Application Of the First Sale Doctrine To Exclusive Importation Rights After Quality King

Written By: Laura Fishwick Edited By: Lauren Henry Editorial Policy The exclusive right to distribute copies is among the bundle of rights that Congress has bestowed onto owners of United States copyrights.[i] Copies of copyrighted works may include books, DVDs, CDs, and copyrighted labels and logos for other consumer products from shampoo to fashion items. The right to distribute copies is limited by the first sale doctrine,[ii] as codified in Title 17 by the Copyright Act of 1976 (“Act”), which entitles the owner of a copy “lawfully made under [Title 17]” to sell or otherwise dispose of the copy without the authorization of the copyright owner.[iii] The first sale doctrine balances the interests of copyright holders in obtaining fair returns on their products with the interests of consumers in accessing goods at low cost and in reselling goods in the marketplace. Concerning rights holders’ importation rights for their copies, § 602(a) of the Act provides that a copyright owner’s exclusive right to distribute copies under § 106(3) is infringed when someone acquires a copy outside of the United States and imports the copy into the United States without the copyright owner’s authority.[iv] More than a decade ago in Quality King Distributors v. L’anza Research International, the Supreme Court addressed the circumstances in which the first sale doctrine limits copyright owners’ exclusive rights to import copies under § 602(a).[v] In Quality King, the plaintiff manufactured high-end hair care products in the United States and price-discriminated between United States and foreign consumers — selling them for a high price in the United States but discounting them for foreign retailers. Id. at 139. The plaintiff then sued a foreign retailer farther down the resale chain that had purchased the products abroad and resold them in the U.S., claiming a violation of its right to distribute copies under § 602(a). Id. at 138-39. The Court unanimously found that because § 602(a) expressly applies to “infringement of the exclusive right to distribute copies … under section 106,” and section 106 subjects these exclusive rights to “sections 107 through 122,” the importation rights given by § 602(a) are subject to the first sale doctrine in § 109(a). See id. at 143-46. Since Quality King, the general applicability of the first sale doctrine to the § 602(a) bar on importing copies has not been challenged. Quality King left unresolved the question of whether the first sale doctrine would provide a defense to infringement by importation of copies manufactured abroad, because Quality King only involved products that were manufactured in the U.S. See id. at 154 (Ginsburg, J., concurring). Answering this question will depend on how the first sale doctrine’s statutory requirement that copies be “lawfully made under [Title 17]” is interpreted. See id. This comment will explore the three major circuit court decisions on this topic and suggest an alternative resolution in the aftermath of Quality King. Background and Circuit Split Circuit courts have split on the issue of whether the first sale defense applies to a copyright infringement claim brought under § 602(a) for copies manufactured abroad. In the broadest of all of the circuit courts’ interpretations of the first sale doctrine’s application, the Third Circuit suggested in dicta in Sebastian International v. Consumer Contacts that the first sale doctrine covers all non-piratical copies manufactured abroad, though it has never decided a case based on its dicta.[vi] In Sebastian International, a California manufacturer of professional salon products with U.S.-copyrighted labels printed the labels in the U.S. and sold products to a foreign distributor who was contractually obligated to sell them only in South Africa. Id. at 1094-95. When the distributor shipped them back to the U.S. for resale without the manufacturer’s consent, the manufacturer sued for breach of contract and for violation of its § 602(a) right to import copies. Id. After the court held that the distributor had not violated the manufacturer’s § 602(a) rights because the labels were produced in the U.S. and were therefore covered by the first sale doctrine, it went on to argue in dicta that if Congress had considered the place of manufacture to be important for the first sale doctrine to apply, such as Congress did in 17 U.S.C. § 601(a),[vii] it would have articulated this geographical distinction more clearly than by using the phrase “lawfully made.” See id. 1099 n.1. Holding the middle ground, the Ninth Circuit has a domestic sale exception — for copies that have been sold previously by an authorized party in the U.S. — to their general rule that the first sale doctrine applies only to copies legally made here.