Construing an “utterly ambigious” provision of the U.S. copyright statute, the Second Circuit Court of Appeals rejected the first sale doctrine as a defense against claims of copyright infringement arising from the importation of foreign-published textbooks, and affirmed an award of $600,000 in statutory damages against a graduate student who imported and sold textbooks on eBay.

The first sale doctrine, codified at 17 U.S.C 109(a), permits the owner of a copyrighted work “lawfully made under this title [U.S. copyright law]… without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” Exactly what it means to be made “under this title,” that is under United States copyright protection, has been the source of much litigation, including a decision of the Ninth Circuit Court of Appeals and a recent decision of the Unites States Supreme Court.

We previously wrote about some of the issues raised by the first sale doctrine for importers here and also covered the US Supreme Court’s decision in Costco Wholesale Corporation v. Omega S.A., 178 L.Ed.2d 470 (U.S. 2010), which failed to resolve the issue, here.

In John Wiley & Sons, Inc. v. Supap Kirstaeng, Docket No. 09-4896-cv (2d. Cir. Aug. 15, 2011), the Second Circuit affirmed a jury verdict finding willful copyright infringement by the defendant in the importation of textbooks manufactured overseas and imported in the Unites States without the permission of the copyright owner.  The jury awarded $75,000 in statutory damages for each of the eight books published by Wiley and imported without permission.

The first sale doctrine is critical to the grey market, a term used to describe the unofficial system of distribution that takes advantages of niches and discrepancies in the customary distribution chain. The reason the grey market exists is that prices, at wholesale and retail, vary widely across vendors and location. The same product, or a similar product with the same trade name, that sells for $10 at wholesale from authorized distributors may be available overseas for half that amount and, sometimes, can even be purchased at the discount retailers for less than its wholesale price.

Risk in Grey Markets

Grey market transaction can be risky, however, as this case amply demonstrates. The manufacturer and authorized distributors can sue if the importation violates trademark rights, exclusive distribution rights or, as in this case, the goods are the subject of a copyright.

Kirtasaeng, a Thai national studying mathematics in a Ph.D. program, used friends and family to purchase foreign editions of textbooks published by Wiley, which they shipped to the U.S. and he resold on e-Bay and other websites’. The books were manufactured abroad and, according to Wiley, although they contained substantially similar text, they were not as well-manufactured as the United States editions.

Wiley brought suit alleging copyright infringement. Under 17 USC 602 (a)(1), the importation in the United States of copies of a copyrighted that was acquired outside of the United States is an infringement of the copyright owner’s exclusive right to distribute the work. Kirtasaend argued that the importation was protected by the first sale doctrine in that the imported books were authentic copies that were lawfully purchased overseas.

Second Circuit First Impression

The issue, which the court recognized as being of first impression in the Second Circuit, was whether the first sale doctrine may be applied to books that are manufactured abroad. Because the statutory right to resell only applies to a copy “lawfully made under this title,” there have been a number of decisions attempting to construe exactly what the ambiguous phrase means. Copyright holders argue that the phrase means simply not manufactured in the United States, while importers like Kirtasaeng argue that it means subject to the copyright laws of the United States, as in a manufacturer licensed by the holder of a U.S. registered work.

The court noted that the text of the statute could support sevreal interpretations, not all of which were favorable to copyright holder. Ultimately, however, the court relied on dicta from the U/S/ Supreme Court in Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998). In that case, the court held that the first sale doctrine does prevent a copyright holder from suing for infingement when the goods were manufactured in the Inted States, exported and then purchased from an overseas wholesaler– at a price significantly less than in the United States — for re-importation. In deciding that case, the court noted that it was specifically not deciding whether the first sale doctrine would apply to good manufactured overseas. This suggests, most courts have held, [ that the cort would not apply] the doctrine in cases involving foreign manufactured goods. The Second Circuit agreed, relying heavily on the dicta in the Quality King decision to affirm the trial court.

Examples

It is ironic that the the Second Circuit had to rely on the dicta in Quality King because this exact issue reached the Supreme Court last year in Costco Wholesale Corp. v. Omega, S.A., a case involving the importation of Omega watches wihtout the apporval of the copyright holer. In Costco, a decision of the Ninth Circuit Court of Appeals holding the doctrine inapplicable to foreign manufactured goods was affirmed, but by an equally divided court (with one justice recused). As noted in our prior post on this subject, the fact that four justices voted in favor of applying the first sale doctrine to forgeign-manufactured goods is a good indication that the issue may still turn in another direction.

Ultimately, the Second Circuit held that “confronted with an utterly ambiguous text” it was best to adopt an interpretation that comports with the language of 17 U.S.C. 602(a)(1), which prohibits importation into the unites States of copyrighted works acquired abroad without the authorization of the copyright holder, and the dicta in the Quality King decision.

Another indication that the law is applicable to the first sale doctrine could head in a new direction is that the Second Circuit decision was not unanimous. District Judge Murtha sitting by designation, wrote a dissenting opinion, noting first that the construction given to the statute gives more copyright protection to foreign manufactured goods than domestic goods and, second, that whatever persuasive force the Quality King decision once had was lost when four justices voted against affirming the Ninth Circuit’s opinion refusing to allow the defense for foreign-manufactured goods.