First Sale and the Specter of “International Exhaustion”: Kirtsaeng comes down

The Supreme Court issued its decision today in Kirtsaeng v. Wiley, addressing whether the first sale doctrine, which prevents copyright owners from further controlling works after sale, applies to works legally manufactured abroad. First sale doctrine allows libraries and second hand bookstores to operate without fear of copyright consequences. Kirtsaeng was a student in the U.S. who made money off of reselling Wiley textbooks that had been published in Thailand. Wiley argued that the first sale doctrine as codified by Congress in 17 USC 109(a) does not apply to works manufactured and sold abroad. The Court disagreed.

This post summarizes the opinion, talks briefly about the conflict that exists between US law and language in our Free Trade Agreements, and then makes a few guesses of what will happen next.

The opinion:

Justice Breyer wrote the majority opinion (6-3), which to those following SCOTUS copyright cases says it all. The majority held that authorized works manufactured abroad are subject to the first sale doctrine, so Kirtsaeng did not infringe copyright by reselling the legally purchased works in the United States. In other words, when coupled with Quality King, Kirtsaeng determines that 17 USC s. 602(a)(1) creates an importation right as part of the distribution right of s. 106, which in turn is limited by first sale in s. 109(a); thus 602(a)(1) is limited by 109(a). (As I’ll discuss below, it is important that this is all statutory interpretation.)

Breyer trumpeted the importance of first sale, emphasizing the “practical copyright-related harms with which a geographical interpretation would threaten ordinary scholarly, artistic, commercial, and consumer activities.” In the absence of first sale doctrine, libraries, used book stores, museums, and retailers would all struggle to trace title for used books and other works originating abroad. As my colleague Christina Mulligan has noted, investigating the licensing history of a work can be costly.

Breyer also got a chance to reorient copyright doctrine from the rights holder to the consumer, remarking that “American law too has generally thought that competition, including freedom to resell, can work to the advantage of the consumer” (at 18). The opinion evinced little sympathy for publishers, explaining that there is  “no basic principle of copyright law that suggests that publishers are especially entitled to… charge different prices for the same book in different geographic markets” (at 31).

In the broadest language of the opinion, Breyer explained that a “copyright law that can work in practice only if unenforced is not a sound copyright law. It is a law that would create uncertainty, would bring about selective enforcement, and if widely unenforced, would bred disrespect for copyright law itself” (at 24). This language can be applied to a whole host of current copyright policy, including the little-enforced criminal copyright standard created by the NET Act.

Conflict with Free Trade Agreements (FTAs):

The US Trade Representative (USTR) has bound us to a standard that is now in conflict with Supreme Court caselaw. My co-author Sean Flynn correctly pointed out this morning that Kirtsaeng conflicts with proposed language in the Trans-Pacific Partnership Agreement and language adopted in earlier Free Trade Agreements. In the U.S.-Jordan FTA, for example, Article 4(11) prohibits the “importation into each Party’s territory of copies of works and phonograms, even where such copies were made with the authorization of the author.” This directly conflicts with the Kirtsaeng-Quality King holding that importation is allowable when works were legally purchased abroad.

Similarly, both the Anti-Counterfeiting Trade Agreement (ACTA) and the TRIPS Agreement contain broad border measure provisions that are implicated by Kirtsaeng. Both agreements assume that countries will employ broad border measures in the name of copyright enforcement. Now those border measures must be limited to pirated goods only, not including legally manufactured goods that weren’t authorized for importation.

Each agreement contains “de minimis” provisions that limit border measures from applying to smaller importations. Under TRIPS, copyright-related border measures need not be applied to “small quantities of goods of a non-commercial nature contained in travellers’ personal luggage or sent in small consignments.” ACTA, by contrast, requires that border measures be applied to “goods of a commercial nature sent in small consignments.” This means that under TRIPS, border guards can search everything except for small consignments and personal luggage to determine if goods are infringing. Under ACTA, border guards were required to search through “small consignments” like the ones Kirtsaeng received, to determine if these consignments are “commercial” or “noncommercial” in nature.

Kirtsaeng suggests that these de minimis provisions are now far less significant because border measures should apply to less activity. ACTA’s requirement that border measures must apply even to “goods of a commercial nature sent in small consignments” must now be limited to goods that are copyright infringing, not goods that are unauthorized for importation.

What happens next:

What will happen after Kirtsaeng?

Kagan’s concurrence suggests one outcome: Congress could legislate around the Court’s opinion and re-establish a broader importation right not subject to first sale. But if done carelessly, new legislation will present exactly the same problems for secondary markets such as libraries and museums: the cost of determining whether a good has been legally imported would rise again, discouraging resale markets. As James Grimmelmann tweeted this morning: “If you want national market segmentation, prohibit unauthorized imports, but keep your fingers off resale of the items once they’re here.” I would add that if Congress creates a new prohibition against unauthorized imports, it should clarify that (1) downstream purchasers of legally manufactured but unauthorized imported goods will not be liable for copyright infringement and (2) the de minimis importation of goods manufactured abroad will still be allowed, under TRIPS Article 60.

Another likely outcome post-Kirtsaeng is that rights holders will continue to expand the trend of licensing copyrighted goods rather than selling them. Breyer makes it very clear that first sale applies to owners only. A “lessee of a copy will not receive “first sale” protection but one who owns a copy will receive “first sale” protection, provided, of course, that the copy was “lawfully made” and not pirated” (at 14). Many copyrighted goods are now licensed, not sold, thus working around Kirtsaeng. Amazon, for example, notoriously does not allow you to “purchase” territorially licensed books on the Kindle from other geographical territories.

Finally, there’s the question of what the practical outcome will be if Congress does not legislate. Joe Karaganis has done great work showing that piracy occurs in emerging economies when there is a “failure of affordable access to media in legal markets.” If publishers and other rights holders try to avoid the inevitable arbitrage by raising prices in emerging countries to match prices in the U.S., they may stimulate more piracy in those countries.

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