International Copyright Exhaustion: Supreme Court to Decide Whether Copyright Holders Can Block Imports

By Dennis Crouch

Kirtsaeng v. John Wiley & Sons, Inc. (Supreme Court 2012)

Oral arguments are being held this morning in the Kirtsaeng copyright case involving international exhaustion. The case has direct implications on international patent law considerations.

Kirstaeng purchased legitimate copies of Wiley textbooks in various foreign countries and then imported those into the US for resale. The international versions of the textbooks vary somewhat from the US version (e.g., the foreign version covers evolution and is printed on cheaper paper). However, Kirtsaeng was able to find a substantial US market for the books and used the revenue to fund his own education. Copyright includes the exclusive right of distribution, and resale of a product is typically seen as a form of distribution. 17 U.S.C. 106. A separate provision also bars importation of copyrighted works without permission of the copyright holder. 17 U.S.C. 602(a)(1). However, the copyright statute also includes an exception known as copyright exhaustion or the first sale doctrine. 17 U.S.C. 109. The statute provides:

[T]he owner of a particular copy … lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.

Patent law has an equivalent doctrine. Notably, however, the patent law doctrine of exhaustion is not bound by any statute but does stem from parallel common law origins. The exhaustion doctrine allows for a robust secondary market for goods.

In this case, Wiley wants to use its US copyrights to block Kirtsaeng from reselling his books. Kirtsaeng argues that he purchased non-counterfeit authorized copies of the books and that Wiley’s copyrights are therefore exhausted. Wiley, in turn, focuses on the statute and argues that the US copyright is not exhausted because the foreign-made books were not “lawfully made under this title” where “this title” refers to the US Copyright Act. In its appellate decision, the Second Circuit agreed with Wiley and held that the foreign sale did not trigger the Section 109 exception. The decision supports a notion of country-by-country price discrimination of works protected by copyright (or patent). Unfortunately for US consumers, the price of these goods is typically higher in the US than abroad. In addition to price discrimination, the law is also being used to control access to goods in various countries. In many cases, these ideas have been implemented as mechanisms for preventing important of goods that do not – at first glance – appear to be protected by intellectual property. In the Supreme Court cases of Costco v. Omega and Quality King Distribs., Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998), the asserted copyrights were unrelated to the value of the product being sold. In Costco, the protected copyright was a small symbol on the under-side of the watch while in Quality King, the protected copyright was the shampoo bottle label. (On remand, the district court dismissed Omega’s action on the ground of copyright misuse.)

The Supreme Court is hearing oral arguments in the case this morning. In 2010 the court heard Costco v. Omega. In that case, however, the court was deadlocked 4-4 (thus affirming the copyright holder’s position). The ninth justice that will sit on this case is Justice Kagen who had recused herself in 2010 – apparently after working on the case as Solicitor General. In her absence, the DOJ has supported the copyright holders in arguing against international exhaustion.

In my view, Wiley likely has the better argument based on a straight reading of the statute. However, the implementation of Section 109 was largely a codification of the 1908 Supreme Court decision in Bobbs-Merrill Co v. Straus. And, it appears that international copyright exhaustion was on the mind of Congress at that time. Further, we already know that if the text of the statute is construed as copyright holders suggest, then the statute does not entirely define the scope of exhaustion. For instance, authorized sales within the US are seen as exhausting the copyright even if the work was not “lawfully made” in the US. In my mind, this opens the door to a potential atextual expansion of the exhaustion doctrine.

There are several interesting briefs filed in the case. The IPO, AIPLA, ABA all support the copyright holders rights to block importation of goods that the copyright holder sold abroad. For the most part, these organizations say that their arguments are “limited to the Copyright Act” and should not be read into “other fields, such as trademark and patent law” which “involve distinct statutory schemes and implicate separate policy concerns.”

A group of law professors led by Jason Shultz filed an amicus brief and argues that the Wiley’s argument “runs contrary to the statutory context in which § 109(a) appears, the common-law backdrop against which Congress legislated, and analogous principles of patent law as well.” Federal Circuit precedent on the topic runs parallel to the Wiley decision finding no international exhaustion. See Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001) and Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368 (Fed. Cir. 2005). Interestingly, the brief rejects the Jazz Photo cases as against the weight of past and present Supreme Court precedent on the topic.

Mark Lemley filed a brief on behalf of Powell Books, et al. that runs in parallel with a brief filed by a group of art museums. Both briefs argue that their respective operations (selling used books and showing artwork) have long relied upon international exhaustion. If copyrights are not so exhausted, both business models will suffer greatly.

Notes:

39 thoughts on “International Copyright Exhaustion: Supreme Court to Decide Whether Copyright Holders Can Block Imports

  1. Prof. Crouch,

    Other than being a truism, I am not sure what point you are trying to make in response to Just another naive 3L.

    Just another naive 3L,

    Nice job, well stated and thank you for subscribing to my newsletter.

  2. software can exhibit both expression and functionality

    This is true of all types of information and all types of instructions, depending on your definition of “functionality”.

