SCOTUS Adopts International Copyright Exhaustion in Kirtsaeng

Tuesday, in Kirtsaeng v. John W. Wiley and Sons, Inc., the Supreme Court held 6-3 that the first sale doctrine  of Section 109(a) of the Copyright Act  trumps a copyright owner’s right under Section 602(a)(1) to bar importation of copies when they were made and sold outside the United States.

The majority’s and dissent’s analyses largely involved a back-and-forth about  the meaning of Section 109(a)’s “lawfully made under this title” preamble with precious little attempt by either side to harmonize the goals of both sections of the statute.  Only Justice Kagan in her concurrence (joined by Justice Alito) acknowledged the potential damage to Section 602(a)(1) caused by adopting the majority’s conclusion.

The Court appropriately rejected a cramped geographic reading of “lawfully made under this title,” but largely gutted the right of copyright owners under Section 602(a)(1) to bar importation of copies.  Along the way, the Court unequivocally adopted international copyright exhaustion without a lick of statutory support or evidence of Congressional intent.  Given the Court’s willingness to find international exhaustion even in the face of statutory language limiting parallel imports under the Copyright Act,  it wouldn’t be surprising to see the Court fully embrace international patent exhaustion in the future, since there’s even less statutory basis to bar its adoption.

Background

Recall that in this case, Petitioner Supap Kirtsaeng came to the United States from Thailand in the late 1990s to study.  Back home, his family bought cheaper versions of Respondent Wiley’s textbooks published in Asia, which they shipped to Kirtsaeng to resell in the United States.   Even though much of the content of the Asian books (sold at a fraction of the U.S. price) was the same as the U.S. versions, the Asian books didn’t contain the same supplemental content and often employed lesser-quality printing material.

Wiley sued Kirtsaeng for copyright infringement under Section 602(a)(1) of the Copyright Act.  That section expressly provides that importation into the United States of copies acquired abroad without the O.K. of the copyright holder “…is an infringement of the exclusive right to distribute copies…”.

On appeal to the Second Circuit,  Kirtsaeng argued that the Supreme Court’s holding in Quality King Distribs., Inc. v. L’Anza Research Int’l, Inc.  523 U.S. 135 (1998) rendered Section 602(a)(1) inapplicable.  There, L’Anza sold products with copyrighted labels from the United States to a foreign distributor.  The products ended up back in the United States where Quality King tried to sell them.  L’Anza sued for infringement under Section 602.

In Quality King, the Supreme Court said that Section 109(a) trumps Section 602(a) because the distribution right is subject to Section 109(a) and a violation of Section 602(a) constitutes infringement of the distribution right.  Importantly, though, the Court found that “ . . .once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.” Id. at 152.  Because the imported copies in Quality King were initially sold from the United States, however, the Court wasn’t faced with the question of whether Congress intended to provide for the extraterritorial application of the distribution right and the exception found in Section 109(a) to foreign-made copies.

Wiley tried to sidestep Quality King  by claiming that the prefatory language in Section 109(a) applying  to copies  “lawfully made under this title” created  a domestic manufacturing requirement  in Section 109(a), thus rendering it inapplicable to  foreign-made  copies.

The Kirtsaeng majority finds “made under this title” applies to all lawfully-made copies

The bulk of the Court’s opinion, written by Justice Breyer, focused on Section 109(a)’s “lawfully made under this title” language without examining the balance of the section’s text.  The majority engaged in a discussion of how “under” can mean “in accordance with,” and concluded, “In sum, we believe that geographical interpretations create more linguistic problems than they resolve.  And considerations of simplicity and coherence tip the purely linguistic balance in Kirtsaeng’s, nongeographical, favor.”

The Court then went on to adopt many of the arguments raised by Kirtsaeng  and several amici including:  1) that the Copyright Act initially contained a manufacturing clause, so Congress knew how to create a geographic carve-out;  2) that such a limited reading could wreak havoc for museums relying on identical language under the display right when hanging foreign-made works; and 3) the “equal treatment” argument that limiting 109(a) to U.S. made works would subject foreign-copies to perpetual alienation by their copyright holders.

In holding that Section 109(a) applies to all lawful copies, anywhere, the Court avoided  violence to the Act overall; however, it was much less successful in squaring  that reading with the purpose of Section 602(a)(1).  The majority read Quality King as holding that 602(a)(1) is always subject to 109(a), no matter where a copy is made.  In so doing, it struggled to come up with situations where its reading left 602(a)(1)  with “any real work to do.”

The Court generally pointed to examples of a foreign rogue publisher or printer who opts to send copies to the United States before actually selling them abroad.  The problem with these examples is that they fail to truly address real problems.   A rogue publisher who wants to avoid 602(a)(1) can simply sell the copies to a straw purchaser, meet the perfunctory “sale” requirement and then proceed to import.  It’s also unlikely that Congress would have drafted 602(a)(1) to address these limited situations.

In concluding (appropriately) that the situs of a copy’s manufacture doesn’t dictate its future alienation, the Court blithely adopted international exhaustion, even though there’s no indication in the Copyright Act that U.S. copyright law was ever meant to regulate activity in foreign markets.  (Indeed, the opposite is true.  For a century,  U.S. Courts have held that the  copyright owners  cannot exercise their rights over activities in foreign countries.)

Moreover, as the dissent pointed out, the U.S. position on the “highly contentious trade issue” of international exhaustion is far from settled.   The majority’s only rejoinder was to argue that the dissent “point[ed] to nothing indicative of congressional intent in 1976.”  That’s backwards.  Under long-standing  principles of statutory construction reaffirmed by the Court just a few years ago, absent a contrary intent in the statute, legislation “is meant to apply only within the territorial jurisdiction of the United States.”  EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991).  See also, Morrison v. Nat’l Australia Bank, Ltd. 130 S. Ct. 2869, 2877 (2010).

