Waiting for Kirtsaeng: the Unresolved Tension Following the 4-4 Split in Costco Between Sections 602 and 109 of the Copyright Act

The huge gray market industry, disappointed with the Supreme Court’s 4-4 split in Costco v. Omega, has been hoping for better news from the 2^nd Circuit. They keep waiting and hoping.

Different panels of the 2^nd Circuit have now heard argument in three cases raising identical issues to those raised but not decided in Costco. But the 2^nd Circuit has not decided any of these cases, even though the earliest, John Wiley v. Kirtsaeng, was argued in May 2010.

The Three 2^nd Circuit Cases

The three cases pending in the 2^nd Circuit deal with textbook arbitrage and the unresolved tension between two sections of the Copyright Act: the first sale doctrine in § 109 and the § 602. In each case, the defendant was found liable under § 602 for infringing the publisher’s copyright by importing its foreign-made textbooks into the US without the publisher’s permission and selling them here at prices below what the publishers charged for the same books made in this country.

In fairness Kirtsaeng was on hold for months awaiting guidance from Costco. But when the Court announced its 4-4 split in December 2010, the unresolved issues landed back in the lap of the 2^nd Circuit, where they remain.

I recently took the Costco side in a webinar sponsored by the ABA and organized by Scott Bain, Chief Litigation Counsel and Director, Internet Anti-piracy, Software and Information Industry Association. Click here for more information about the webinar. On the other side was William Dunnegan who has ably represented the publishers in the three cases pending before the 2^nd Circuit.

I argued that the first sale doctrine in § 109 of the Copyright Act ought to best the considerations underlying § 602 of the Act. For those not familiar with the tension between these sections, here is a brief overview which takes (I am afraid) a bit of focus to follow.

The Tension Between §§ 109 and 602

Section 602(a)(1) states “[i]mportation into the United States, without the authority of the owner of the copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies . . . under section 106.”

Section 106(3), in turn, states that “[s]ubject to sections 107 through 122 [of the Act], the owner of copyright under this title has the exclusive rights to do and to authorize … [the] distribut[ion] [of] copies … of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.”

Section § 109(a), the first sale doctrine, is one of those “subject to” sections. The doctrine provides that the owner of a copyrighted work “lawfully made under this Title” has the right under of the Act to sell the work without the permission of the copyright holder.

Now for the tension (and please stay with me here because this is unavoidably tricky): once the copyright owner sells a lawfully manufactured item, §109(a) ends the owner’s §106(3) distribution right. Because §602 (a)(1) provides that unauthorized importation infringes the exclusive but limited right “under section 106,” and because that right does not extend to resales by lawful owners, §602 seems to be inapplicable to goods that a lawful owner like Costco resells, even if they were imported without authorization of the copyright holder.

Well, … not quite.

The Place of Manufacture Is Key

Liability under § 602 depends on where the goods are made. If your response is “**##** wait, where in the statute is  liability conditioned on the place of manufacture,” you would not be alone. But the place of manufacture is now the great divide.

The Supreme Court in Quality King v. L’Anza held that goods made here are protected by the first sale doctrine when they undergo a round trip:  exported and then shipped back into this country without the authorization of the copyright holder. But move the manufacture of the goods overseas and the result changes. Those goods, when imported into the US without the permission of the copyright holder, violate §602 said  the Ninth Circuit in Costco, which is still the law in that circuit (but nowhere else) as a result of the 4-4 split.

Why Costco Should Win Next Time Around

Will the 2^nd Circuit take a different approach in the textbook cases? Here are some reasons why I think it should.

1. These are not the usual copyright cases where the focus is on punishing the maker or distributor of unauthorized copies. Instead, the publishers seek to use the Copyright Act to subjugate retail competition in the US to market segmentation and price controls. The publishers want to continue to sell the same or similar goods at higher prices here than they sell abroad. The intent of the Copyright Clause of the Constitution is to stimulate innovation, not create a two-tiered pricing structure to the detriment of the American consumer.

2. The copyright holders are trying to misuse §602 by exercising more control over their goods made abroad than those made in this country. A copyright holder who makes and sells goods here controls the first sale but no more. But the copyright holder who makes goods abroad is attempting to control the goods in two markets: overseas and here. If copyright holders succeed in this control by placing, as Costco did, a small logo on the back of an otherwise uncopyrightable watch (see tiny logo below), won’t that drive manufacturers to make even more goods overseas with the resulting further erosion of our domestic economy. Did Congress intend to disadvantage domestic manufacturers when it enacted §602?

3. The language of the first sale doctrine also supports the gray market importers. That doctrine permits the owner of a work “lawfully made under this Title” to sell it without permission of the copyright owner. The copyright owners argue that lawfully made under this title means lawfully made in the U.S. But as Justice Scalia asked at oral argument in Costco if that’s what Congress meant, why didn’t Congress say so. In other parts of the Copyright Act when Congress was concerned about the place of manufacture it expressed that concern in clear statutory language. For example the now expired manufacturing clause in §601 prohibited the importation of books that were not manufactured in the US or Canada.

4. Lawfully made under this title should logically mean made anywhere with the authorization of the copyright holder. Does this interpretation require an extraterritorial extension of the Copyright Act? Quality King, the most authoritative voice on extraterritoriality, didn’t think so. It stated that “the literal text of § 602(a) is simply inapplicable to both domestic and foreign owners of L’Anza’s (the copyright holder’s) products who decide to import and resell them here.” The court never limited those foreign owners to those who acquired goods that were first made in the U.S.

Further, Quality King added in footnote 14 that applying §109 “in an action in a United States court” to a first sale abroad “does not require the extraterritorial application of the Act.” If a foreign sale does not trigger extraterritorial application, why should foreign manufacture?

5. Finally the practical implications of the position taken by the copyright holders cautions against applying §602. If the 1^st sale doctrine does not protect goods made abroad, sold there and then imported without the permission of the copyright owner, the copyright owner, as Judge Pogue warned in the district court opinion in Kirtsaeng, could have a “never-ending section 106(3) ‘exclusive distribution’ protection against any subsequent sale, no matter how legitimate.” Therefore a consumer buying a foreign-made wrench at Home Depot (on which the maker, with the advice of counsel, placed a small copyrighted design) may be an infringer if that product found its way into the United States without the permission of the copyright holder. Does that make any sense?

Recent Developments in Kirtsaeng

Kirtsaeng watchers were buoyed when the 2^nd Circuit recently ordered the parties to answer some post-argument questions. But it is difficult to determine from the questions asked which way the 2^nd Circuit is leaning. The questions include in what country were the textbooks manufactured and what nation’s copyright laws govern the works when manufactured. See William Dunnegan’s responses to these questions here and here.

So we wait some more. If the 2^nd Circuit decides in favor of the arbitrageurs, the circuit split could send these issues back  to the Supreme Court.

Prediction are welcome. For some further background click here.