First Sale, “Lawfully Made,” and Copyright Stalking-Horses

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Category: Intellectual Property Law, Public, U.S. Supreme Court
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The Supreme Court heard oral argument this morning in Kirtsaeng v. John Wiley & Sons, Inc., despite Hurricane Sandy’s imminent arrival and the fact the entire federal government in Washington DC is shut down today. Kirtsaeng is a copyright case raising the issue, argued two years ago in Costco Wholesale Corp. v. Omega, S.A., of whether the first sale doctrine applies to third-party imports of goods manufactured under the authority of the copyright owner abroad. (Costco resulted in a 4-4 affirmance due to Justice Kagan’s recusal.) In more plain English, if someone in the United States purchases legitimate copies of some item abroad that has a copyrighted work somewhere in it, can they import those items into the United States and resell them here without violating the Copyright Act? The specific issue in Kirtsaeng involves used textbooks, but it could just as easily apply to watches with a copyrighted logo on the back (the good at issue in Omega), shampoo with a copyrighted label on the bottle (Quality King v. L’Anza), or any product with copyrighted software in it.

Costco indicates the mischief that could come about from a holding saying that the first sale doctrine does not apply to imported goods. There is zero chance that Omega was actually concerned about the redistribution of its copyrighted logo, located inconspicuously on the backs of its watches, as opposed to the grey market arbitrage of the watches themselves, which of course are not copyrightable. But mischief that does not rise to a constitutional level doesn’t tell us what the law is. The arguments in Kirtsaeng focus on the meaning of the phrase “lawfully made under this title.” Section 109(a) provides that:

Notwithstanding the provisions of section 106(3), 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.

Kirtsaeng, the petitioner, argues that “lawfully made under this title” means “made with the authority of the copyright owners as required by Title 17, or otherwise authorized by specific provisions of Title 17,” a theory Kirtsaeng borrows from the Solicitor General’s brief back in Quality King. Wiley argues that because Title 17 does not have extraterritorial application, “lawfully made under this title” must mean “lawfully made in the United States pursuant to Title 17.”

That’s the question that cert. was granted on, but the whole debate strikes me as off-target. As a result I don’t think either side’s briefs really grapple with the problem here.

First, I don’t buy Wiley’s argument, but not for the reasons that Kirtsaeng suggests. The primary problem with Wiley’s interpretation of “lawfully made under this title” is that, as I see it, there are only two possible states a copy of a work could be in: “lawfully made under this title,” or “unlawfully made under this title.” I don’t understand how there can be some sort of intermediate state, “neither lawfully made under this title nor unlawfully made under this title.” That’s because I don’t think “lawfully made under this title” really defines any category of objects on its own — it’s simply the negation of “unlawfully made under this title,” in the same way that the set of prime numbers is merely the negation of the set of all numbers n with more than one divisor smaller than n. As is well known, the Copyright Act does not grant copyright owners the affirmative right to do anything, including manufacture copies of their works. All they get is a right to exclude others from doing certain things, such as making copies in certain circumstances. Therefore there really isn’t any such thing as “lawfully made under this title” — that is, made in compliance with the requirements of Title 17. Title 17 has no requirements on how something is to be made. It defines certain circumstances in which a thing is not to be made — where making that thing (or distributing it, or rendering it, etc.) is an infringement. So “lawfully made under this title” just means that the copy in question was not an infringing reproduction. And, as Wiley points out, Title 17 has no extraterritorial application. All foreign-manufactured copies are “lawfully made under this title.” The only alternative that I see is that all foreign-made copies, including those made with the copyright owner’s authority, are “unlawfully made,” which would be bizarre.

But, contra Kirtsaeng, I think that Congress did in fact mean to bar the importation of copies made and sold by the copyright owner abroad. The problem is the Supreme Court’s 1998 decision in Quality King, holding that Section 602 in effect ropes in the exemption in Section 109(a) by making importation a violation of the exclusive right to distribute in Section 106(3). Section 106 is, by its terms, subject to the limitations in Sections 107 through 122, and Section 109 is one of those limitations. Presto! First sale applies to imported copies. Except that I don’t think that makes sense as statutory interpretation. (It looks like 25 IP professors are lined up against me on this point, but it wouldn’t be the first time.) Section 109(a) is a general limitation on the Section 106(3) right; but Section 602 much more specifically applies to imported works. In statutory construction, the specific typically governs the more general. So does the more recent provision. The statutory first sale exemption dates back to the 1909 Act, but Section 602 was inserted in 1976. There is every indication that in adopting Section 602, Congress intended to bar unauthorized importation of copies of works legitimately manufactured abroad. After all, this was the era of the “manufacturing clause,” when books and magazines were required to be physically printed in the United States. Section 602(b) expressly contemplates a distinction between cases where “the making of the copies or phonorecords would have constituted an infringement of copyright if this title had been applicable,” and cases where “the copies or phonorecords were lawfully made.” (The Customs Bureau has the authority to bar importation of the former but not the latter.) If copies manufactured abroad are not lawfully made under this title, nothing would fall in the second category with the minor exception of goods making a round trip — manufactured here, exported, and re-imported. And there would be a huge chunk of works not provided for at all in Section 602(b), works neither infringing if Title 17 had been applicable nor “lawfully made.” Congress clearly intended Section 602 to have a broader application than that. (Section 602 has been amended since Quality King and Costco — I have a redlined version here — but not in a way that matters, as far as I can tell.)

I think the real culprit here is stalking-horse copyright claims: copyright claims that have as their ultimate objective something other than protecting the copyrighted work. Omega could care less, I’m sure, about its hidden logo, and L’Anza likely was not very concerned to prevent importation of its label. Even if an importation prohibition is a good idea (and I’m not saying it is), there should be an exception to Section 602 for claims that have as their primary purpose the obstruction of the importation of a useful article.

Cross-posted at Madisonian.net.

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2 Responses to “First Sale, “Lawfully Made,” and Copyright Stalking-Horses”

  1. Bruce, in the real (non-courtroom) world, aren’t both Kirtsaeng and Costco about attempts to artificially control the global marketplace for goods? Copyright law seems to be a convenient vehicle to try to maintain the ability to price products, be they textbooks or watches, differently in different markets. Between the internet and relatively inexpensive global shipping, attempts to price the same product differently in different parts of the world seem destined to fail. If labor can be outsourced to the country with the lowest-cost provider, shouldn’t the consumer be able to outsource his purchasing power to the country with the lowest-cost provider, too? Much like the entertainment industry was forced to change its distribution and pricing models in response to the internet, I suspect that the consumer goods industry will also have to flatten out pricing on a global level or face the reality of consumers making use of the “grey market.”

  2. Chris, thanks for the comment. I think the answer to your questions depends on what you mean by “artificially control.” All of copyright law is an artificial control in the sense that it gives exclusive rights over some uses of things that are not in the copyright owner’s physical possession. I’m not sure a rule against importation of a copyrighted work is any more artificial than a rule against reproduction. And I think there’s at least some potential benefit for market segmentation for copyrighted works — since the standard of living varies so widely in countries around the world, it would seem beneficial to allow copyright owners to set the price accordingly depending on where they are selling and not have it revert to the lowest common denominator — but that would presume that arbitrage could be kept to a minimum. At least for physical copies like textbooks that doesn’t seem extraordinarily hard, even with cheaper shipping. Where I think the copyright importation prohibition becomes artificial is when it is being used to defend non-copyright interests, like preventing secondary markets in shampoo or watches.

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