Backwards or not, international copyright exhaustion is now unequivocally part of U.S. law.

The dissent finds the majority’s 602(a)(1) analysis lacking

Claiming that the Court had “reduce[d] §602(a)(1) to insignificance,” the dissent by Justice Ginsburg (joined by Justice Kennedy and Justice Scalia in part) took on many of the shortcomings in the majority’s analysis of Section 602(a)(1). (“Had Congress intended simply to provide a copyright remedy against larcenous lessees, licensees, consignees, and bailees of films and other copyright-protected goods…  it likely would have used language tailored to that narrow purpose.”)  It also pointed out that many of the exceptions to Section 602(a)(1) contained later in the section are rendered meaningless by the Court’s interpretation:

But if, as the Court holds, such copies can in any event be imported by virtue of §109(a), §602(a)(3)’s work has already been done. For example, had Congress conceived of §109(a)’s sweep as the Court does, what earthly reason would there be to provide, as Congress did in §602(a)(3)(C), that a library may import “no more than five copies” of a non-audiovisual work for its “lending or archival purposes”?

The dissent also took aim at international exhaustion, finding no statutory support for the holding and arguing that the United States repeatedly had rejected such a scheme in trade negotiations:

While the Government has urged our trading partners to refrain from adopting international-exhaustion regimes that could benefit consumers within their borders but would impact adversely on intellectual-property producers in the United States, the Court embraces an international-exhaustion rule that could benefit U. S. consumers but would likely disadvantage foreign holders of U. S. copyrights. This dissonance scarcely enhances the United States’ “role as a trusted partner in multilateral endeavors.”

(citations omitted)

Ultimately, however, the dissent’s analysis , much like the majority’s,  turned on the interpretation of the five-word preamble in Section 109(a). It argued, based on its own reading of the words and handpicked portions of the voluminous legislative history that “lawfully made under this title” must impose a geographic limitation.   It failed to provide any meaningful basis for providing  just why Congress would provide for perpetual alienation of copies simply because they were made on foreign soil.

Justice Kagan’s lesser of two evils

In her concurrence, Justice Kagan (joined by Justice Alito), was the only justice to address any language in Section 109(a) beyond “lawfully made under this title.”  Although she fully concurred with the majority’s view that Section 109(a) could not properly be limited to domestic copies, she acknowledged the majority opinion did damage to Section 602(a)(1).  The “culprit,” she wrote, however, is Quality King and its holding that Section 602(a)(1) is subject to Section 109(a).

In Quality King,  Justice Kagan wrote, the Solicitor General “… reasoned that §109(a) does not limit §602(a)(1) because the former authorizes owners only to “sell” or “dispose” of copies—not to import them: The Act’s first-sale provision and its importation ban thus regulate separate, non-overlapping spheres of conduct.”  That reading remains the Government’s preferred construction, she wrote.

Justice Kagan didn’t provide an explanation as to why the Court couldn’t limit or reverse Quality King, but, she concluded, saving 109(a) was far more important than inflicting damage on Section 602(a):

I think John Wiley may have a point about what §602(a)(1) was de­signed to do; that gives me pause about Quality King’s holding that the first-sale doctrine limits the importation ban’s scope. But the Court today correctly declines the invitation to save §602(a)(1) from Quality King by destroy­ing the first-sale protection that §109(a) gives to every owner of a copy manufactured abroad. That would swap one (possible) mistake for a much worse one, and make our reading of the statute only less reflective of Congres­sional intent.

Quality King is distinguishable

Quality King’s rejection of the Solicitor General’s distinction is, in fact,  salvageable under the facts of Kirtsaeng.  In Quality King the Court said it wouldn’t  focus on the word “importation” in Section 602(a) because, “The whole point of the first-sale doctrine is that once the copyright owner places a copyright item in the stream of commerce by selling it, he has exhausted his statutory right to control its distribution.”  523 U.S. at 152.  Recall, however, that in Quality King the goods initially were sold from the United States.  Thus, the “exhaustion” the Court addressed in Quality King was purely domestic.  Put another way, by the time the goods left the United States they already had been subject to Section 109(a).  It would make little sense to suddenly reanimate a copyright owner’s rights in U.S.-made copies because they were suddenly exposed to foreign air or landed on foreign soil.

On the other hand, the copies at issue in Kirtsaeng were never made, sold or otherwise disposed of in the United States;  any transactions to which they were subject were never governed by U.S. law.  Kirtsaeng’s relatives could buy, sell, lend or destroy the books to their hearts’ content in Thailand and they would remain strangers to U.S. copyright law.  Only when those copies crossed the border would U.S. law and 109(a)’s right to “sell or otherwise dispose of” kick in.  By then it would be too late to invoke Section 109(a) since the simple act of importation already would have violated 602(a)(1)’s prohibition. The domestic “exhaustion”  which saved the Quality King goods wouldn’t  help the Kirtsaeng books because all of the transactions involving the books  occurred outside U.S. borders.  The only means of rendering 602(a)(1) inapplicable is to simply assume—without statutory support—the conclusion; i.e., the  presence of international exhaustion.

Obviously, the Court wasn’t interested in limiting or distinguishing Quality King.  A majority was ready to embrace international exhaustion and unless and until Congress takes up Justice Kagan’s suggestion to change the law, international copyright exhaustion remains the law of the land.