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Copyrighted Goods Need a Middle Ground for Enforcement

JURIST Guest Columnists Beth Heifetz and David Cooper of Jones Day argue that copyright protections for the resale of goods should only apply to copyrighted goods first manufactured and sold outside the US...

Earlier this afternoon, the US Supreme Court heard oral arguments in Kirtsaeng v. John Wiley & Sons, Inc., a case with enormous implications for copyright law. Specifically, the Court is considering whether copyright protection includes the right to prevent the resale of goods manufactured and legally acquired abroad and then imported into the US. There is a substantial market in the US for these "gray market" goods.

The lawsuit concerns Supap Kirtsaeng's plan to profit from the disparity in the prices of the same textbooks in domestic and foreign markets. Kirtsaeng's family in Thailand shipped him textbooks published by John Wiley & Sons, Inc. that were manufactured and first sold there. These textbooks sell for higher prices in the US than in Thailand, so Kirtsaeng resold the textbooks in the US for a profit, without Wiley's permission.

Wiley sued Kirtsaeng in the US District Court for the Southern District of New York for copyright infringement, and prevailed on a jury finding of infringement with statutory damages of $75,000 per work ($600,000 total). The US Court of Appeals for the Second Circuit affirmed, and the Supreme Court granted certiorari.

There are several provisions of the Copyright Act at issue, which are in some tension with each other. The first, codified at 17 U.S.C. § 602(a)(1) prohibits importing goods into the US without the permission of the copyright holder. It states: "Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106 . . . ." But another provision, section 106, subjects the copyright holder's rights to several limitations, including the "first sale" doctrine contained in section 109. That provision states that "the owner of a particular copy or phonorecord 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 or phonorecord." For purposes of the instant case, the key words in that provision are "lawfully made under this title."

The Supreme Court attempted to reconcile these statutory provisions in Quality King Distributors, Inc. v. L'anza Research International, Inc., a case that left the issue here unresolved. At issue there were hair care products with copyrighted labels. The labels were manufactured in the US and shipped abroad. The hair care products — with the labels — were then imported and resold in the US without the copyright owner's permission. The Court held that the right against importation in section 602(a)(1) is limited by the "first sale" rule in section 109, and therefore the round-trip importation and resale of the hair care products did not violate the copyright laws. However, this holding came with an important caveat. The Court recognized that section 602(a)(1) cannot be rendered superfluous through an expansive interpretation of section 109, and one category where section 602(a)(1) still applied is for "copies that were 'lawfully made' not under the United States Copyright Act, but instead, under the law of some other country." Justice Ruth Bader Ginsburg, in a solo concurring opinion, emphasized "that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad."

The Court faced the question of infringing imports manufactured abroad in another case, Omega S.A. v. Costco Wholesale Corp.. At issue there were watches imprinted with Omega's copyrighted design. However, with Justice Elena Kagan not participating in the case, the Court divided 4-4 and affirmed without an opinion or a precedent.

Now, the issue arises again, with two key questions: what does it mean for a copyrighted good to be "lawfully made under this title?" And what are the practical consequences of allowing or disallowing domestic resale of foreign-made copyrighted goods?

First, while Quality King made clear that the right of an owner to resell a copyrighted product applies only to copies "lawfully made under this title," it gave little guidance on what that phrase actually means. A good starting point is that a copy is lawfully (or unlawfully) made "under" the Copyright Act only if the making of the copy is subject to the Copyright Act. That is both the normal definition of "under" in this context, and the only way to make sense of the "lawfully" qualifier before it, as a copy can only be lawful (or unlawful) if it is subject to the law.

