Kirtsaeng v. Wiley Incentivizes Digital Distribution

This article originally appeared in Mealey’s Litigation Report: Cyber Tech & E-Commerce June 2013 

by Ilaria Maggioni

In Kirtsaeng v. Wiley,[1] the Supreme Court ruled that once a copyrighted work has been sold by its owner anywhere in the world, it is free to be resold - including by importation into the U.S. itself. Hence, under U.S. copyright law a doctrine of "worldwide exhaustion of rights" now applies
 
1) The Supreme Court's Decision

The Supreme Court relied on narrow statutory-interpretative grounds to reach its conclusion that Kirtsaeng's resale in the U.S. of books manufactured abroad did not infringe Wiley's copyright under the first-sale doctrine.[2] The Court held that the copies sold by Kirtsaeng were "lawfully made" under the Copyright Act and so they are subject to the first-sale exception to copyright infringement.

The Supreme Court overruled the Court of Appeal for the Second Circuit's more conventional ruling that the statutory language "lawfully made under this title" means that the first-sale doctrine does not apply to copies of American-copyrighted works manufactured abroad.[3] This conventional territorial view was urged by Wiley's geographical reading of that language essentially so that the exception would apply only to copies "made in the U.S."; being as the "title" is in fact the copyright law of the U.S., not the world.

The Supreme Court favored Kirtsaeng's reading of the relevant language as ". . . imposing the non-geographical limitation made 'in accordance with' or 'in compliance with' the Copyright Act, which would permit the doctrine to apply to copies manufactured abroad with the copyright owner's permission" - as were the Wiley books at issue in this case (emphasis added).[4]

The Supreme Court's reasoning is troubling since the U.S. Copyright law does not provide enforceable basis for copyright in Asia - only local law may provide the basis to adjudge activities that took place there. The manufacturing and the first sale took place in Asia; the license was to a foreign company - none of these activities may logically come to be evaluated for lawfulness "under the title" (i.e., the U.S. Copyright Act). The Supreme Court exhibited disregard for the territorial principle of Intellectual Property law, which the lower court had correctly upheld.

An extensive dissenting opinion by J. Ginsburg points out that the majority's ruling is a bold departure from ". . . Congress' aim to protect copyright owners against the unauthorized importation of low-priced, foreign made copies of their copyrighted works . . . "; and is "all the more stunning, for it places the United States at the vanguard of the movement for 'international exhaustion' of copyrights - a movement the United States has steadfastly resisted on the world stage."[5]

While the Wiley decision was saluted by some commentators as a welcome victory for consumers, it does not likely represent a game-changing paradigm outside of the print universe. Online retail of digital content should not be affected, due to its narrow reasoning and its focus on print publications. The shift to digital content, already well underway, should get a boost.
 
2) Digital Music

The decision's inapplicability to digital content is exemplified in a recent decision about music files. In the market for digital resale of copyrighted works, the Wiley decision had generated concern that a similar exhaustion of copyrights would be forthcoming for digital music files. In that case, a legitimate second market for digital files would be free to flourish after first sale - with revenues migrating out of the hands of original copyright owners (mostly publishers and record labels, or in some cases established independent musicians) and right into the hands of reselling websites and original first purchasers. Advocating for this shift are new comers like the digital cloud-based reseller website ReDigi; and established online retailers such as Amazon; and self-styled consumers organizations.

However, in March 2013, shortly after the Supreme Court's Wiley decision, the District Court for the Southern District of New York (SDNY) issued a ruling in the case Capitol Records LLC v. ReDigi Inc. holding that there is no copyright exhaustion by "first-sale" of digital music files.[6]

Hence, increased reliance on digital distribution may be viewed as a direct - although perhaps unintended - consequence of the Supreme Court's Wiley decision. Since publishers no longer have control of print publications after first sale abroad, the natural market response after Wiley would be for publishers to turn to digital distribution, where publishers may retain full control under prevailing digital licensing models. The SDNY in ReDigi confirms that result for digital music. Since digital works are traditionally brought to market under non-transferable personal-use licenses - not "sold", the first-sale doctrine so far has been held inapplicable to licensed digital works.

