Second Circuit Says No First Sale Doctrine for Works Manufactured Outside the U.S. — Wiley & Sons v. Kirtsaeng

[Post by Venkat Balasubramani]

Wiley & Sons, Inc. v. Kirtsaeng, 09-4896-cv (2nd Cir. Aug. 15, 2011)

Wiley asserted copyright infringement claims against Kirtsaeng, who imported into the United States and sold “foreign editions” of Wiley textbooks. The books had legends printed on them which indicated that they were “Authorized for sale in Europe, Asia, Africa and the Middle East Only,” and any exportation or importation to another region was prohibited. Kirtsaeng, who sold the books to finance his education, reportedly earned a tidy profit (between $900,000 and $1.2 million). The jury found Kirtsaeng liable for willful infringement and imposed $75,000 in damages for eight separate works. The district court judge disallowed Kirtsaeng’s first sale defense, and on appeal, the Second Circuit addressed the issue of whether it should have been available to Kirtsaeng.

A section of the Copyright Act (section 602(a)(1)) provides that unauthorized importation is a violation of the copyright owner’s exclusive distribution right:

Importation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute . . . .

Separately, the section codifying the first sale doctrine (section 109(a)) provides that:

the owner of a particular copy . . . lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy . . . .

The key question was whether the “lawfully made under this title” language of the first sale section refers to items that were physically made in the United States or whether it encompasses copies that were licensed by a United States copyright holder but manufactured abroad. There’s obvious tension between section 602(a)(1) and section 109(a). Allowing importers to take advantage of the first sale doctrine with respect to works manufactured abroad would limit the copyright owner’s rights under section 602(a)(1), as the owner would not be able to prevent the importation of copies once sold.

The Ninth Circuit recently took up this conflict, and ruled in Costco v. Omega that the “lawfully made under this title” language in section 109(a) only applied to items that were produced in the United States. The Supreme Court accepted cert. in the Costco case but affirmed without providing any guidance due to a 4-4 split among the Justices (Justice Kagan recused). A prior Supreme Court case dealing with the interplay between section 109 and 602(a)(1) (Quality King Distributors, Inc. v. L’anza Research International, Inc.) held that the first sale defense is available to imported goods, but that case involved goods that were manufactured within the United States, sent abroad, and then imported. The Ninth Circuit held that Quality King did not overrule existing Ninth Circuit precedent which restricted the first sale defense to goods that are “legally made and sold in the United States.”

Wiley argued in the Second Circuit that, because the Copyright Act (Chapter 17 of the US Code) did not apply extraterritorrialy, “lawfully made under this title,” should mean “lawfully made in the United States.” The Second Circuit found that the textual argument was not determinative. Among other things, copyright protection can apply to works published in foreign nations, and elsewhere in the Copyright Act Congress used the phrase “lawfully made under this title” and did not limit it to items that were produced in the United States. Nevertheless the court held that any conflict between sections 109(a) and 602(a)(1) was best reconciled by limiting the first sale doctrine to “works manufactured domestically.” According to the court, this was the approach the Court hinted at in Quality King and the approach that best comports with the overall structure of Title 17.

The court also pointed to some drawbacks of the approach suggested by Kirtsaeng. Under his approach, copyright holders could control importation either only where (1) the importer does not legally “own” the copy or (2) where the work is produced in a country where US copyrights are not protected (i.e., by treaty). From the court’s perspective, this was untenable, because in order to be able to control importation, copyright owners would have to either not sell their works or would have to produce them in countries “that may not honor their copyright in the first place.” Kirtsaeng also argued that US copyright owners could take advantage of the importation bar to circumvent the first sale defense by outsourcing all of their manufacturing to foreign countries and ship them back into the US for domestic sales. While this seemed farfetched to me, the court said this was a policy matter that did not affect its interpretation of the statute.

Judge Murtha dissented, pointing out that in Quality King, the Court noted that the bar on importation without permission “is an infringement of the . . . distribution right.” Because the rights of distribution are expressly “‘subject to sections 107 through 122,’ the copyright owner’s power to limit importation is qualified by the first sale doctrine . . . . ” He also argued that the overall structure of the Copyright Act and other provisions support Kirtsaeng’s position. In other sections of the Copyright Act, Congress expressly referenced the location of manufacture, and if it wanted to limit the first sale doctrine only to works manufactured in the United States, it could have easily done so. He also argued that economic justifications favor Kirstaeng’s position. Allowing a copyright owner to freely limit importation would lead to uncertainty in the secondary market. It would also “provide an incentive for U.S. copyright holders to manufacture copies of their work abroad,” since works manufactured abroad would in practical terms be entitled to greater copyright protection.

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Although the policy clearly should favor the re-seller here, I didn’t see a clear solution to the statutory conflict, and don’t see either side as having a particularly compelling argument. The place of manufacture as a basis for a distinction seems arbitrary to me, particularly when it comes to something like content. I would expect that this may not be the last word, and the Supreme Court may end up weighing in on this case.

My understanding is that the publishing industry has traditionally treated the domestic and foreign markets separately and, as a matter of long-standing practice, has charged different prices for domestic and foreign editions of books. This pricing structure depends on being able to limit the availability of foreign editions in the domestic market. At first glance, this is precisely what section 602(a)(1) facilitates. I don’t think this is a practice that should be encouraged, but it’s one that publishers have long engaged in and that courts have supported. (See Eric’s post on a case from the Southern District of New York, which reaches the same conclusion: “Resale of International Textbooks to US Students Not Protected by First Sale Doctrine–Pearson v. Liu.”)

On the other hand, does it make sense to limit the copyright owner’s control to new versions of the books? Should the resale market remain free of the copyright owner’s control? Wiley’s approach ends up allowing for greater copyright protection for works in the foreign markets, which is odd from a copyright standpoint. But will this realistically result in some sort of offshoring push by publishers? I wasn’t sold on this argument.

One tweak in the case is that Wiley included a legend in one of the foreign editions which referenced US copyright laws:

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form . . . except as permitted under Section 107 or 108 of the 1976 United States Copyright Act.

As the dissent notes, it’s awkward for Wiley to be able to rely on rights under the Copyright Act but for Kirtsaeng to be deprived of the protections afforded by the same act. Interestingly, the majority references this legend in a footnote states that they “are . . . somewhat puzzled as to why Title 17 is invoked.” I wasn’t sure if this referred to Wiley invoking Title 17 in the legend, or Wiley bringing an infringement claim under Title 17 rather than some other cause of action. (An interesting sidenote: Kirtsaeng was located in the US and sold the books via eBay; what result if he had been located off-shore and sold to US consumers via eBay?)

As books, including textbooks, migrate to devices and are sold or licensed in digital form, the focus of this battle will shift away from first sale to DRM. Although it’s early to tell, my impression is that thus far, content owners are winning that battle.

[An interesting footnote to the case is that Kirtsaeng consulted, among other sources, "Google Answers" in order to determine the legality of his practice. It's unclear what answer he was provided, but he either didn't get the right answer, or got the right answer and disregarded it.]

Other coverage:

Poking More Holes in the First Sale Doctrine (EFF)

Legally Bought Some Books Abroad? Sell Them In The US And You Could Owe $150k Per Book For Infringement (Techdirt)

Previous related posts:

Software Vendor Trumps First Sale Doctrine via License–Vernor v. Autodesk

UMG Can’t Enforce “Not for Sale” Restrictions on Promo CDs — UMG v. Augusto

Supreme Indecision: Costco v. Omega Gums up the (Watch)Works