The U.S. Court of Appeals, Second Circuit decision in John Wiley & Sons, Inc. v. Kirtsaeng, No. 09-4896-cv, 2011 WL 3560003 (2nd Cir. Aug. 15, 2011), represents the latest chapter of a long-running saga that could be titled, “Gray Market Goods Try to Enter the Homeland.” In Kirtsaeng, a divided panel of the Second Circuit held that the first-sale doctrine of 17 U.S.C. § 109(a) does not apply to works of authorship manufactured outside of the U.S. Hence, owning such a copy bestows no right to resell or distribute. If followed, Kirtsaeng would alter established law and practice on resale of new and used works of authorship, allowing copyright holders to control, or prohibit entirely, the resale of books, electronic products and any other works of authorship (or goods containing them) that are made overseas.
Like other manufacturers who price differentially in different markets, publisher John Wiley & Sons designated certain editions of its texts for sale only outside the U.S. and printed them overseas. Friends and family members of Kirtsaeng bought copies in Thailand and shipped them to him in the United States, where he sold them on eBay. Wiley brought an action claiming that Kirtsaeng violated § 602(a)(1) of the Copyright Act, which provides: “Importation into the United States, without the authority of the owner of copyright…, of copies… of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies [of the work].”
Kirtsaeng asserted that the first-sale doctrine shielded him from liability. Under § 109(a), the owners of copies “lawfully made under this title” may sell or distribute their copies without the copyright holder’s permission. Wiley argued that copies manufactured overseas were not “made under this title.”
The Second Circuit noted the tension between § 602(a)(1) and § 109(a) and framed the issue broadly: whether the first-sale doctrine applies at all to copies manufactured abroad. The court found the wording of § 109(a) to be ambiguous and sought an interpretation that comported with the purpose of § 602(a)(1) and with the Supreme Court’s decision 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 defense does apply to importation claims concerning “round trip” goods – those made in the U.S. and lawfully sold abroad before being sent back into the United States and re-sold by unauthorized third parties.
Thus, the main issue posed by Kirtsaeng was whether the first-sale defense applies to importation claims concerning foreign-made copies. The Kirtsaeng majority noted that § 602(a)(1) is intended to allow manufacturers to control the circumstances in which copies of their works that are manufactured abroad can be brought into the U.S. The court reasoned that the protection to be afforded by the provision would have no force in most cases if the first-sale doctrine was allowed as an exception to § 602(a)(1). The court also deemed its interpretation to be consistent with dicta in Quality King and held that the first-sale doctrine does not apply to copies manufactured abroad.
The Second Circuit could have framed and decided the issue more narrowly by simply deciding that § 109(a) is not a defense to an unauthorized and unlawful importation. Instead, the Second Circuit limited the scope of § 109(a) itself by concluding that copies manufactured outside the U.S. are simply not “made under this title.” Consequently, § 109(a) is not a defense to the resale of copies of a work that have been imported by or with the copyright holder’s consent and there has therefore been no violation of § 602(a)(1).
The Kirtsaeng majority did not address or suggest any policy reason why Congress might have intended that the first-sale doctrine not apply to goods manufactured outside the U.S. Although the court expressly acknowledged the force of Kirtsaeng’s argument that its ruling would provide an incentive for outsourcing production, and could result in the circumvention of the first-sale right, it deemed this consideration irrelevant to its analysis.
In his careful dissent, Judge Murtha focused on a close textual analysis, on the history of the first-sale doctrine, and on the policies underlying it, and reached the opposite conclusion in a set of arguments that the majority did not address.
As the Second Circuit noted, these issues had been addressed by the Ninth Circuit. In Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), affirmed by 4-4 vote, 131 S. Ct. 565 (2010), the Ninth Circuit held (as does the Second Circuit in Kirtsaeng) that § 109(a) does not protect the unauthorized importer of foreign-made copies. But — unlike Kirtsaeng — the Ninth Circuit has opined that the first-sale doctrine does apply to items manufactured abroad when they are imported and first sold in the United States by or with the copyright holder’s permission. Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d 477 (9th Cir. 1994).
It is not clear whether the Supreme Court would perceive the differences in analysis by the two courts as a “circuit split” on the importation right, since the Second and Ninth Circuits both concluded that § 602(a)(1) bars unauthorized importation of foreign-made copies and neither allowed § 109(a) as a defense. But Kirtsaeng’s different path to that conclusion would have profound implications for first-sale rights and, if widely accepted or affirmed by the Supreme Court, could alter the terms of sale of a wide range of goods.
While it is not clear which manufacturers would choose to exercise the power that Kirtsaeng affirms, an extraordinary range of products could fall within its ruling. In addition to obvious works of authorship, like books, musical recordings, films and computer software, myriad products include works protected by copyright. Virtually all electronic goods include integrated circuits containing copyright-protected software or firmware; so do microwave ovens, washing machines, telephones, blood pressure monitors, “intelligent” electric irons, automobiles and trucks, and probably most machinery. Other products, such as clothing, sheets and pillowcases, kitchen canisters and dishware, are commonly decorated with copyright-protected designs and are therefore within the resale control of the “copyright holder,” if made overseas. Yet other goods obviously unprotected by copyright — like the shampoo and hair products in Quality King — often bear labels or are sold inside of packaging with copyrightable designs or graphics.
The stocks of some shotguns are decorated with protectable designs; likewise, some coffins. A bicycle probably includes nothing protected as a work of authorship, but if the box containing the bike includes a maintenance manual, it could be an infringement to import the box. A made-in-China picture frame may not be protected by copyright, but the sample photo that is typically in the frame undoubtedly is. For that matter, a watermelon grown in Central America usually has a small label on it; including a copyright-protected graphic is not unimaginable.
You get the picture. Nearly everything that is sold does or can include a work of authorship if it is not one itself. Whether most manufacturers would want to exercise control over resale is not clear. But most goods sold in the United States are imported or could be. Kirtsaeng opens a new world of possibly unintended consequences.
At this writing, Kirtsaeng’s petition for rehearing en banc is pending, and his counsel has advised they will likely file for certiorari should rehearing be denied. Since, as mentioned earlier, Kirtsaeng’s broad holding conflicts with the reasoning of the Ninth Circuit decision in Omega, which the Supreme Court reviewed last year and affirmed on a four-four split, it seems almost inevitable that these issues will again be presented to the high court.
We note that the unauthorized importation of a copyrighted shampoo label and some of the other “tail-wags-dog” instances might also be subject to a fair-use defense. That issue does not appear to have been discussed in the cases addressing § 602(a)(1) and is beyond the scope of this article.