Overseas Manufacturing Creates Copyright Dilemma For US Supreme Court

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Kirtsaeng v. John Wiley & Sons presents the United States Supreme Court with a stark and weighty choice. In the 29 October oral argument [pdf], Supap Kirtsaeng urged the court to uphold purchasers’ right to freely dispose of copyrighted works they have purchased, even when those works are made overseas. If this right is struck down, Kirtsaeng warned, museums in the US may be unable to borrow works of art created overseas, consumers may be unable to sell their used books and CDs, and many companies engaged in secondary markets, such as eBay and used car dealers, may be put out of business.

Wiley, on the other hand, urged the Supreme Court to uphold the right of copyright owners to prevent unauthorised import of their works into the US. This right, according to Wiley, is needed if copyright owners are to sell different versions of their works at different prices in different countries. Such market segmentation is key for the book, television, movie and music industries, bringing them billions in revenue. And this segmentation is essential if content owners are to provide their works at prices that third world consumers can afford.

In other words, the ramifications of the Kirtsaeng case could be huge. And they could reach far beyond the United States’ borders.

Wiley, like many textbook publishers, sells different versions of its textbooks in different countries. The Asian version of its textbooks use lower quality paper and covers than the US version. However, the text is the same and the price is far less.

Kirtsaeng helped pay for his university education (and made a tidy profit, too) by bringing Asian versions of Wiley textbooks into the US and reselling them to students seeking to save some money. He was subsequently sued by Wiley, which alleged his activities infringed Wiley’s copyrights in the textbooks.

This case turns on the interpretation of two provisions of the US Copyright Act. Section 602(a)(1) of the Act clearly allows copyright owners to engage in market segmentation by stopping unauthorised imports of their works. This provision states that the US copyright in a work is infringed when a copy of the work (acquired outside the US) is imported into the US without the copyright owner’s approval.

Section 602, however, appears to conflict with the first sale doctrine, now codified in Section 109(a) of the Act. Section 109(a) states that the owner of a copy “lawfully made under” the Copyright Act can sell or dispose of that copy without the permission of the copyright owner. In other words, once a copyright owner authorises the initial sale of a copy of a work, the copyright owner loses the right to control further distribution of that copy. The copy’s owner can freely resell, lend or give away the copy, as can any subsequent recipient of the copy.

The US Supreme Court ruled in 1998 that the right granted by §602(a)(1) is limited by §109(a). The court held in Quality King Distributors, Inc. v. L’anza Research International, Inc. that copies created in the US and sold by a copyright owner overseas are subject to the first sale doctrine. If those copies are resold and eventually reimported into the US, these grey market goods are noninfringing under §109(a) – in spite of §602.

But there’s a significant difference between Quality King and Kirtsaeng. The former involved copies made in the US, while the latter involves copies made overseas. Are copies made overseas, with the permission of the US copyright owner, “lawfully made under” the US Copyright Act? If not, these copies are outside the protection of §109(a), and their import into the US is therefore infringing under §602(a)(1).

Kirtsaeng has argued that the phrase “lawfully made under” the Copyright Act should be interpreted broadly; it should include copies created anywhere in the world, so long as those copies were made in a manner that satisfies the standards of US copyright law. Wiley has argued for a narrower interpretation, which would cover only copies created in the US pursuant to US copyright law.

If the US Supreme Court adopts Kirtsaeng’s interpretation of §109(a), copyright owners could find themselves unable to stop grey market resales of their goods into the US. That would be a huge problem for content businesses. “They often create different versions of their goods for different markets, in different languages and with different interoperability standards,” said Hillel Parness, a partner in the New York law firm of Robins, Kaplan, Miller & Ciresi.

And the US version is frequently significantly more expensive than the non-US versions. So if non-US versions could be imported and resold into the US, these cheaper, grey market goods would undercut sales of the higher priced versions and damage content owners’ profitability. Such grey market sales could also damage content owners’ reputations in the US, because the non-US goods are often of lower quality than the US goods, and the non-US goods may not interoperate properly in the US.

Should content owners be unable to stop grey market resales into the US, they may take drastic action in order to protect their profits and reputation in the US, some experts warn. These businesses may raise the prices on their non-US goods, making them the same as the goods intended for the US market. This would remove the incentive to resell the non-US goods in the US, but it would hurt the content owners’ sales outside the US. This also would hurt many consumers in lower income countries. “People in those countries may no longer be able to afford the copyrighted goods,” said Matthew W. Siegal, a partner in the New York office of Stroock & Stroock & Lavan.

On the other hand, if the US Supreme Court adopts Wiley’s interpretation of §109(a), all copies made outside the US would never be subject to the first sale doctrine in the US. As a result, everyone buying books, CDs, or DVDs manufactured outside the US could be liable for infringement if they attempted to resell, lend or give away the copies in the US. These consumers would not be protected by the first sale doctrine, even if the copyright owners authorised the import and sale of the copies in the US. This could limit consumer freedom and devastate the market for used books, video games, CDs, DVDs, movie posters, sheet music, and other copyrighted works. It could also prevent US museums from borrowing or lending copyrighted works of art created outside the US.

And that’s just the beginning. Many items contain copyrighted elements, and if these items are made outside the US, their copyrighted elements would fall outside the first sale doctrine. As a result, purchasers in the US might be unable to dispose of these items without the consent of the copyright owner.

Consider, for instance, cars manufactured outside the US. They typically contain copyrighted software. If those cars are imported into the US, the copyrighted software in the cars would not be covered by the first sale doctrine, so anyone attempting to resell one of these cars without permission of the copyright owner could be liable for infringement. This possibility seemed to trouble Justice Stephen G. Breyer, who expressed his concern during oral argument in Kirtsaeng.

Businesses could also add copyrighted elements to their goods simply to control the distribution of their works in the US. Famous watchmaker Omega S.A. already did this. The Swiss firm placed a tiny copyrighted design on the underside of its luxury watches, where it would not be seen, then asserted unauthorised imports of these designs (and the attached watches) into the US market infringed Omega’s copyright. The 9th Circuit Court of Appeals agreed [PDF] with Omega. That 2008 ruling was affirmed in 2010 by the US Supreme Court, but because the justices split 4-4, the high court’s decision has no precedential value.

The 2010 decision, however, may foretell how the justices will rule in Kirtsaeng, because both cases present the same legal issue – the interpretation of §§109(a) and 602(a)(1). “You would think the eight justices would decide as they did last time,” said James M. Burger, a partner in the Washington, DC office of Dow Lohnes.

The ninth justice, Elena Kagan, recused herself from the Omega case because she had participated in the litigation during her stint as US Solicitor General. But Justice Kagan may wind up deciding Kirtsaeng. “I expect Justice Kagan will be the swing vote,” Siegal said.

Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 15 years. He is based in the greater New York City area and may be reached at info@ip-watch.ch.

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