The question, then, is the scope of the Copyright Act with respect to the making of copies. It is well-settled that the Copyright Act does not apply extraterritorially. The Court generally looks to a statute's "focus" in deciding what constitutes a domestic, as opposed to extraterritorial, application of a statute. For example, because the focus of Section 10(b) of the Securities Exchange Act is on the "purchases and sale of securities," it, as the Court stated in Morrison v. Nat'l Austl. Bank Ltd., applies only to purchases or sales "made in the United States." The focus of the Copyright Act provisions regarding the making of copies is on infringement. Thus, the infringing conduct must occur in the US to fall within the territorial scope of the Copyright Act. Here, because the books were manufactured abroad and sold abroad, it is difficult to discern any potentially infringing conduct in the making of copies of the book that occurred in the US. Simply put, it seems unlikely that a person can sue under the Copyright Act for supposed infringement that occurs because someone in a foreign country is making copies of his book and selling them abroad. As a result, because the textbooks here were manufactured and sold abroad, they were not made "under" the Copyright Act, which means that the first-sale doctrine does not protect Kirtsaeng, and Wiley can rely on the importation restrictions of section 602(a)(1).

Second, on the practical side, the harms from allowing resale of foreign-made and foreign-sold products is clear. Arbitrageurs like Kirtsaeng will increasingly take advantage of foreign and domestic pricing disparities as e-commerce and easy international shipping make it cheaper to do so. As a result, companies will be forced to back out of some international markets, price their products higher in those markets, or simply swallow the loss of profit in the market. All of these results are economically inefficient and seemingly unnecessary.

Those supporting Kirtsaeng, however — which include eBay and Costco — predict dire consequences from prohibiting resale of foreign-made goods. They warn that such a rule would wrongly encourage companies to manufacture their products abroad for sale in the US. Indeed, under Wiley's approach, foreign-made goods could obtain greater protection against resale than would US-made goods. But Wiley suggests that this concern is overstated because there is little, if any, evidence of companies actually moving manufacturing to gain resale protection, or of companies fighting the resale of products that are first sold in the US.

More importantly, the Court need not create this perverse incentive because there is a firm legal basis for distinguishing foreign-made goods that are first sold abroad from those that are first sold domestically. Specifically, the domestic sale of a product may (depending on the circumstances) constitute domestic conduct that could give rise to "domestic infringement" subject to the Copyright Act. And, as discussed above, if a copy is subject to the Copyright Act, then resellers will be shielded from liability under section 109(a).

Thus, there is a middle ground between allowing rampant arbitrage and allowing companies to prohibit all resale by locating manufacturing outside the US. If there is copyright protection against resale only for copyrighted goods both manufactured and first sold outside the US, then copyright holders are given the reasonable option to price goods differently abroad, but not the unreasonable option to punish those who are reselling goods that they legally bought in the US in the first place.

Beth Heifetz is a partner at Jones Day with more than 25 years of experience in appellate litigation, representing clients in constitutional, tax, antitrust, securities, insurance, and bankruptcy matters. She is a former co-chair of the Appellate Practice Committee of the American Bar Association Litigation Section and former co-chair of the Litigation Section's Pro Bono Committee. She is also a former law clerk to Justice Harry Blackmun, and holds a J.D. from New York University School of Law and a B.A. from the University of Wisconsin.

David Cooper is an associate at Jones Day, where he focuses on appellate litigation and complex civil litigation, and he has authored briefs in the US Supreme Court on a variety of issues. He is a former law clerk to Justice Anthony Kennedy, and holds a J.D. from Stanford Law School and a B.A. from Harvard College.

Suggested citation: Beth Heifetz & David Cooper, Copyrighted Goods Need a Middle Ground for Enforcement, JURIST - Sidebar, Oct. 29, 2012, http://www.jurist.org/sidebar/2012/10/heifetz-cooper-copyright-kirtsaeng.

This article was prepared for publication by Sean Gallagher, the section head of JURIST's professional commentary service. Please direct any questions or comments to him at professionalcommentary@jurist.org

Opinions expressed in JURIST Commentary are the sole responsibility of the author and do not necessarily reflect the views of JURIST's editors, staff, donors or the University of Pittsburgh.

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