitted its statutory interpretation could be incorrect and invited Congress (and presumably the Supreme Court as well) to weigh in:

We freely acknowledge that this is a particularly difficult question of statutory construction in light of the ambiguous language of § 109(a), but our holding is supported by the structure of Title 17 as well as the Supreme Court’s opinion in Quality King. If we have misunderstood Congressional purpose in enacting the first sale doctrine, or if our decision leads to policy consequences that were not foreseen by Congress or which Congress now finds unpalatable, Congress is of course able to correct our judgment. (John Wiley, slip. op. at 17).

The lone dissenter (Judge Murtha) would have followed the Ninth Circuit pre-Quality King cases and held “the first sale defense should apply to a copy of a work that enjoys United States copyright protection wherever manufactured.” John Wiley, slip. op. dissent at 1. Judge Murtha disagreed with the majority’s conclusion that “the [first sale] doctrine does not apply to imported copies that were made abroad because § 109(a) applies only to copies that are ‘lawfully made under this title,’ and that means physically manufactured in the United States.” Id., at 2.

John Wiley –Potential Adverse and Unintended Consequences

Under the Second Circuit’s holding in John Wiley, copyright owners can completely defeat the protections of the first sale doctrine provided for in section 109(a), by merely having their works made abroad, and then importing them into the U.S. themselves or by third parties under their authority. Purchasers of those works abroad could not import them into the U.S.; fair enough. But persons purchasing those works in the U.S. from the copyright owner or its authorized distributors, such as used book stores, arguably could not resell them either without being vulnerable to a copyright infringement claim, because the first sale doctrine would be inapplicable as the works were not made in the U.S. This might have the unintended consequences of enticing copyright owners, including large publishers, to move their production to locations outside the U.S. to enable them to control not only importation into the U.S., but all further distribution of the copyrighted work to the public “by sale or other transfer of ownership, or by rental, lease, or lending.” 17 U.S.C. § 106(3).

In his dissent, Judge Murtha noted these concerns as well as other practical difficulties that the majority’s decision imposes on the owner of a copy of a work:

An owner first would have to determine the origin of the copy – either domestic or foreign – before she could sell it. If it were foreign made and the first sale doctrine does not apply to such copies, she would need to receive permission from the copyright holder. [Note 2 omitted.] See 17 U.S.C. § 106(3). Such a result would provide greater copyright protection to copies manufactured abroad than those manufactured domestically: Once a domestic copy has been sold, no matter where the sale occurred, the copyright holder’s right to control its distribution is exhausted. I do not believe Congress intended to provide an incentive for U.S. copyright holders to manufacture copies of their work abroad. (John Wiley, slip. op. dissent at 5-6).

It would seem that this would be a good time for the Supreme Court to tackle this thorny issue one more time, this time with a full panel of Justices and a precedential, binding decision. Of course Congress could intercede, but its track record lately for moving with speed and purpose is not the best. So the Supreme Court looks like the better bet for bringing certainty to this important issue.