April 16, 2012, the Supreme Court granted certiorari in the case John Wiley & Sons, Inc. v. Kirtsaeng d/b/a Bluechristine99,1 suggesting that the high court will decide a critical issue that it left unresolved a year ago due to a 4-4 split in Costco Wholesale Corp. v. Omega, S.A.2: whether the first-sale doctrine in copyright law applies to copies manufactured outside of the United States, known as “grey market” goods.

The first-sale doctrine, codified in Section 109(a) of the Copyright Act (Section 109(a)), provides that “the owner of a particular copy [of a copyrighted work] . . . 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.”3The phrase “lawfully made under this title” in Section 109(a), however, has confounded courts and copyright scholars when applied to the grey market. Some courts have found that this language limits the applicability of the first-sale doctrine to copies manufactured within the United States.4 Other courts have suggested that this phrase requires only that the copy at issue be manufactured in compliance with the Copyright Act.5

Resolving these conflicting interpretations of Section 109(a) in grey market cases was at the heart of the Costco case, but the issue remained clouded because the Court split 4-4 following Justice Kagan’s self-recusal.

In Costco, Omega S.A. (Omega), the maker of watches manufactured abroad and distributed worldwide sued Costco Wholesale Corp. (Costco), a membership warehouse store chain, after Costco purchased watches abroad and resold them in the United States. Omega claimed copyright infringement, on the grounds that each watch featured a small, copyrighted “Omega Globe Design” engraved on its surface. Omega therefore argued that the watches amounted to infringing copies of copyrighted material. Costco invoked the first-sale doctrine. A divided panel of the Ninth Circuit refused to apply the first-sale doctrine to items manufactured outside the United States. When the Supreme Court granted certiorari, many believed that uncertainty about the applicability of the first-sale doctrine to foreign-manufactured goods would be resolved. The Court, however, was unable to muster a majority in support of either side. Justice Kagan recused herself due to her prior involvement in the case as Solicitor General, and the justices split 4-4 on the issue. As a result, the Ninth Circuit’s decision was affirmed.6 This week’s grant of certiorari in Wiley gives the Court a second chance to settle the issue.

Case History: John Wiley & Sons, Inc. v. Kirtsaeng d/b/a Bluechristine99

John Wiley & Sons, Inc. (Wiley) publishes textbooks, including editions of textbooks designed exclusively for distribution overseas.7 These editions are manufactured abroad and distributed by Wiley’s wholly-owned foreign subsidiary, with a label on the books purporting to limit their sale only to certain geographic areas.8 The textbooks sold abroad are of slightly lower quality than the editions sold in the United States and lack several additional features (i.e., study guides) standard in the domestic editions.9 Often, the overseas editions of the books are substantially cheaper than the editions sold in the United States.10

Supap Kirtsaeng d/b/a Bluechristine99 (Kirtsaeng), originally a resident of Thailand, attended university in the United States. In order to help finance the cost of his education, Kirtsaeng asked friends to send him copies of textbooks purchased abroad, so that he could re-sell them in the US on commercial auction sites like eBay.com, enabling US students to purchase the less-expensive foreign editions of the books.11 According to media coverage, Kirtsaeng reaped approximately $37,000 in profit from his sales.12

Wiley sued Kirtsaeng for copyright infringement in the Southern District of New York. The trial judge ruled that the first-sale doctrine did not apply to copies manufactured outside the United States, and thus barred Kirtsaeng from raising Section 109(a) as an affirmative defense to Wiley’s claims.13 The jury found in favor of Wiley and awarded $600,000 in statutory damages.14

The Second Circuit affirmed the trial court’s ruling on appeal, and Kirtsaeng petitioned for certiorari. A number of amici filed briefs urging the Supreme Court to hear the case, including the Retail Industry Lenders Association, the American Free Trade Association, EBay, Inc., and the American Intellectual Property Law Association.15 The Supreme Court granted certiorari on April 16, 2012.

Both the Ninth Circuit’s decision in Costco and the Second Circuit’s decision in Wiley relied on dicta from a 1998 Supreme Court case, Quality King Distribs., Inc. v. L’anza Res. Int’l.16 Quality King concerned the re-sale of goods manufactured domestically but purchased abroad at discounted prices. The Court held that the first-sale doctrine applied to such items. Dicta in the case, however, suggested that the Court may not have reached the same result in Quality King if the goods at issue had been manufactured abroad, leading lower courts to apply Section 109(a) inconsistently. For instance, the Court noted in Quality King that Section 602(a) of the Copyright Act (the provision forbidding unauthorized importation of a work acquired abroad) was “broader than Section 109(a), because it encompasses copies that are not subject to the first sale doctrine — e.g., copies that are lawfully made under the law of another country.” The Ninth Circuit in Costco and the Second Circuit in Wiley construed this sentence as a statement by the Supreme Court that Section 109(a) does not apply to foreign-made copies. The Supreme Court’s inability to produce a majority opinion affirming this position in Costco, however, suggests that the matter is not nearly so clear-cut. Observers now hope that the outcome of Wiley will resolve the issue.

Implications

Resolution of this issue impacts not only textbook resale operations but virtually any business based on the creation, distribution or exploitation of copyrighted works and related goods, which engages in or permits foreign distribution of similar goods intended solely for foreign markets.17 An affirmance of the Second Circuit’s line of reasoning will buoy such content owners and help ensure that foreign distribution of their products does not impair their domestic business. On the flip-side, a reversal by the Court could lead to an influx of grey market goods, and would likely lead many companies to substantially change their foreign distribution models.