Kirtsaeng v. John Wiley & Sons:

U.S. Supreme Court Addresses the First Sale Doctrines Applicability to Goods Produced and Manufactured Abroad

On October 29, 2012, the Supreme Court heard oral arguments in Kritsaeng v. John Wiley & Sons. The outcome of this case has very important implications for consumers as well as discount sellers and online re-sellers alike such as Amazon, EBay, Google, and Costco. The final decision could also reshape courts interpretation of the “First Sale Doctrine,” the legal principle that “permits the owner of a lawfully purchased copy of copyrighted work to resell it without limitations imposed by the copyright holder.”

The Kirtsaeng Case:  Factual and Procedural Overview

Supap Kirtsaeng moved to the United States from Thailand in 1997 to pursue an undergraduate degree in Mathematics at Cornell University. Upon completion, Kirtsaeng later moved to California to pursue a doctoral degree. To help fund the cost of his education, Between 2007 and September 8, 2008 Kirtsaeng operated a resale text book business.  His friends and family members would ship him foreign edition textbooks printed by John Wiley & Sons Asia division. Kirtsaeng would then sell these textbooks on commercial websites in the United States such as EBay and Amazon.

What many consumers may not know is that “foreign edition” textbooks; i.e., textbooks designed to be sold and used outside of the United States, are often identical in content to the U.S. editions, but retail for prices that are as much as 75% less.  American publishers will produce these international versions because students in foreign countries often cannot afford to pay the same prices as their American counterparts.

It is estimated that Kirtsaeng made anywhere between $900,000 and $1.2 Million in revenues and $100,000 in profits from secondary market sales of these text books.  In response, the publishing giant Wiley filed a copyright infringement law suit against Kirtsaeng in the United States District Court for the Southern District of New York. The District Court ultimately found Kirtsaeng liable for willful copyright infringement and imposed $600,000 in damages.

Kirtsaeng subsequently appealed the decision to the United States Court of Appeals for the Second Circuit arguing that pursuant to the first sale doctrine, Wiley lost its right to control resale of the books once they were legally purchased by his relatives in Thailand.

On appeal, the threshold question was whether the Copyright Act protections for copyright holders applied to goods produced and purchased outside of the United States, and subsequently resold in the United States without the copyright holders permission.  In its analysis of the statue, the Second Circuit looked to 17 U.S.C. §602(a)(1) and 17 U.S.C. §109(a) which both give somewhat conflicting views on the copyright holders protections.  On the one hand, Section 602(a)(1) provides that “[i]mportation into the United Sates,

without the authority of the owner of copyright under this title, of copiesof a work that have been acquired outside of the United States is an infringement of the exclusive right to distribute copies” On the other, 17 U.S.C. §109(a) “ the codification of the “first sale doctrine” “ provides that “the owner of a particular copylawfully made under this titleis entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”

In attempts to resolve this conundrum, the Second Circuit looked to the Supreme Courts decision in Quality King Distributors, Inc. v. Lanza Research International, Inc. In that 1998 case, Lanza Research International, a California distributor, sold its hair care products both internationally and domestically, but charged foreign distributors significantly lower prices than domestic distributors. Quality King took advantage of these cost savings by purchasing shipments of Lanzas products from one of Lanzas foreign distributors and re-exporting the products to the United States for re-sale. Similar to Wiley in the Kitrsaeng case, Lanza made claims that Quality Kings operation violated its exclusive rights to distribute and reproduce the copyrighted material in the United States. In an unanimous opinion, the Quality King court held that Section 109(a) limited the scope of Section 602(a)(1)s exclusive rights provisions, and that resale by a lawful owner is not an unauthorized importation. Thus, the first sale doctrine was indeed applicable, and the copyright holder, Lanza, could not prevent re-importation and resale of the products that it lawfully sold to its foreign distributors.

However, as the Second Circuit noted in the Kirtsaeng decision, the Quality King holding was distinguishable because there, the copyrighted items in question had all been manufactured in the United States. It is arguable whether Quality Kings dicta suggested that copyrighted material manufactured abroad was not subject to the first sale doctrine. But Justice Ruth Bader Ginsburgs concurrence in that case squarely stated that “I join the Courts opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad.”