In 2010, in the Autodesk case[7] a similar issue in respect of resale of software was decided (on appeal) substantially the same way as ReDigi. The Autodesk case even dealt with a physical tangible medium (CD embodying the software) originally sold under license, resold to a third-party who in turn resold them on eBay. Supporters of exhaustion of copyrights in digital resale hoped that the Wiley decision would lead to a different ruling in ReDigi, but Wiley did not and could not effect that shift.

The fundamental difference between a physical and digital product is the nature of the legal transaction that is used to handle digital versus non-digital works. That is at the core of most of these cases because normally title in non-digital works is transferred, meaning there is an actual sale, and the sale triggers the first-sale doctrine. Non-digital works are most frequently not transferred. They are provided to consumers based on a limited license which contractually restricts use and re-distribution of the work.

In 2010, in Vernor v. Autodesk, the Court of Appeals for the Ninth Circuit, overruled the District Court's finding that a digital resale of Autodesk's AutoCAD software by a third-party, who legitimately purchased it from the original buyer, was permitted by the first-sale doctrine. The Ninth Circuit agreed with Autodesk that its software was sold under a non-transferable license and so it was not subject to the first-sale doctrine.[8]

The Autodesk decision and now the ReDigi decision, still pose a substantial obstacle for companies looking to resell digital content. Apple and Amazon recently sought patent protection for cloud-based reselling models applicable to second-hand digital content.[9] Obtaining such patents does not mean that the patent owner would be able to use them, without infringing the copyright owner's digital content. Under the current legal framework, Amazon, Apple, ReDigi and the like, do not have much to counter with. The legal authority over copyrighted digital products still remains within the copyright owner's control because the copyright owner retains the copyright over digital property sold under strict personal-use licenses.

From a practical perspective, copyright owners may be expected to adjust to circumstances and find ways of making products that cannot easily be re-distributed after they leave the manufacturer. Copyrighted digital content might not be re-salable in practical terms. Copyright owners can add password protection and other security mechanisms, which are illegal to circumvent under the Digital Millennium Copyright Act, or that make the products unmarketable because they are no longer usable on other devices; or without periodic payment of subscription fees. For example, Adobe recently transitioned to a subscription-fee based distribution model.
 
Possible Effects on Exhaustion of Trademarks and Patents

The Wiley decision declaring international exhaustion of copyrights may foreshadow similar exhaustion for trademarks (e.g., legitimizing pharmaceutical grey imports). The decision incentivizes publishers to phase out print publications in favor of digital distribution. Since digital works are traditionally brought to market under non-transferable personal-use licenses - not "sold", the "first-sale" doctrine so far has not been applied to licensed digital works.[10]

While some commentators speculate that this decision may also lead to worldwide exhaustion of patent rights,11 the principle of territoriality of patents seems to have been more securely established over the years than for trademarks, which have long been the subject of controversy over the legality of "gray imports" from abroad.
 
Endnotes:

1.Kirtsaeng v. Wiley, 133 S.Ct. 1351 (2013) [an enhanced version of this opinion is available to lexis.com subscribers].

2. The "first-sale" exception to copyright infringement is provided by the Copyright Act, 17 US.C. § 109(a) [an annotated version of this statute is available to lexis.com subscribers]  . See also Kirtsaeng v. Wiley at 1352 (2013) (". . . the owner of a particular copy or phonorecord 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 or phonorecord, § 109(a). Importing a copy made abroad without the copyright owner's permission is an infringement of § 106(3)").

3. Id. at 1352.

4. Kirtsaeng v. Wiley at 1352-1353 (2013).

5. Id. at 1373.

6. Capitol Records LLC v. ReDigi Inc., 2013 U.S. Dist. LEXIS 48043 (S.D.N.Y. 2013). The author expected that result - as discussed in an interview with U.K. "IP Magazine". "Brought to book", I.P. Magazine (April 2013) (Copyright (c) I.P. Magazine 2013) [enhanced version].