[viii] Before the Supreme Court’s Quality King opinion, the Ninth Circuit in Parfums Givenchy, Inc v. Drug Emporium had applied the first sale doctrine to a case of copies made outside of the U.S. when an authorized sale of the copies had previously occurred here.[ix] The court reasoned that without an exception for copies previously sold in the U.S. by the copyright holder, the law “appeared to give greater copyright protection to foreign-made products than to their domestically made counterparts,” which could be lawfully sold in the U.S. after an authorized sale anywhere.[1] The Ninth Circuit later ruled in Omega v. Costco Wholesale that their general rule survived the Supreme Court’s holding in Quality King.[x] However, they did not decide whether the domestic sale exception was “clearly irreconcilable”[xi] with Quality King. Id. Omega exemplifies the Ninth Circuit’s application of their general rule to § 602(a) importation rights. In that case, Omega manufactured and sold watches overseas bearing a U.S.-copyrighted globe design, which were eventually sold through the gray market to Costco, who sold the watches to customers in California. Id. at 983-84. Omega sued Costco for violating its § 602(a) right to import copies. Id. at 984. The Ninth Circuit found that because the copies were manufactured abroad and sold in the U.S. without Omega’s authority, and the watches had never previously been sold in the U.S. by Omega or an authorized party, the first sale doctrine was not a defense to Omega’s claims. Id. at 990. Adopting a more conservative construction of the first sale doctrine, the Second Circuit in John Wiley & Sons v. Kirtsaeng rejected the Ninth Circuit’s domestic sale exception and found that the first sale defense does not apply to any products manufactured abroad.[xii] In Kirtsaeng, the American textbook manufacturer John Wiley manufactured textbooks in Asia through its wholly-owned subsidiary and authorized their sale only in Asia. Id. at 213. A graduate student in the United States had his family in Thailand ship him foreign edition textbooks, which he resold on websites such as eBay to buyers in the U.S. Id. The court found that the student did not have the first sale doctrine as a potential defense to infringement under § 602(a) because the textbooks were manufactured abroad. Id. at 221-22. The Second Circuit rejected the Ninth Circuit’s exception for goods previously sold in the U.S. in dicta, stating that this exception was not supported by the interplay between § 602(a)(1) and § 109(a). Id. at 221. In sum, the views of the three circuit courts that addressed the application of the first sale doctrine to § 602(a) may be conceptualized as falling on a scale from applying the first sale doctrine’s defense to all copies manufactured abroad (the Third Circuit) to applying the defense to no copies manufactured abroad (the Second Circuit), with the Ninth Circuit’s precedent falling somewhere in between. Interpreting the first sale doctrine, § 602(a), and Quality King The language in the first sale doctrine that limits it to copies “lawfully made under [Title 17]” plausibly supports multiple interpretations. The Second Circuit has suggested that this language could plausibly refer to copies that were manufactured in the United States, copies that have had at least one authorized sale in the United States, non-piratical copies, or some combination thereof. See id. at 220. The consensus of the circuit courts seems to be that the statutory text is unhelpful or ambiguous. See id. Probably as a result of this ambiguity, the Third and Ninth Circuits have barely addressed the statutory text at all, proceeding straight to issues of policy, legislative purpose, or circuit precedent. See e.g., Omega, 541 F.3d at 988-89; Sebastian, 847 F.2d at 1098-99. Only the Second Circuit, which held that the first sale doctrine does not apply to products manufactured abroad, has parsed the statutory language thoroughly. See Kirtsaeng, 654 F.3d at 218-20. Despite its more in-depth analysis however, the Second Circuit has found that the text of the statute leaves the door open for multiple interpretations. See id. at 220. None of the circuit courts have found that the statutory language forecloses any of the above interpretive possibilities. While the statutory language could plausibly support multiple interpretations, the best reading is that the first sale doctrine’s phrase “lawfully made under this [Title 17]” refers to non-piratical copies made by a party in possession of United States § 106(3) distribution rights, whether or not the copies were manufactured in the United States (referred to later as the “distribution rights rule”).[xiii] Under copyright law, the copyright creator, or her employer,[xiv] holds United States distribution rights from the time of fixation unless the holder assigns those rights to a third party. Under the distribution rights rule, the first sale doctrine could not be used to give a buyer of copies United States distribution rights if the manufacturer did not have those rights when it made the copies. To illustrate by example, the first sale doctrine would be a defense to a copyright infringement action brought under § 602(a) for a manufacturer of U.S.