The Supreme Court’s Kirtsaeng Ruling Is Good News for Consumers, but the First Sale Doctrine Is Still Doomed–Kirtsaeng v. John Wiley (Forbes Cross-Post)

March 26, 2013 · by · in Copyright, E-Commerce, Licensing/Contracts

By Eric Goldman

Kirtsaeng v. John Wiley & Sons, No. 11–697 (U.S. Supreme Court March 19, 2013).  Prior blog post of the Second Circuit ruling in the case.

In Kirtsaeng v. John Wiley & Sons ($JW-A), the U.S. Supreme Court ruled that U.S. copyright law doesn’t restrict the importation of legitimate copyrighted works manufactured and sold overseas.  As a result, publishers cannot use U.S. copyright law to enforce their price discrimination schemes of pricing copyrighted works on a per-nation basis.

This ruling is a legal victory for U.S. consumers, who should see cheaper prices in the short run.  This ruling is also a win for museums, libraries and other institutional collectors of copyrighted works, who face less risk now when acquiring copyrighted works (especially those initially sold overseas).  Still, amidst the good news, it’s impossible to ignore the rapid and probably irreversible demise of copyright’s First Sale doctrine, meaning this legal victory is likely short-lived at best.

What Happened

In 1998, the U.S. Supreme Court decided Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U. S. 135 (1998), holding that a copyrighted item manufactured in the U.S. and initially sold outside the U.S. could be legally imported back into the U.S. pursuant to copyright’s First Sale doctrine (17 U.S.C. 109) and without violating the copyright owner’s importation right (17 U.S.C. 602).  The Quality King court expressly declined to resolve the much more common situation where the copyrighted item was initially manufactured overseas and then imported into the U.S.

That well-known issue has remained legally ambiguous for 15 years.  The 2010 Costco v. Omega case squarely raised the issue, but the court deadlocked at 4-4 (Judge Kagan recused) and didn’t definitively resolve the issue, necessitating the court to revisit the issue just 3 years later.  The legal interplay between the First Sale doctrine and the importation right vexes the courts because Congress’ poor statutory drafting supports at least two different but equally plausible interpretations of its language.  Courts often produce inconsistent results and split opinions in those situations.

The Kirtsaeng court concluded that Quality King didn’t apply only to copyrighted goods manufactured domestically.  Instead, copyright’s First Sale doctrine–allowing the unrestricted resale of legitimate copyrighted goods after they are first sold into the market–applies regardless of where the goods are initial made or sold.  This means copyright owners can’t prevent goods sold in cheap markets from competing with the same goods sold in higher-priced markets.  With the emergence of efficient online retail markets such as eBay ($EBAY), a textbook publisher who sells a low-priced book in Thailand won’t be able to sell the same textbook in the U.S. market for a much higher price.  The pricing gap will allow arbitragers to buy the books in Thailand, resell them via eBay or textbook e-tailers, and still make a profit even after shipping and taxes.  Thus, a copyright owner’s trans-border price competition with itself will jeopardize the now-common international price discrimination schemes.

Why the First Sale Victory Will Be Short-Lived

It’s hard to be too sympathetic to publishers deploying international price discrimination.  Culturally, U.S. consumers intuitively oppose price discrimination; and U.S. consumers are paying higher prices due to price discrimination against them.  Still, to the extent that price discrimination helps put more money overall in publishers’ hands, the current price discrimination schemes (in theory) have been encouraging publishers to publish more content, so without international price discrimination, at the margins some of that content will go unpublished.  At least, that’s the story copyright owners like to tell.

shutterstock_50106550.jpgDon’t cry for publishers just yet.  Copyright’s First Sale doctrine has become increasingly less useful to consumers over the past couple of decades due to changes in technology and business practices, and I anticipate this ruling will accelerate the trend.  Some of the ways publishers may strike back without seeking any changes to the law:

  • Localization.  Publishers can localize their offerings for local markets such that different countries’ versions can’t substitute for each other.  For example, if John Wiley releases a Thai-language textbook, it won’t be very interesting to most U.S. consumers.  Publishers have numerous other ways of localizing copyrighted works (beyond translations) to restrict trans-border substitutability.
  • Versioning.  Publishers can quickly issue new editions of their works that moot prior editions.  We’re already seeing this in the textbook market.  Publishers are increasingly releasing new textbook editions on a 3-year (or even 2-year) schedule to eliminate competition with used books.
  • “Shrinkwrapping.”  Instead of relying on copyright law, publishers can try to impose and enforce contract restrictions on resale.  It’s clear that software can be sold subject to a contract that restricts transfer (see Vernor v. eBay), but it’s less clear if the resale of other physical items containing copyrighted works–such as books, CDs or DVDs–can be restricted by copyright law.  The seminal Supreme Court case Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908) could be read to say that such shrinkwrapped contracts are ineffective, but I consider that issue legally unresolved.
  • Geographic Coding.  Publishers can encode electronic media in geographic-specific technical formats.  For example, DVDs currently have “region codes” that do not permit DVDs sold in one region to be played on equipment built for that region.
  • Tethering/DRM.  Increasingly, physical versions of copyrighted works are “tethered,” i.e., they require an interaction with a central server to operate.  For example, with some videogames and software, consumers need to input an “unlock code” to access the game or software; and the unlock code can be limited to the initial buyer or to a particular machine in a way that restricts transfer.  Even textbooks may be subject to tethering if they have an integrated online component, which is increasingly the case.

Even without any of those efforts, the long-term movement from publishing content in physical items to electronic publication has been effectively shrinking the importance of copyright’s First Sale doctrine.  There is no “digital” First Sale doctrine, meaning that a buyer of an electronic file cannot resell or transfer “possession” of that electronic file under the First Sale doctrine.  So as consumers buy fewer physical copies of copyrighted works and more electronic versions, consumers implicitly forego the First Sale rights associated with the physical goods.  Plus, as fewer physical goods enter the market, the copyright owner feels less price competition from them.

In addition, copyright owners might assault the First Sale doctrine legislatively.  One possibility is that publishers will simply ask Congress to statutorily reverse the Kirtsaeng opinion.  More likely, publishers will advance their interests via negotiations over international treaties or Free Trade Agreements (FTAs).  Coordinated special interests can game international negotiations more easily than Congress–the publishers have direct financial payoffs from participating in the process, while the interests of consumers, libraries, museums and other “buyers” are more diffuse.  Anticipate more publishers showing up at the negotiations, and don’t be surprised if publishers overturn the Kirtsaeng decision without ever approaching Congress directly.

So, as a content consumer, enjoy the upcoming price competition while it lasts.  The First Sale doctrine is dying rapidly, and we as consumers are becoming poorer as that happens.

Some Related Materials

* In 2010, the High Tech Law Institute at Santa Clara University School of Law held an all-day academic conference on the First Sale doctrine.  See the associated symposium issue in the Santa Clara Law Review.

* In 2010-11, the Ninth Circuit issued a troika of First Sale doctrine cases: Vernor v. Autodesk, MDY v. Blizzard, and UMG v. Augusto. In my opinion, the net effect of these cases was irresolute.

[Photo credit: CD/DVD safely backed up by padlock // ShutterStock]