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High Court Decides to Revisit First Sale Issue Left Hanging by 4-4 Deadlock

Tuesday, April 17, 2012

By Anandashankar Mazumdar  

The granting of certiorari on April 16 in a case asking whether the Copyright Act's first sale doctrine applies when a work manufactured overseas is imported and resold in the United States will give the Supreme Court a second chance to answer a question left hanging after a 4-4 deadlock in late 2010 (Kirtsaeng d/b/a Bluechristine99 v. John Wiley & Sons Inc., U.S., No. 11-697, review granted 4/16/12).

The recusal of Justice Elena Kagan from Costco Wholesale Corp. v. Omega S.A., 131 S. Ct. 565, 96 USPQ2d 2025 (2010), and the subsequent tie left standing an appeals court ruling that appeared to create a loophole that gave copyright holders the incentive to produce works overseas.

That result, in addition to rulings by other circuit courts, left standing a three-way split among federal appeals court circuits regarding the question of how the first sale doctrine, 17 U.S.C. §109(a), interacts with 17 U.S.C. §602(a)(1), which gives copyright owners the right to control the initial release of a work in the United States.

Question Unresolved on Last Trip to High Court.

This line of cases began when Swiss luxury watch maker Omega S.A. brought an action against Costco Wholesale Corp., whose membership warehouse chain is the third largest retailer in the United States and is among the top 10 retailers worldwide.

Omega had produced a batch of wristwatches in Switzerland intended for sale outside the United States. Costco sold some of these watches that it had acquired legally from a distributor.

This Costcowas notable in one aspect in that it represented an attempt by a manufacturer to block sales of gray-market goods through a copyright infringement action. Generally, such attempts to block importation give rise to claims of counterfeiting or trademark infringement. However, such causes of action were not applicable because the goods in question were genuine.

Thus, Omega asserted copyright interest in the logos that appeared on the watches and brought a copyright infringement claim against Costco under Section 602(a)(1), which states:  

Importation into the United States, with out 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 … .  

 

 

Costco, however, asserted that it had the right to sell its legally acquired watches under Section 109(a), which states: 

[T]he 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 … .  

 

 

The U.S. Court of Appeals for the Ninth Circuit ruled that Section 109(a) did not apply because the watches had been manufactured overseas and thus had not been “lawfully made under this title.” Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 88 USPQ2d 1102 (9th Cir. 2008).

The Supreme Court granted a writ of certiorari in the Costcocase, but failed to reach a majority ruling.

Prior Decision Addressed 'Round-Trip' Situation.

The Supreme Court had addressed the interplay between Section 109 and Section 602 in Quality King Distributors Inc. v. l'Anza Research International Inc., 523 U.S. 135, 45 USPQ2d 1961 (1998).

In Quality King, however, the copies in question were produced in the United States, and then shipped abroad for distribution. A parallel importer then acquired copies and re-imported them into the United States.

Under those circumstances, the Supreme Court said, the first sale doctrine did apply. However, the distinguishing fact in Quality Kingwas the “round-trip” element; the goods in the Kirtsaengcase were not originally made in the United States.

Student Imports Textbooks, Sells Them Online.

The issue came up again in the instant case, which began with the importation of textbooks.

John Wiley & Sons Inc. publishes editions of textbooks targeting overseas markets. These books are of slightly lower quality than those it markets in the United States and have fewer additional features, such as study guides. The foreign editions are printed overseas, and text on the back covers indicates restrictions on their sale to markets other then those indicated and prohibits exportation.

Wiley assigned rights to reprint and publish the foreign editions to its Wiley Asia subsidiary, and the contracts limit the subsidiary's geographical distribution area. In the agreement, Wiley retained the right to publish and sell the books in the United States, a more profitable market.

Supap Kirtsaeng d/b/a Bluechristine99 was originally a resident of Thailand. After he relocated to United States, he received shipments of Wiley Asia-made foreign edition textbooks from contacts in Asia and sold the books through commercial websites, such as the eBay online auction site. Kirtsaeng used the proceeds of such sales--amounting to $37,000-- to help cover his expenses while attending universities in the United States.

Wiley sued Kirtsaeng, alleging copyright infringement.

The U.S. District Court for the Southern District of New York ruled that the first sale doctrine was inapplicable. John Wiley & Sons Inc. v. Kirtsaeng d/b/a Bluechristine99, 93 USPQ2d 1432 (S.D.N.Y. 2009).

A jury found Kirtsaeng liable for infringing eight Wiley works and awarded $600,000 in statutory damages.

Appeals Court Declines to Apply First Sale Doctrine.

On appeal, the U.S. Court of Appeals for the Second Circuit affirmed that ruling 2-1, joining the Ninth Circuit's reasoning in Costco. John Wiley & Sons Inc. v. Kirtsaeng d/b/a Bluechristine99, 654 F.3d 210, 99 USPQ2d 1641 (2d Cir. 2011)

However, the majority opinion in this case included an extensive footnote acknowledging that this interpretation had “undesirable” public policy implications, effectively giving producers an economic incentive to outsource manufacturing.

A dissenting opinion argued that a copy of a work manufactured outside the United States with the authorization of the copyright owner could indeed constitute a work made lawfully under the Copyright Act.

Petition Alleges Three-Way Split.

A petition for a writ of certiorari was filed Dec. 5 by Kirtsaeng. The question presented therein states:  

Under §602(a)(1) of the Copyright Act, it is impermissible to import a work “without the authority of the owner” of the copyright. But the first-sale doctrine, codified at §109(a), allows the owner of a copy “lawfully made under this title” to sell or otherwise dispose of the copy without the copyright owner's permission.  

