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U.S. Supreme Court Copyright Non-Infringement Ruling Results in Global Expansion of the First-Sale Defense

April 3, 2013

By: Mary Lou Wakimura

Hamilton Brook Smith Reynolds Alert

  • The first-sale doctrine has no geographical boundaries and is a defense to copyright infringement when copyrighted goods lawfully made abroad are imported into the U.S. and re-sold.
  • The U.S. should expect an increase in the availability of “gray market” goods authorized to be made and sold abroad, but imported into the U.S. for resale at discounted prices.
  • Manufacturers and publishers of copyrighted materials may need to lobby Congress for more protection against the importation of lower priced, foreign-made and sold copyrighted works.

On March 19, 2013, in Kirtsaeng v. John Wiley & Sons Inc., the U.S. Supreme Court addressed the geographical boundaries of the first-sale doctrine and held that copyright protection is not territorial.  According to the 1976 U.S. Copyright Act, a copyright owner has the exclusive right to “distribute copies of a copyrighted work."  This exclusive right to distribute includes a prohibition against “importation into the U.S., without the authority of the owner of the copyright…” of copies of the copyrighted work.  However, copyright infringement is limited by the "first-sale" doctrine, which provides that a first buyer (and subsequent owners of) “a particular copy or phonorecord lawfully made under this title….is entitled, without authority of the copyright owner, to sell or otherwise dispose of the possession of that copy....”  In other words, the first-sale exhausts the copyright owner’s exclusive distribution rights.  An example of lawful distribution is an individual who, subsequent to purchasing an authorized copy of a copyrighted book, sells his copy to another person.

Prior to this decision, the U.S. Supreme Court in Quality King addressed the geographical scope of the first-sale doctrine as a defense to copyright infringement for goods made in the U.S. and sold abroad.  The Court held that the first-sale doctrine is applicable and authorizes the resale of copies made in the U.S., sold abroad and imported back into the U.S.

In the present case of Kirtsaeng v. John Wiley & Sons Inc., Wiley authorized its Asian subsidiary to publish and sell copyrighted text books abroad at a retail price lower than the corresponding retail price of the same text books published and sold in the U.S.  Kirtsaeng, while studying in the U.S., had friends and family in Thailand purchase and send to him over 600 text books published and sold by Wiley Asia.  Kirtsaeng then sold the books on eBay at a discounted price, reimbursed the expenses of his friends and family, and kept $100,000 in profits.  Based on the precedent of Quality King, Wiley argued in the lower courts that the phrase "lawfully made under this title" from the first-sale doctrine geographically restricted the scope of the doctrine to copyrighted works made in the U.S.  Wiley thus contended that the first-sale doctrine defense should not be extended to copyrighted works manufactured abroad.  Kirtsaeng argued that because the textbooks were lawfully published in Thailand and legally purchased in Thailand, the first-sale doctrine permitted importation and resale without Wiley's further permission.  The lower courts found for Wiley holding that Kirtsaeng could not assert the first-sale defense because the doctrine did not apply to foreign-made goods.

These same arguments were presented to the U.S. Supreme Court.  The Supreme Court further considered amicus briefs filed by members of the retail industry on behalf of Kirtsaeng, indicating that the importation of traditionally copyrighted works, such as books, electronic games and manufactures containing copyrighted software, constitute a $220 billion industry.  The position of the retailers was that the threat of infringement would be extremely disruptive if copyright protection was viewed territorially.  Kirtsaeng prevailed on the appeal.  The Supreme Court held that the subject phrase “lawfully made under this title” did not impose a geographical limit to use of the first-sale defense, and that the first-sale doctrine applies to copies of a copyrighted work lawfully made abroad.
In Kirtsaeng, the Supreme Court upheld the concept that copyright protection is not territorial and expanded the boundaries of the first-sale doctrine defense to U.S copyright infringement based on worldwide activity.  In support of their decision, the Supreme Court cited the importance of allowing buyers of copyrighted goods to be free to compete with each other when reselling those goods.  In general, competition is advantageous to the consumer when buyers are free to resell without price constraints.
In the dissent, three justices stated that the decision renders copyright protection essentially meaningless against the unauthorized importation of foreign-made copies of protected works, and undermines the ability of copyright owners to charge different prices for their works due to worldwide economic and financial considerations.

Many may view the Kirtsaeng ruling as a blow to copyright protection and a boon to the gray market.  According to a recent Bloomberg business report, imports of gray market goods into the U.S. are estimated to cost American manufacturers as much as $63 billion a year.  The Kirtsaeng decision will force U.S. copyright owners selling in the wholesale and retail markets to rethink their pricing strategies (selling for a higher price in the U.S. and a lower price abroad).  As stated in the majority opinion, “whether copyright owners should, or should not, have more than ordinary commercial power to divide international markets is a matter for Congress to decide.”

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