7. Vernor v. Autodesk Inc., 621 F3d 1102 (9th Cir. 2010) [enhanced version].

8. Id. at 1103-1104 ("Autodesk distributes Release 14 pursuant to a limited license agreement in which it reserves title to the software copies and imposes significant use and transfer restrictions on its customers. We determine that Autodesk's direct customers are licensees of their copies of the software rather than owners, which has two ramifications. Because Vernor did not purchase the Release 14 copies from an owner, he may not invoke the first sale doctrine, and he also may not assert an essential step defense on behalf of his customers.")

9. E.g., Ricardo Bilton, Apple and Amazon want to let you resell your digital stuff (if that even makes sense), VentureBeat MediaBeat Section, March 8, 2013 (http://venturebeat.com/2013/03/08/apple-amazon-resell/); and Darrell Etherington, Apple Patents A System For The Resale And Transfer Of 'Used' Digital Goods, TechCrunch, March 7, 2013 (http://techcrunch.com/2013/03/07/apple-patents-a-system-for-the-resale-and-transfer-of-used-digital-goods/).

10. The author and her colleague Mr. Robert M. Kunstadt, Managing Attorney of R. Kunstadt, P.C., dealt extensively with various aspects of this recurring trademark issue, litigating leading trademark grey-import cases. E.g., see Merck v. Mediplan, 425 F.Supp.2d 402 (SDNY 2006) [enhanced version]; 431 F.Supp.2d 425 (SDNY 2006) [enhanced version]; Bell & Howell-Mamiya v. Masel Supply Co., 548 F.Supp. 1063 (EDNY 1982) [enhanced version] and Bell & Howell-Mamiya v. Masel Supply Co., 719 F.2d 42 (2nd Cir. 1983) [enhanced version].

11. E.g., John Rothchild, The Exhaustive Consequences of Kirtsaeng, JURIST - Forum, April 29, 2013 (http://jurist.org/forum/2013/04/john-rothchild-kirtsaeng.php); and Dennis Crouch, First-Sale Doctrine: Authorized Foreign Sales Exhaust US Copyrights [and US Patents], PatentlyO, March 19, 2013 (http://www.patentlyo.com/patent/2013/03/first-sale-doctrine-authorized-foreign-sales-exhaust-us-copyrights-and-us-patents.html).

[Editor's Note: Ilaria Maggioni is Vice President of the New York Intellectual Property firm R. Kunstadt, P.C. Her practice includes domestic and international litigation involving patent, copyright, trademark and trade dress infringement, commercial disparagement and trade libel; protection of computer hardware and software; multimedia and Internet law; music licensing and entertainment; clearance and registration of marks and logos and IP portfolio management in the U.S. and abroad. A member of the New York Bar and Italian Bar, she speaks Italian and Spanish; and has working knowledge of French and Portuguese. A graduate of the University of Pennsylvania Law School and the Law School at the University of Pisa, Italy, Ms. Maggioni is admitted to practice before the Federal Courts for the Southern and Eastern Districts of New York; the Court of Appeals for the Second Circuit; and the Court of Appeals for the Federal Circuit in Washington, D.C. She is on the Editorial Board of The Trademark Reporter, the official journal of the International Trademark Association, and has published articles in industry and academic publications in the U.S. and abroad (such as the National Law Journal, the legal journals of Oxford University, the University of Santiago de Compostela in Spain, the Max-Plank Institute in Germany, the Comparative Law Review in Japan, and Intellectuele recten/Droits intellectuels in Belgium). Ms. Maggioni has spoken before the New York Software Industry Association; the Association of the Bar of the City of New York; and Whistler Intellectual Property Conference. Copyright (c) 2013 by R. Kunstadt P.C. Responses are welcome.]
 
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