-copyrighted product labels that holds distribution rights whether it manufactured the labels domestically or abroad. On the other hand, if a U.S. copyright holder for textbooks assigned distribution rights to foreign publishers for distribution abroad only, the first sale doctrine would not provide a defense to a § 602(a) over products manufactured by the foreign publishers. The Supreme Court in Quality King hinted at this type of distinction in dicta. Quality King, 523 U.S. at 148. The Court, in a hypothetical, stated that if a book author divided distribution rights between a United States publisher and a British publisher, then the British publisher would presumably not have the exclusive right to distribute copies, and the first sale doctrine would not apply. Id. Though the Court stopped short of so arguing, it should not matter where products are manufactured as long as they were manufactured by a party with United States distribution rights. See id. While the hypothetical is not binding precedent, such a rule would encompass the products at issue in Quality King, which were manufactured by a holder of United States distribution rights based in California. See id. at 138-39. By the statutory text, Congress seems to have intended to extend first sale doctrine protection to at least some copies manufactured abroad. Had Congress desired to exclude all works manufactured abroad from coverage by the first sale doctrine, as the Second Circuit held in Kirtsaeng, Congress would have done so explicitly. Also, other sections of Title 17 use the same phrase to arguably apply to at least some copies manufactured abroad. See Kirtsaeng, 654 F.3d at 220. For example, another section of the Title 17 defines an “interested copyright party” as “the legal or beneficial owner of, or the person that controls, the right to reproduce … a musical work that has been embodied in a digital musical recording or analog musical recording lawfully made under [Title 17] ….” Id. If “lawfully made under [Title 17]” did not include at least some non-piratical recordings made abroad, then some interested copyright parties may not be entitled to royalty payments on the basis of these copies under the Audio Home Recording Act.[xv] While the Ninth Circuit’s domestic sale exception does seem to be consistent with legislative intent, it is not a fair interpretation of “lawfully made under [Title 17],” which describes some characteristic element of the copy’s manufacture (such as where, how, or under what rights it was made), not whether subsequent authorized sales have occurred. The Extraterritoriality Doctrine The presumption against extraterritoriality most likely does not apply rigidly to Title 17, but even if it does, the presumption against extraterritoriality is consistent with the idea that the first sale doctrine only applies to products manufactured by distribution rights holders. The presumption against extraterritoriality states that a statute “appl[ies] only to conduct occurring within, or having effect within, the territory of the United States, unless the contrary is clearly indicated by the statute.”[xvi] There are several provisions of Title 17 that “explicitly take account of activity occurring abroad.” Kirtsaeng, 654 F.3d at 219. For example, §104(b)(2) provides copyright protection to works published by foreign nations. Id. Therefore, it is unlikely that a court would find that the presumption against extraterritoriality would bar the distribution rule’s application. Even if a court were to find that the presumption against extraterritoriality was a concern for Title 17 generally, the distribution rights rule does not violate this presumption. In an analogous example, the Supreme Court in Quality King rejected the contention that applying the first sale doctrine to copyrighted products manufactured in the United States but sold abroad would violate the presumption against extraterritoriality, because merely recognizing that an authorized sale has occurred abroad, like recognizing that copies have been acquired abroad, does not violate this presumption. Quality King, 523 U.S. at 145 n. 14. The distribution rights rule also only recognizes what rights the manufacturer had when the copy was made, but does not do any work until a copy is brought into the U.S.