The Supreme Court recently handed down its decision in Kirtsaeng v. John Wiley & Sons, a copyright exhaustion case concerning the sale of “gray-market” works published outside the United States and imported for sale. In a surprisingly decisive 6-3 decision, the Court reversed the Second Circuit’s decision and held that the first sale doctrine applies to copyrighted works lawfully produced abroad.
The facts of the case center around the actions of a student by the name of Sarap Kirtsaeng, who sold “gray-market” textbooks imported from Thailand beginning in 1997. Kirtsaeng, who did business on eBay under the handle “Bluechristine99,” set up a very lucrative online business wherein his relatives sent him textbooks from Thailand that he then sold to students in the U.S. Since textbooks are significantly less expensive in Thailand than in the U.S., Kirtsaeng was able to realize a tidy profit of roughly $100,000—and effectively subsidize an undergraduate degree from Cornell University and a Ph.D. in math from the University of Southern California. U.S. publishers caught wind of Kirtsaeng’s business and were not amused. John Wiley filed suit and won in federal district court; the Second Circuit later affirmed, setting up a showdown in the Supreme Court.
Global Concerns and Jet Lag
In its opinion, the Court immediately identified the primary issue in this case, which is whether the words “lawfully made under this title” limit the first-sale doctrine in cases involving works published outside the U.S. The Court went to great lengths to parse the language of the Copyright Act, and ultimately came to the conclusion that reading in geographic limitations to § 109, the first-sale doctrine, would be inappropriate, “particularly in light of the ever-growing importance of foreign trade to America.” This decision gives resellers of books produced in foreign countries a sort of “jet lag defense,” as copyright is exhausted after the first sale and before the works ever begin their journey to the U.S.
At oral arguments, there was much hand-wringing about § 602(a)(1), Omega S.A. v. Costco Wholesale Corp., and the parade of horribles that could result from an overly broad reading of § 109. Interestingly, Justice Breyer’s opinion centers around an attack on Wiley’s reliance on a colorful bit of dictum in Quality King v. L’Anza Research International. Quality King involved works that were manufactured in the U.S., sold in the United Kingdom, and then imported back into the U.S. Wiley focused on a fleeting bit of commentary appearing in the Court’s opinion in Quality King that stated, “presumably only those [copies] made by the publisher of the United States edition would be ‘lawfully made under this title’ within the meaning of § 109(a)” (emphasis added).
Justice Breyer was not subtle in his response:
“We cannot, however, give the Quality King statement the legal weight for which Wiley argues. The language ‘lawfully made under this title’ was not at issue in Quality King; the point before us now was not then fully argued; we did not canvas the considerations we have here set forth; we there said nothing to suggest that the example assumes a ‘first sale'; and we there hedged our statement with the word ‘presumably.’ Most importantly, the statement is pure dictum. It is dictum contained in a rebuttal to a counterargument. And it is unnecessary dictum even in that respect. Is the Court having once written dicta calling a tomato a vegetable bound to deny that it is a fruit forever after?”
In short, the Court did not give significant weight to Quality King’s interpretation of “lawfully made under this title.”
Perpetual Downstream Control vs. Restriction of Market Segmentation
Wiley and Kirtsaeng each took positions that could have had a potentially tremendous effect on control of copyrighted materials in the U.S. Wiley’s reading of the Copyright Act would have gave publishers “perpetual downstream control,” and would invalidate the first-sale doctrine for works produced outside the U.S. Advocacy groups championing “ownership rights” pushed hard against this reading, backed by a groundswell of public support. Kirtsaeng’s reading, on the other hand, would gut publishers’ ability to segment markets by region or country; in other words, publishers would have a hard time setting higher prices in the U.S. than in Thailand. Publishers were viably concerned that such a reading could result in a severe shake-up in their well-established model of market segmentation, and ultimately make textbooks inherently unprofitable.
Justice Breyer was once again something short of subtle in his response to Wiley’s concerns about market segmentation:
“A publisher may find it more difficult to charge different prices for the same book in different geographic markets. But we do not see how these facts help Wiley, for we can find no basic principle of copyright law that suggests that publishers are especially entitled to such rights.”
In other words, the Copyright Act does not provide publishers with any sort of right to segment markets. The Court concedes that this could lead to problems to publishers. However, any fallout from flattened world markets would pale in comparison to the parade of “horribles” marching out of “the absurd result that the copyright owner can exercise downstream control even when it authorized the import or first sale.”
At oral arguments, much of the talk centered around the gray-market issues evaded by Omega S.A. v. Costco Wholesale Corp., a case involving the sale of imported watches at a deep discount. The Court split 4-4 in Omega, however, and many copyright experts expressed dismay at the lack of precedent provided by the decision. Such experts were hopeful that Kirtsaeng would give the Court a chance to set the record straight., Many assumed that the eight Justices who voted in Omega would come to a similar split in Kirtsaeng. By that reasoning, Justice Kagan (who recused herself in Omega) represented a potential tie-breaking vote. Given the fact that Kagan had recused herself based on her previous involvement with the case as U.S. Solicitor General, most guessed that her vote would swing a decision in the pro-manufacturer (and therefore pro-publisher) direction.
Kirtsaeng’s 6-3 decision certainly did set the record straight, but not in the way that many had anticipated. Not only did the Court come out in favor of the consumer (and therefore on the side of international exhaustion), but it did so with a vote to spare. Furthermore, it featured a dissent written by Justice Ginsburg, and joined by Justices Kennedy and Scalia. The dissent argues that the Court is departing from the legislative intent of the Copyright Act, and that it places the U.S. “at the vanguard of the movement for ‘international exhaustion’ of copyrights—a movement the United States has steadfastly resisted on the world stage.”
Though Justice Kagan’s role as a tie-breaker never materialized, her concurrence represents one of the more interesting parts of the opinion. The concurrence focuses on addressing publishers’ concerns about the evaporation of market segmentation by looking to Quality King and its misconstruction of §109(a) as a limitation to §602(a)(1). In effect, she adopts the stance taken on by the Solicitor General in Quality King, which is that §109(a) allows users only to sell or dispose of copies whereas §602(a)(1) regulates importation. Justice Kagan states that these “non-overlapping spheres of conduct” were conflated in Quality King, and that revisiting the holding in that case might satisfy the desires of both publishers and consumers.
A Victory For The First Sale Doctrine
The ultimate winner in this case is the first sale doctrine, whose relevance in an increasingly international market was questioned, analyzed, and validated. The Supreme Court’s decision assures consumers that they actually own the content they purchase—even if they purchase that content internationally. While in the short term publishers will feel the sting of reduced price differentiation among regional markets, they will certainly make adjustments that will preserve some form of market segmentation. And perhaps the Court will ultimately heed Justice Kagan’s advice and revisit Quality King and establish a clear legal differentiation between §109(a) first-sale consumer protection and §602(a)(1) importation.