Ultimately, the Second Circuit ruled in favor of Wiley. In its decision, the Second Circuit interpreted Section 109 (a)s phrase Ëœlawfully made under this Title to apply exclusively to

copies that are made in territories where the Copyright Act is law and not to foreign-manufactured works. The Second Circuit did however note the difficulty of deciphering the ambiguous language of the statues, and noted that its interpretation may be incorrect.  In response to the unfavorable decision, Kirtsaeng filed a petition for writ of certiori which was granted on April 16, 2012 and is now before the United States Supreme Court. This will not be the first time the United States Supreme Court has addressed the issues presented in the Kirtsaeng matter.

In 2010, the United States Supreme Court addressed this issue in Omega S.A. v. Costco Wholesale Corp.  In that case, Costco obtained watches with Omegas copyrighted design from the grey market.  Omega manufactured its watches in Switzerland and sold the watches through its network of authorized distributors abroad. Third parties purchased the watches and subsequently sold them Costco.  Costco then sold these watches domestically.  At no point did Omega authorize the importation of the watches into the U.S nor did it authorize Costcos resale.

In a 4-4 split decision in which Justice Elena Kagan recused herself, the Court was unable to come to a conclusion as to where it stood on the issue; therefore, it was obligated to affirm the lower courts decision which maintained that the first sale doctrine does not apply to items manufactured overseas unless they were previously imported and sold in the United States with the copyright holders permission.

Consequences of a Kirtsaeng Decision in Favor of Wiley

Legal commentators are hopeful that the ruling on the Kirtsaeng v. Wiley matter will provide a final answer on the issue of the first sale doctrine as it applies to foreign-produced items. While the Kirtsaeng case in particular deals with textbooks, the holding with respect to the applicability of the first sale doctrine to products produced outside of U.S. borders will have tremendous effects on consumer sales and trade. Many of the most frequently purchased items domestically are manufactured abroad and have logos, packaging, or component parts that are subject to copyright laws.  As such, global resellers and e-commerce sites may have to make major adjustments to their operations if the Court rules in Wileys favor.

On a broader scale, if the Supreme Court follows Wileys proposed interpretation of the first sale doctrine, another result may be an increase in the economic cost of producing goods.  As Judge Garvan J. Murtha of the Second Circuit wrote in his dissent in Kirtsaeng, “Granting a copyright holder unlimited authority to control all commercial activities involving copies of

her work would create high transaction costs and lead to uncertainty in the secondary market.”

Take for an example a domestic distributor of laptop computers or automobiles that are manufactured outside the United States. Under a holding that favors Wiley, a manufacturer could refuse the resale of these products in the U.S.  While this scenario is unlikely, there is no doubt that an interpretation of the first sale doctrine which limits secondary market sales of goods produced abroad could result in higher manufacturing costs to produce finished goods that are in compliance with this heightened standard.  Another possible consequence is that domestic manufacturers will be further incentivized to increase overseas manufacturing of their goods as a means of limiting the distribution of their products through secondary markets.

Gray Market Importations

Regardless of the outcome in Kirtsaeng, it is important to note that U.S. Customs and Border Protection (“CBP”) affords companies gray market protection for their items.  Such protections can include CBP seizing imports of genuine products for which importation into the U.S. has not been authorized by the trademark holder.

We will continue to follow the developments in this precedential case, but encourage U.S. resellers of imported merchandise to check the U.S. Customs and Border Protection Intellectual Property Rights e-Recordation database to determine if the copyright or trademark holder of the imported product(s) has requested gray market protection through CBP.  Failure to do so could result in the seizure of the products.

Furthermore, businesses attempting to protect unauthorized distributors from reselling their goods in domestic markets should record their trademarked or copyrighted material with CBP and designate gray market protection for these items.  It is a fairly inexpensive process that allows CBP to enforce the copyright and trademark protection at the border and enables owners to submit reports of possible violations and violators.  Most importantly, recordation serves as evidence of a businesss desire to keep its goods off of the gray market while also informing individuals operating in secondary markets that importation of such goods carries significant business risks.

This entry was posted on Wednesday, November 28th, 2012 at 3:46 pm and is filed under Litigation.

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