The question presented is how these provisions apply to a copy that was made and legally acquired abroad and then imported in to the United States. Can such a foreign-made product never be resold within the United States without the copyright owner's permission, as the Second Circuit held in this case? Can such a foreign-made product sometimes be resold within the United States without permission, but only after the owner approves an earlier sale in this country, as the Ninth Circuit held in Costco? Or can such a product always be resold without permission within the United States, so long as the copyright owner authorized the first sale abroad, as the Third Circuit has indicated?  

 

 

The Third Circuit decision referenced by the petition is Sebastian International Inc. v. Consumer Contacts (Pty.) Ltd., 847 F.2d 1093, 7 USPQ2d 1077 (3d Cir. 1988). That decision expressed doubt that Congress intended that only works made in the United States were lawfully made under the Copyright Act.

The petition emphasized the urgency surrounding this issue, resulting from the economic impact of the global explosion in parallel importation. The Costco case attracted heavy hitters on both sides, including eBay Inc., Amazon.com Inc., Google Inc., Target Corp., Wal-Mart Stores Inc., Intel Corp., Fujifilm Holdings Corp., and Seiko Epson Corp.

The petition said:  

[T]he stakes extend far beyond buyers and sellers of traditional copyrighted content. If a foreign-made copy can never be sold without authorization in the U.S., then obviously it can never be imported into the U.S. without authorization either. … And the exclusive right “to distribute copies” encompasses the right to block any “other transfer of ownership”--including a gift--and any “rental, lease, or lending.” … Thus, … Netflix and Blockbuster are vulnerable. So are libraries. …  

The natural response to a parade of horribles like this is to roll one's eyes and blithely insist, “It'll never happen.” But if a major international publisher is willing to doggedly pursue a graduate student who sold textbooks--and crush him with a $600,000 judgment for a willful violation and an order to turn over his computer--there is little assurance that others will exercise restraint where the rents to be extracted are far richer and the pockets far deeper.  

 

 

The petition urged the court to grant certiorari and to resolve the question regarding the proper scope of the phrase “lawfully made under this title” as used in Section 109. Three possible interpretations were proposed:

(1) That the phrase means that the copy in question was produced in a manner “consistent with” the Copyright Act; that is, that copies lawfully produced under the law of another country might so qualify;

(2) That, as stated by the Second Circuit, only copies produced in the United States could qualify; and

(3) That, as stated by the Ninth Circuit, a work produced outside the United States could qualify if the copyright owner had authorized at least one such importation.

 

Respondent: There Is No Such Split.

In opposing the cert petition, Wiley argued that there is no circuit split as proposed by the petition. Wiley first disputed Kirtsaeng's interpretation of the Ninth Circuit decision:  

Petitioners claim that there is a circuit split on this issue, but they have not identified any court of appeals that has ever applied the first-sale doctrine to foreign-made copies where, as here, the copyright holder has not authorized their sale in the United States. And while Petitioners insist that the Ninth Circuit would apply the first-sale doctrine to foreign copies given such authorization, purportedly unlike the Second Circuit below, the Ninth Circuit has specifically reserved the question whether that approach is still good law in the circuit; in any event, the decision below does not implicate this supposed disagreement because it is undisputed that Respondents did not authorize the domestic sale of any foreign-manufactured textbooks.  

 

 

Regarding the Sebastian decision, Wiley rejected this reference as dictum; indeed, “dictum that did not even purport to resolve the question presented.”

The respondent's opposition brief concluded that the Second Circuit's ruling was consistent with the text of the Copyright Act, with Quality King, and with “the purposes of the Copyright Act.”

Amici Curiae Support Granting Cert.

A few amicus briefs were filed on the question of whether certiorari would be granted:

• The Retail Industry Leaders Association, the American Free Trade Association, and Quality King Distributors Inc., filed in support of the petition, stating that “the correct interpretation of the first sale doctrine to imported goods has great importance to the U.S. economy.” The brief argued that the Second Circuit had misinterpreted the statute as well as Quality King and that the Supreme Court should intervene in order to “safeguard the first sale doctrine and preserve lawful commerce in genuine parallel imported goods.”

• EBay Inc., the NetCoalition, the Computer and Communications Industry Association, the Internet Commerce Coalition, TechNet, NetChoice, and TechAmerica labeled the Second Circuit's decision as “extreme,” and urged review. “ 'Lawfully made under this title' means made according to or in conformance with the Copyright Act, not made in the United States,” the brief argued.

• The American Intellectual Property Law Association filed a brief in support of neither party, but urged the court to grant certiorari in order to resolve the question of the scope of the first sale doctrine with respect to copies of copyrighted works made abroad.

Related Petition Still Pending.

Another petition pending before the court addresses the same issue. Liu v. Pearson Education Inc., No. 11-708 (U.S. review sought 12/8/11), appeals an unpublished ruling by the Second Circuit denying interlocutory appeal of Pearson Education Inc. v. Liu, 656 F. Supp. 2d 407 (S.D.N.Y. 2009). Wiley is also a party in that proceeding.

Kirtsaeng was represented by E. Joshua Rosenkranz of Orrick, Herrington & Sutcliffe, New York. Wiley was represented by Theodore B. Olson of Gibson, Dunn & Crutcher, Washington, D.C.

By Anandashankar Mazumdar  

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