[xvii] The Purpose of the Act and Practical Considerations The distribution rights rule splits the difference between the broad Third Circuit dicta and the narrow Second Circuit holding. This rule is narrow enough that it gives effect to the importation right granted in § 602(a). Many courts have argued against finding that the first sale doctrine applies to imported copies manufactured abroad because a contrary interpretation[xviii] would render § 602(a) superfluous. See, e.g., Kirtsaeng, 654 F.3d at 221. Following this line of argument, the Ninth Circuit justified its general rule — that the first sale doctrine does not provide a defense against a claim of infringement under § 602(a) for copies manufactured abroad — on the grounds that a contrary interpretation would render § 602(a) virtually meaningless because “importation is almost always preceded by at least one lawful foreign sale.” Omega, 541 F.3d at 986. The Second Circuit independently concluded that § 602(a) “would have no force in the vast majority of cases if the first sale doctrine was interpreted to apply to every copy manufactured abroad.” Kirtsaeng, 654 F.3d at 221. The distribution rights rule gives copyright holders a way to control the importation of their copies, by assigning foreign distribution rights to foreign manufacturers, and therefore gives effect to § 602(a). The distribution rights rule is also not so narrow that manufacturing copies abroad gives rights holders significantly more rights to control the importation and subsequent sales of copies in the United States. Concerned over the imbalance of rights between foreign and domestic manufacturers, the Ninth Circuit in Drug Emporium carved out an exception to their general rule where copies manufactured abroad were previously sold in the United States with authorization from the copyright holder, which was upheld in Denbicare U.S.A. v. Toys “R” Us.[xix] The court in Drug Emporium reasoned that without this exception, copies manufactured abroad would have greater copyright protection than domestically manufactured copies. Omega, 541 F.3d at 989. Unlike the Ninth Circuit’s exception, the distribution rights rule only gives more copyright protection to some products manufactured abroad, especially those that are made specifically for particular geographic regions and are unlikely to ever be authorized for sale in the United States, such as foreign versions of books and movies. The distribution rights rule distinguishes between copies that are traditionally manufactured for different geographical regions, such as books, textbooks, and DVDs, because rights holders typically separately assign distribution rights to publishers in individual regions. Part of the concern of the Third Circuit in Sebastian International was that manufacturers were attempting to control the importation of products into the United States by relying on copyright doctrine, even though copyrights are not the foundation of many of these products. Sebastian, 847 F.2d at 1099 (involving importation of beauty products with copyrighted labels). The Third Circuit’s opinion hints at drawing a distinction between importation of goods whose market value stems directly from copyrights, such as books or sound recordings, and goods whose copyrights are secondary to their market value, such as products with copyrighted emblems or labels. While such a distinction might make sense from a policy perspective, it cannot be fairly read into the text of the Act, which gives copyright protection to all products having copyrighted content. However, drawing a distinction on the basis of what distribution rights the manufacturer holds approximates the Third Circuit’s practical opinion. Conclusion The circuit courts have split over whether the first sale doctrine provides a defense to copyright infringement under § 602(a) for importation of copyrighted goods. The courts have generally distinguished between copies based on where they were manufactured and whether there had been an authorized first sale in the United States. Instead, courts should consider whether the manufacturer had United States distribution rights because this rule would balance the copyrights holders’ interests in controlling importation with enabling the free market and does not significantly disadvantage rights holders that manufacture copyrighted goods domestically. Two years ago, the Supreme Court granted certiorari to review the Ninth Circuit’s decision in Omega. After Justice Kagan recused herself, the Court split evenly, and they affirmed the Ninth Circuit but did not issue an opinion. The spectrum of circuit court opinions suggests that there is considerable confusion over when the first sale doctrine applies to copyrighted works manufactured abroad. On April 16, 2012, the Court took some first steps to resolve this issue and granted certiorari in Kirtsaeng.[xx] Since the statute is ambiguous, the Court should focus more on policy considerations than it did in Quality King. The Supreme Court was reluctant to decide Quality King on policy grounds, stating that “whether or not [they thought] it would be wise policy to provide statutory protection for … price discrimination [was] not a matter that [was] relevant to [their] duty to interpret the text of the Copyright Act.” Quality King, 523 U.S. at 153. The composition of the Court has changed in the last fifteen years, and the new justices may have different understandings of what are and what are not their duties.