  3. Not so naive, 3L. As you say, “this is a market competition issue.” Grey markets are an issue in a number of industries, including the electronics industries. The decision in this case could have an impact that extends well beyond books.

  4. Conceptually, I am a bit lost here. If the copyright in the textbook is owned by JWS, and they licensed it for production and sale in another country, didn’t they contract to get paid for the book when it was sold in a foreign market?

    When the guy bought the book overseas, JWS got paid/rewarded for the copyright in that version of the book, and they would have ceded their rights in that copy of the book in that sale. At that point, isn’t it private property of the student, who brought it to the US and sold it in the free market, as he would be entitled to do with any of his property? I think in LG v Quanta on patents, the USSC said that unless there was specific contractual language specifying clearly that a sale did not cede any downstream IP rights, first sale doctrine applies. Doesn’t that logic apply here too?

    JWS made a commercial decision to license their books for production overseas at a lower cost. If they wanted to prevent parallel imports, shouldn’t they be obliged to use market mechanisms, such as competitive pricing, to prevent parallel imports? I’ve always read that Copyright and IP in general is supposed to be a limited monopoly to ensure fair compensation/incentive to creators/owners. In this case, it seems that JWS is trying to interpret the Copyright Act to give it extended monopoly benefits that it gave up in the free market by its own commercial decision. It made a market-based decision and took the risk that its differential international printing pricing scheme would enable greater market penetration and sales. The fact that somebody used the same market to buy their books and resell them domestically is less about copyright and more about somebody else figuring out a more efficient way to meet domestic demand for JWS own product.

    The fact that this student was able to find legitimate copies of, buy, ship and resell these books in the US for less than JWS could or would simply shows that transaction costs for international purchasing & shipping are low enough to enable new and more efficient product delivery channels. This is a market competition issue. JWS already received its compensation for its copyright – it chose to sell the book for less in a foreign market and got paid what it stipulated there. If it wants to prevent parallel imports, shouldn’t it first resort to market mechanisms by lowering the price of its books in the US to undercut the feasibility of the parallel imports? Its a global market where pricing information and shipping costs have done what they were meant to do – increase options through supply/demand efficiencies.

    I think perhaps JWS (and other publishers/content creators) need to adjust their domestic pricing and business strategies accordingly. JWS made a business decision, they got paid for their IP (this isn’t piracy). What was that saying we learned in 1L, property law shouldn’t build fences that can be built more efficiently by a free market. Something like that? I think and hope the USSC should interpret the law with that broader social purpose and benefit in mind.

  5. Thanks anon,

    Rather than meaningless, it is directly on point against those with an anti-software patent agenda.

    The repetition comes from those with that agenda persevering in their quest and ignoring what to you and I are plainly evident facts and rules of law. Yes, it seems that 101 Integration Expert’s posts are “meaningless” to those who have already accepted the meaning (a preaching to the choir effect). The take-away is that IF those with an anti-software patent agenda would face reality, then 101 Integration Expert would stop making those posts.

    They don’t. He doesn’t.

    And judging from Prof. Crouch’s 50 Year Old article, those posts will continue for quite some time.

  6. Well the trouble with drawing an analogy between concepts and software is that one can’t patent a pure concept (it needs to be integrated), but pure software can be patented. Indeed, I struggle to understand how one can divorce software from the process that the software implements which makes 101IE’s repeated asking of this question a bit meaningless.

  7. Sorry, I don’t get the relevance

    Obviously.

    Do you understand what the phrase “Terms of Use” entails?

  8. anon said in reply to 101 Integration Expert…

    To anon: equating software with a concept is …

    Are you talking to yourself AGAIN?

  9. Really? After I told you that the rules of use look to be taken from a contracts template you want to dive into the wrong direction completely?

    Sorry, I don’t get the relevance. Because the rule are taken from a template they are not subject to contract law? Or?

  10. contract-law-based analysis

    Really? After I told you that the rules of use look to be taken from a contracts template you want to dive into the wrong direction completely? Again?

    Don’t you tire of shooting and missing?

  11. Personal trolls are “fun” – especially ones who sanctimoniously take the low road.

    To anon: equating software with a concept is, I believe, shorthand to indicate merely to use patents for what patents are for.

    In other words, (and to something that MM recently flubbed), copyright protects expression – patents protect doing, or functionality (in addition to manufactures, machines, compositions of matter, or any new and useful improvements thereof).

    Since software can exhibit both expression and functionality, protection under the two distinct regimes (for each regime’s intent) is entirely permissible.

  12. I am agree with judith_IP I thought the Ninth Circuit’s interpretation in Omega that basically said the “sale in the US is sufficient to trigger First Sale” made a lot of sense, though it was was statutory interpretation of the most judicially activist sort.

  13. I answered that question, or a similar one, several days ago. It can. I also told you several weeks ago that I have no serious issues with your “integration analysis.” So, there’s really nothing for us to debate, I suppose, unless you want to engage in a contract-law-based analysis of the applicability of the Patently-O terms of use to Ned’s postings.

