Guest Post by John Rothchild, Associate Dean and Associate Professor at Wayne State University Law School. Rothchild's 2011 article Exhausting Extraterritoriality is published in the Santa Clara Law Review.
The Supreme Court granted certiorari in Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697, to settle the question whether exhaustion of a copyright owner's public distribution right results from a first sale of a copy or phonorecord that was manufactured, with the authorization of the copyright owner, outside the territorial limits of the United States. The outcome of the case, however, could have broader ramifications: in particular, it could bear upon an analogous international exhaustion issue with respect to patents.
Under § 109(a) of the Copyright Act, a copyright owner's right to control public distribution of a physical embodiment of a copyrighted work — such as a book, a music CD, the label attached to a shampoo bottle, or a brand-signifying logo engraved on the back of a watch — is exhausted once there has been an authorized first sale of that object. In international contexts application of this rule presents some special issues. One of those is how the first-sale rule interacts with the copyright owner's right to control importation of copies of her work under § 602(a) of the Copyright Act. The Supreme Court largely resolved that issue in Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., 523 U.S. 135 (1998), holding that the first-sale rule is a limitation on the importation right. The remaining issue, and one with enormous practical consequences, is how the first-sale rule applies to copies that are manufactured abroad. The issue turns on the interpretation of critical language in § 109(a), which provides that the distribution right is exhausted only with respect to a copy "lawfully made under this title." This is the issue facing the Court in Kirtsaeng, which was argued on October 29.
One possible outcome of Kirtsaeng is a rejection of the holding of the court below that "lawfully made under this title" means "made, with the authorization of the copyright owner, at a location within the territorial limits of the United States." The petitioner, who invoked (so far unsuccessfully) the first-sale rule in an effort to justify his unauthorized importation and resale in the United States of textbooks manufactured and first sold abroad, urges that the Court instead interpret that language along the lines suggested by Judge Murtha's dissent in the case below, as meaning something like "made with the authorization of the U.S. copyright holder." See John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210, 226 (2d.Cir.2011) (Murtha, J., dissenting). Following such an interpretation, "lawfully made under this title" would not speak to the geographical provenance of the copy, but would refer only to whether the making of the copy was permissible as judged by the Copyright Act's allocation of rights.
Such a holding would deflate the mistaken view that giving legal significance, with respect to the operation of a U.S. law, to conduct occurring outside the United States inevitably amounts to impermissible extraterritorial application of that law. This view underlies the holdings of some courts that a sale of a patented article that occurs outside the United States does not exhaust the patentee's rights with respect to that article. The Court's resolution of this issue in Kirtsaeng therefore could have a significant impact on international exhaustion of patent rights.
A misguided application of the rule that the patent and copyright laws do not apply extraterritorially underlies holdings of the courts in both of these subject matters. Consider copyright first. In the first case addressing international exhaustion, a federal district court interpreted "lawfully made under this title" as if it read "lawfully made within the United States," concluding that no exhaustion occurs by virtue of the sale of copies that were manufactured outside the United States. It justified this result as necessary to avoid extraterritorial application of the Copyright Act, explaining: "The protection afforded by the United States Code does not extend beyond the borders of this country unless the Code expressly states." Columbia Broadcasting System, Inc. v. Scorpio Music Distributors, Inc., 569 F. Supp. 47, 49 (E.D.Pa.1983), aff'd mem., 738 F.2d 424 (3d Cir.1984). The Ninth Circuit subsequently arrived at the same outcome in several cases of its own, which were likewise predicated on an overly expansive view of what constitutes extraterritorial application of a statute. See Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 987 (9th Cir.2008) ("applying § 109(a) to foreign-made copies would violate the presumption against the extraterritorial application of U.S. law"), aff'd by an equally divided Court, 131 S.Ct. 565 (2010).
That same mistaken view of what constitutes extraterritorial application of U.S. law underlies the doctrine that a first sale abroad cannot exhaust a U.S. patent. The Federal Circuit adopted this doctrine in the Jazz Photo case, setting it forth as if it were self-evident but offering no justification for it. See Jazz Photo Corp. v. Int'l Trade Comm'n, 264 F.3d 1094, 1105 (Fed.Cir.2001) (exhaustion occurs "when a patented device has been lawfully sold in the United States"). Four years later, in a follow-on case, the Federal Circuit court offered this rationale for its holding in Jazz Photo:
[T]his court in Jazz stated that only [single-use cameras] sold within the United States under a United States patent qualify for the repair defense under the exhaustion doctrine. Moreover, Fuji's foreign sales can never occur under a United States patent because the United States patent system does not provide for extraterritorial effect.
Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed.Cir.2005).
If the Supreme Court decides Kirtsaeng in favor of the interpretation of "lawfully made under this title" urged by the petitioner and dissenting Judge Murtha, this rationale goes out the window. In other words, the Court will have declared that it is not an extraterritorial application of the Copyright Act for the scope of a copyright owner's public distribution right to depend on the transfer of ownership of an article that was manufactured outside the territorial limits of the United States. That conclusion would likewise undermine the rationale of the Federal Circuit's rejection of international exhaustion in the patent context, since it would then not be an extraterritorial application of the Patent Act for exhaustion to depend on a first sale that occurred abroad. One court has declared that the Jazz Photo rejection of international patent exhaustion has already been overruled sub silentio by the Supreme Court's decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). See LG Electronics, Inc. v. Hitachi, Ltd., 655 F. Supp. 2d 1036, 1044-45 (N.D.Cal.2009). The outcome of Kirtsaeng could resolve the issue.
Rejection of a geographical limitation on what conduct results in exhaustion of rights would be a welcome return to first principles under both patent and copyright law. The relevant first principle is that the owner of an intellectual property right, whether a patent or a copyright, is entitled to only a single reward attributable to the sale of an article that embodies the protected intellectual property: "[T]he ultimate question embodied in the 'first sale' doctrine [is] 'whether or not there has been such a disposition of the article that it may fairly be said that the patentee [or copyright proprietor] has received his reward for the use of the article'. . . ." (third alteration in original) (quoting United States v. Masonite, 316 U.S. 265, 278 (1942)). Platt & Munk Co. v. Republic Graphics, Inc., 315 F.2d 847, 854 (2d Cir. 1963). An overly expansive application of the rule that the patent and copyright laws do not have extraterritorial effect has allowed patent and copyright owners to extract greater rewards from their intellectual property rights than Congress intended.