[i] “Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following … to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending….” 17 U.S.C. § 106(3) (2011).

[ii] The reader should note that the first sale doctrine in copyright law is different in many respects from the first sale doctrine in trademark law, and the Supreme Court has cautioned against applying doctrine formulated for one subject to the other. See Sony Corp. of Am. v. Universal City Studios, 464 U.S. 417, 439 n. 19 (1944).

[iii] “Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. § 109(a) (2011).

[iv] “Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501.” 17 U.S.C. § 602(a)(1) (2011).

[v] Quality King Distribs., Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998).

[vi] Sebastian Int’l, Inc. v. Consumer Contacts (PTY) Ltd., 847 F.2d 1093, 1099 n.1 (3rd Cir. 1988).

[vii] Section 601(a) states that the importation or public distribution in the U.S. of a work consisting of nondramatic literary material is prohibited “unless the portions consisting of such material have been manufactured in the United States or Canada.” 17 U.S.C. § 601(a).

[viii] See Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 986 (9th Cir. 2008), aff’d by an equally divided court, Costco Wholesale Corp. v. Omega S.A., 131 S.Ct. 565 (2010) for a discussion of the Ninth Circuit doctrine. The Ninth Circuit’s general rule was first articulated by the court in BMG Music v. Perez, 952 F.2d 318, 319 (9th Cir. 1991).

[ix] Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d 477 (9th Cir. 1994).

[x] See Omega, 541 F. at 990.

[xi] The Ninth Circuit will overrule their prior decisions if the SCOTUS decision "undercut[s] the theory or reasoning underlying the prior circuit precedent in such a way that the cases are clearly irreconcilable." Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003).

[xii] See John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210 (2nd Cir. 2011); see also JOLT Digest’s coverage of Kirtsaeng, stating that the decision incentivizes “copyright owners to manufacture their goods abroad, harming American workers.”

[xiii]See 17 U.S.C. § 109(a).

[xiv] In its 9th Circular, the Copyright Office outlined the ways by which employers may own the copyrights to a work created by an employee — if that work is a “work made for hire.”

[xv] Id. (stating that the U.S. Copyright Office has construed § 1006(a)(1) of the Audio Home Recording Act to cover foreign copies on the basis of identical language).

[xvi] Restatement (Second) of Foreign Relations Law of the United States § 38 (1965).

[xvii] Holding a contrary view, the Ninth Circuit found that extending the first sale doctrine to copies manufactured abroad would “impermissibly apply the Copyright Act extraterritorially in a way that the application of the statute after foreign sales [of domestically manufactured copies] does not.” Omega, 541 F.3d at 988. In its view, holding that authorized copies manufactured abroad were “lawfully made under [Title 17]” would “ascribe legality under the Copyright Act to conduct that occurs entirely outside of the United States” even though the statute does not clearly indicate this application, and would therefore violate the presumption against extraterritoriality.

[xviii] Suggesting that the first sale doctrine would apply to products manufactured abroad, the Third Circuit stated in dicta that whether manufactured domestically or abroad, by finding that the owner of a copyright receives a “reward for his work” whether he sells copies in the United States or elsewhere. Sebastian, 847 F.2d at 1099. While it’s true that the copyright owner is able to profit to some extent whether or not the first sale doctrine applies, the question is not whether he profits, but whether he has the exclusive distribution and importation rights that the best reading of the Act gives him as an incentive to create. Since the Third Circuit’s argument seems to beg the question, it will likely not hold up in future cases.

[xix] See Denbicare U.S.A., Inc. v. Toys “R” Us, Inc., 84 F.3d 1143 (9th Cir. 1996); see also Drug Emporium, 38 F.3d at 481.

[xx] See SCOTUS Blog’s coverage of the Court’s grant of certiorari.