Copyright and Patent Implications of Supreme Court's First Sale Doctrine Ruling

22 March 2013 Publication
Author(s): Andrew Baum

Legal News Alert: IP Litigation

In a 6-3 decision issued on March 19, 2013, the U.S. Supreme Court held that the first sale doctrine, which allows the owner of a “lawfully made” copy of a copyrighted work to freely sell it, also applies to the resale of copies lawfully made abroad. The decision in Kirtsaeng v. John Wiley & Sons, Inc. (No. 11-697, March 19, 2013) held that a copyright owner’s right to prohibit importation of copies is trumped by the first sale doctrine. The decision will benefit individuals and businesses such as online retailers and gray-market importers, who operate in the secondary market for copyrighted works. In addition, U.S. companies who sell copyrighted works abroad at lower prices will be unable to prevent their importation into the United States. This case may likely have ramifications beyond copyright law, as it may require the Federal Circuit to reconsider its prior panel decisions with respect to the first sale doctrine in patent law.

Wiley & Sons, Inc. (Wiley), a textbook publisher, grants its foreign subsidiaries the right to publish, print, and sell foreign versions of Wiley’s textbooks abroad. The foreign versions are equivalent in content to the versions printed and sold by Wiley in the United States, and contain notices that the textbooks were not to be taken into the United States without permission from Wiley. Supap Kirtsaeng, a student in the United States, had his family in Thailand buy copies of Wiley’s English-language textbooks manufactured in Thailand, where they are sold at lower prices than in the United States, and ship them to him. Mr. Kirtsaeng then sold them for a profit.

In 2008, Wiley sued Mr. Kirtsaeng for copyright infringement, alleging that his unauthorized importation and resale of its books infringed its exclusive right to distribute copies of its works and violated the prohibition on importation and distribution of copyrighted works made abroad without the U.S. copyright owner’s permission, in violation of Section 601 of the Copyright Act.

The Court was presented with the question of whether the first sale doctrine embodied in Section 109 of the Copyright Act, (which provides that the owner of a copy of a copyrighted work “lawfully made” is not liable for copyright infringement when he/she sells that copy without authorization) applies when the copy is manufactured by the copyright owner abroad. In other words, the Court decided whether the unqualified first sale doctrine in Section 109 was limited by the unqualified right to prohibit importation and distribution of foreign-made works in Section 601.

In a majority opinion by Justice Breyer, the Supreme Court reversed last year’s 2-1 decision of the Second Circuit, which had held that the first sale doctrine only protects the resale of copyrighted works made in the United States. In its decision this week, the Supreme Court held that the first sale doctrine protects resellers of copies of copyrighted works lawfully made, wherever they are manufactured.

The Court’s decision was driven in part by its reading of the language of Section 109. It noted that the operative language “lawfully made under this title,” on its face does not impose any sort of geographical limitation on the doctrine’s application and instead simply means “in accordance with copyright law.” In other words, the Court found that this language is simply intended to further the statute’s purpose of combating piracy by limiting the protection of the first sale doctrine to copies that are manufactured with authorization of the copyright owner. In doing so, the Court pointed to related provisions of the copyright statute that explicitly apply without regard to geography.

Key to the decision, however, were the practical implications of holding that the first sale doctrine applies only to goods manufactured in the United States. For example, libraries, used-book dealers, technology companies, and museums contain millions of books and other items that were printed abroad. If Section 109 were interpreted to incorporate a geographic limitation, they would be forced to locate and obtain permission from the copyright owner before further distributing the copies. Further, the Court explained that a geographically limited first sale doctrine would be at odds with the modern importance of foreign trade, noting that more than $2.3 trillion worth of foreign goods were imported in 2011 and that many of these goods were purchased after manufacture abroad. The Court also explained that the lower court’s decision would allow a copyright owner to prevent a lawful owner of a software program or copy of another copyrighted work to resell or give away that copy, even if the copyright holder had granted permission for the foreign manufacture, importation, and domestic sale of the copy. In other words, Wiley could print its books abroad and allow them to be imported and sold in the United States, but prohibit students from later reselling such used books on the grounds that they had been manufactured outside of the United States.

In the dissenting opinion, Justice Ginsburg asserted that the first sale doctrine must give way to the right of a copyright holder to bar importation of a copy manufactured abroad. She emphasized the negative economic implications of preventing copyright owners from selling copyrighted goods for different prices depending on where the goods are manufactured and sold. She also argued that the Supreme Court’s prior decision on the first sale doctrine, Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998), provided that Section 109’s protections only applied to importation of copies made in the United States but sold abroad and reimported to the United States for resale (rather than copies initially made abroad) and that the statutory language “lawfully made under this title” is intended not merely to thwart the sale of pirated goods, but to make clear that the first sale doctrine only applies to goods made in geographic areas where U.S. copyright law applies (i.e., the United States). The majority disagreed with Ginsburg’s interpretation of the statutory text and found that Quality King was not controlling because it did not decide the issue of the Section 109’s application to copies made abroad.

While Kirtsaeng’s holding is limited to Section 109 of the Copyright Act, the Court’s reasoning, particularly its discussion of English common law, may significantly affect patent law. Unlike copyrights, the first sale doctrine for patents is not codified in the patent statutes but is instead based on judge-made common law. In the patent context, the Federal Circuit has held that a first sale of a patented product outside the United States does not terminate a patent owner’s exclusive U.S. patent rights to that product. A petition for certiorari challenging this Federal Circuit holding is now before the Supreme Court in Ninestar Technology Co., Ltd. v. International Trade Com'n, 667 F.3d 1373 (Fed. Cir. 2012). The Supreme Court may decide as early as March 25, 2013 to grant this petition in order to hear the case itself or to permit the Federal Circuit to reconsider the case in light of Kirtsaeng. In particular, the Kirtsaeng majority traced the history of the first sale doctrine to the 17th century English common law, which was viewed to end a property owner’s rights to “articles, things, chattels” once sold. The Court further noted that this common-law doctrine “makes no geographical distinctions.” Given the role that history played in Kirtsaeng, there will certainly be renewed arguments both for and against international patent exhaustion.

In summary, the Court’s Kirtsaeng decision gives comfort to the individuals and sectors of the increasingly global economy that participate in the secondary market for copyrighted goods that were initially made abroad and who may have (perhaps uneasily) until now only assumed that the first sale doctrine provided immunity from copyright infringement liability. The other side of the coin is that this decision will negatively affect the ability of copyright owners to use copyright law to control parallel imports of their copyrighted goods by prohibiting resale in the United States of their copyrighted works made and first sold abroad (generally at a lower price). This may cause copyright owners to either reevaluate (and increase) the prices at which they currently sell foreign-made copies of their works in order to de-incentivize resale of such goods in the United States by eliminating the potential profit, but this course of action will almost certainly decrease the demand for U.S. copyrighted goods abroad.

For some copyright owners, such as textbook publishers, this decision may signal the end of offering foreign-made English-language editions of copyrighted works intended for foreign use that are content-wise equivalent to the U.S. editions made and sold for use in the United States. And if the Kirtsaeng decision is extended to patent law, as the Supreme Court or Federal Circuit may eventually decide, then the ramifications would be felt in sectors including patented pharmaceuticals, electronics, and manufactured goods sold abroad.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Andrew Baluch
Shanghai, China

Andrew Baum
New York, New York

Tara E. Langvardt
Chicago, Illinois