  14. I thought Harmonization was desired? Doesn’t effectively ending country by country subsidization reach this desired effect?

  15. I am not telling you to shut up, but seriously Mr. Bloom can you please give this a rest?

    Or, on the other hand if it is a substantive discussion or debate you wish on patent law then perhaps you will take a crack at answering the following question, which Mr. Heller and MM apparently run from.

    Since the Prometheus Court told you 9-0, “a concept integrated into a process transforms the process into an inventive application of the concept,” why then can’t technology, such as software, integrated into a process transform the process into an inventive application of the software?

  16. I thought the Ninth Circuit’s interpretation in Omega that basically said the “sale in the US is sufficient to trigger First Sale” made a lot of sense, though it was was statutory interpretation of the most judicially activist sort. But conceptually, the argument that if something is produced outside the US there is no copyright exhaustion at all seems overbroad, and also seems incompatible with the language of 17 USC 602, which restricts only importation, not sale or use.

  17. 3. Technical Barrier: Software company already does it, selling single installation Windows download. There is nothing to resell. I imagine ebook publishers will follow and is likely to be come the dominant model for pure information goods.

    I’d like to subscribe to your newsletter.

  18. “lawfully made under this title” — why is Congress so terrible at drafting statutory language? Couldn’t they have just said something like “lawfully made in the United States”? Is that what’s it’s supposed to mean? Just say what you mean.

    Well, the books weren’t unlawfully made under the Copyright Act, were they? I understand this could be disastrous for patent law, but the statutory language is terrible.

    Can you say that the common law exhaustion doctrine was narrower, but this statutory scheme expanded it for copyrights (and not patents)? I haven’t read any of the case law, obviously.

    If international exhaustion applies, can you at least rely upon the “Printed in the United States of America” label for books that you purchase overseas to know whether exhaustion applies or not?

  19. Companies have a set of tools to maintain geographical segmentation.

    1. Elevating prices overseas. This is the IPad model–Apple sells them for essentially the same price in China as in US. The incentive in pharma is already to reduce price differences between countries (by elevating price) due to reference drug pricing. Also the business model of MNC in these large developing countries tend to eschew pure price competition. Instead MNC stakes out the high end market that commands a higher premium.

    2. Regulatory Control: Prescription pharmaceutical is subject to tight control–it is unlikely that a person can somehow set up shop in Vietnam, buy a good chunk of Abbott’s supply of prescription drugs there for resell in US and arbitrage the difference. Shampoo, yes, textbooks, yes, drugs, much harder.

    3. Technical Barrier: Software company already does it, selling single installation Windows download. There is nothing to resell. I imagine ebook publishers will follow and is likely to be come the dominant model for pure information goods.

    4. Inventory control: Companies carefully control how much supply they pump into each country to match demand even now to minimize cross border product flow.

    5. Regional differentiation: Companies can further differentiate and localize products for each market through language and taste and marketing.

    In the end, it changes things but I don’t think it affects businesses that greatly. As IP owners they still hold all the cards, just one less card than before. If it does, I suppose the stock market will tell me wrong when the price of Abbott/Pfizer/Lilly/Merck take a big hit on the day the opinion comes out. That is, if copyright statute has bearing on judge-made exhaustion rules.

  20. If the patent owner sells cheap there

    There’s your answer.

    If a drug company has to compete

    If?

    international exhaustion has to give every patent attorney practicing here in the US a cause for concern.

    Because patent attorneys want Americans to pay absurdly high prices for drugs.

  21. Malcolm, Dennis has it right.

    Lack of international exhaustion is critical to the establishment of IP. Critical.

    If a drug company has to compete with generics in the likes of India due to the lack of an effective patent system or due to compulsory licensing, the prices will be a lot lower. If the patent owner sells cheap there and the buyer can import, what that does is effectively eviscerate the US patent.

    The whole concept of international exhaustion has to give every patent attorney practicing here in the US a cause for concern.

  22. Yes, but you and Ned are conflating. If we’ve learned nothing else over the last week, we’ve learned that conflation, muddling and “whatever-isms” are not permitted per the Patently-O terms of use.

  23. I think Ned’s argument fits very well here, because it is (largely) the national exhaustion doctrine that allows for US drug companies to sell goods at high prices in the US and lower prices in other countries.

  24. I know where this is going. Drugs sell high here, low there because, I believe, of government regulation of prices there and perhaps due to the absence of IP enforcement. The do gooders are lining up to force US drug prices down to world levels.

    I recall that drug companies invest in the first place solely due to the US patent system. If this is true, and I think it is true, then the do gooders will permanently sacrificing the long term benefit of society through R&D into new drugs by these sorts of actions.

  25. In my mind, this opens the door to a potential

    Come on, Dennis, don’t leave us han

    A potential what?

  26. The international versions of the textbooks vary somewhat from the US version (e.g., the foreign version covers evolution …

    And I thought this case was about international exhaustion, when in fact it’s about an international embarrassment.

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