Second Circuit Joins Ninth: No First Sale Defense for Foreign-Made Copyright Works

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• Case Summary: A book publisher differentiating prices for overseas and U.S. versions of the same book can prevent an importer from selling foreign-made books in the United States at a lower price than its U.S. counterpart.

• Key Takeaway: The Second Circuit follows the Ninth Circuit's Costco decision in holding that the first sale doctrine as a defense to copyright infringement does not apply to works manufactured outside of the United States.

In a split decision, the U.S. Court of Appeals for the Second Circuit joined the Ninth Circuit in holding Aug. 15 that an importer of a copyrighted work manufactured overseas for resale in the United States cannot use the first sale doctrine as a defense to infringement (John Wiley & Sons Inc. v. Supap Kirtsaeng, 2d Cir., No. 09-4896-cv, 8/15/11).

The majority and dissent rehashed arguments made by the parties and friends of the court in the U.S. Supreme Court's review of the issue in Costco v. Omega, which ended with a divided court giving no guidance to the copyright community. Both the majority and dissent in the instant case concluded that the relevant statutory text is ambiguous, they had conflicting interpretations of the structure of the Copyright Act and dicta in the high court's Quality King ruling in 1998.

Two additional Second Circuit cases on the same topic, heard by different panels, are pending, so the instant panel's view may not be the final word of the court.

Resale in the U.S. of Foreign Editions of Textbooks

John Wiley & Sons Inc. publishes foreign editions of textbooks of slightly lower quality and with fewer additional features, such as study guides, than available in the company's U.S. editions. Foreign editions are printed overseas. Text on the back covers of the books indicates restrictions on their sale to foreign markets, along with a prohibition against exportation. The U.S. editions are more profitable for Wiley than the foreign editions.

In the agreement with its “Wiley Asia” subsidiary, the company assigned rights to the reprinting and publishing of the foreign editions, but limited geographically the subsidiary's right to sell the books and retained its U.S. copyright protection and its right to publish and sell the books in the United States.

Supap Kirtsaeng, originally from Thailand but now based in California, received shipments of Wiley Asia-manufactured foreign edition textbooks from family and friends in Asia. He then sold the books through commercial websites such as eBay, reimbursed the senders, and retained the profits.

Wiley initiated a copyright infringement lawsuit against Kirtsaeng and unknown associates in the U.S. District Court for the Southern District of New York.

Judge Donald C. Pogue, sitting by designation from the U.S. Court of International Trade, ruled that Kirtsaeng could not use the first sale doctrine, 17 U.S.C. §109(a), as a defense against a charge of infringement. 93 USPQ2d 1432 (S.D.N.Y. 2009) (210 PTD, 11/3/09).

Kirtsaeng appealed that judgment, the jury instructions, and the damages award that was based on willful infringement.

Meanwhile, There Was Costco v. Omega

The Second Circuit heard oral arguments in the case in May 2010, but delayed its decision, pending an anticipated ruling from the U.S. Supreme Court on the same issue on appeal from the Ninth Circuit. Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 88 USPQ2d 1102 (9th Cir. 2008) (175 PTD, 9/10/08).

The issue before each of the courts is a tension between Section 109(a) and the Copyright Act's bar against importation of copyrighted works acquired abroad, under Section 602(a)(1). Section 602(a)(1) allows a copyright owner to claim infringement for the importation while Section 109(a) can be interpreted to give the alleged infringer a defense for the same action.

Amicus briefing before the high court in the Costco case was extensive, with owners of copyrights pitted against retailers and consumer industry groups. The U.S. government entered the argument on the side of watchmaker Omega S.A., which sued to stop Costco Wholesale Corp. from importing and selling Omega watches that were made overseas and intended to be sold outside the United States only. At oral arguments, the eight justices who heard the case—Justice Elena Kagan was recused for her participation on behalf of the government while she was attorney general—suggested that both parties were arguing for an interpretation of the Copyright Act provisions that was not supported by the text of the relevant statutory language (215 PTD, 11/9/10).

Unfortunately, the high court split 4-4 and published no opinion. Costco Wholesale Corp. v. Omega S.A.,131 S. Ct. 565, 96 USPQ2d 2025 (U.S. 2010) (238 PTD, 12/14/10). Thus, the high court's non-decision left intact the Ninth Circuit's ruling that the first sale doctrine did not bar an infringement action, but with no precedential effect outside the Ninth Circuit.

Majority Limits Section 109(a)

In the instant case, Judge José A. Cabranes first conducted a statutory interpretation of Section 109(a) and concluded that the court was “[c]onfronted with an utterly ambiguous text.”

The provision allows for assertion of the first sale defense for resale of a copy “lawfully made under this title,” and the court ultimately allowed that the phrase “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.' ”

The majority concluded that the first interpretation was correct, viewing the statute in the context of Section 602(a)(1). and acknowledging dicta from the Supreme Court's opinion in Quality King Distributors Inc. v. L'anza Research International Inc., 523 U.S. 135, 45 USPQ2d 1961 (1998).

The copies in question in Quality King had been made in the United States, sold abroad, and re-imported into the country, a “round-trip” situation not applicable here. However, the Quality King court added a hypothetical scenario that distinguished works made by a U.S. or British publisher and said, “presumably only those made by the publisher of the U.S. edition would be ‘lawfully made under this title' within the meaning of §109(a).”

According to the majority, the high court in Quality King was thus indicating that “works ‘lawfully made' under the laws of a foreign country—though perhaps not produced in violation of any United States law—are not necessarily ‘lawfully made' insofar as that phrase is used in §109(a) of our Copyright Act.”

The majority accordingly said, “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 foreign-manufactured works.”

Consequently, the court affirmed the lower court's judgment barring Kirtsaeng's use of the first sale defense.

The majority opinion included an extensive footnote acknowledging that this interpretation has “undesirable” public policy implications, effectively giving an economic reason for copyright owners to outsource manufacture of works. “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,” the court concluded.

No Error in Jury Instruction, Evidence Admission

The court then turned to Kirtsaeng's argument that the district court judge should have given an appropriate jury instruction as to the unsettled state of the law on this issue, which, he argued, would have made a finding of willful infringement unlikely.

Applying a plain error standard, however, the court again affirmed the lower court, saying it could find no binding authority that the trial judge was required to give such an instruction. Further, the court said, Kirtsaeng had ample opportunity to make arguments against a willfulness finding at trial.

Finally, Kirtsaeng challenged the admission of evidence of $1.2 million in revenue from his book reselling business, as reflected in postings to his PayPal account, since the figure included sales other than of Wiley books. The court again ruled against the defendant, concluding that the jury's statutory award of $75,000 per copyrighted work—half that allowed under Section 504(c)—was supported even had the jury not known the revenue amount.

Judge Robert Allen Katzmann joined the majority opinion.

Dissent Reads Statute Differently

Senior Judge J. Garvan Murtha, of the U.S. District Court for the District of Vermont, sitting by designation, dissented as to the interpretation of Section 109(a). “Unlike the majority,” he said, “I conclude the first sale defense should apply to a copy of a work that enjoys United States copyright protection wherever manufactured.”

First, Murtha saw more clarity in the provision than did the majority. “The statutory text does not refer to a place of manufacture,” he said, and since a copyright owner may lawfully—under Title 17—authorize a copy to be made by another entity, “regardless of place of manufacture, a copy authorized by the U.S. rightsholder is lawful under U.S. copyright law.”

Second, he noted that Congress distinguished “first published in the United States or in a foreign nation” in Section 104(b)(2), and so it could have used “lawfully manufactured in the United States under this title” in Section 109(a) but did not.

Next, Murtha argued that the public policy argument also favored his interpretation. “I do not believe Congress intended to provide an incentive for U.S. copyright holders to manufacture copies of their work abroad,” he said.

The majority's interpretation means that the copyright owner would have “perpetual control over imported works,” he said. Murtha acknowledged that the Ninth Circuit held that the incentive does not exist, because the first sale doctrine would apply after one authorized sale in the United States. However, Murtha countered, “This interpretation finds no support in the statutory text and is in direct conflict with the portion of the Supreme Court's Quality King decision which noted that where a sale occurs is irrelevant for first sale purposes.”

Finally, he disagreed with the majority's interpretation of the dicta in Quality King, noting that the hypothetical “makes no reference to the place of manufacture, … and therefore does not speak directly to the issue of applicability of the [first sale] doctrine to foreign made copies.”

William Dunnegan of New York represented Wiley. Kirtsaeng was represented by Sam P. Israel of New York.

The Second Circuit Is Not Done

In addition to the instant case, Wiley was co-plaintiff in three similar cases brought in the Southern New York district by Pearson Education Inc. A different judge came to the same conclusion as the Kirtsaeng district court, albeit through a slightly different route, in Pearson Education Inc. v. Liu, 656 F. Supp.2d 407, 93 USPQ2d 1139 (S.D.N.Y. 2009) (199 PTD, 10/19/09).

Two other actions by Pearson are awaiting decisions by different panels of the Second Circuit. Pearson Education Inc. v. Arora, No. 10-2829 (2d. Cir., argued Jan. 19, 2011); and Pearson Education Inc. v. Kumar, No. 10-2610 (2d. Cir., argued March 21, 2011).

Dunnegan represents Pearson, as well, in both cases. John T. Mitchell of Interaction Law, Washington, D.C., represents Arora, and Vivek Suri, New York, represents Kumar.

By Tony Dutra

Opinion at http://pub.bna.com/ptcj/094896Aug15.pdf