A Kat's perspective on Kirtsaeng: why is digital different from analogue?

Last week the US Supreme Court delivered its much-awaited decision in Kirtsaeng v Wiley (IPKat report with background to the case here).

As fans of exhaustion-related issues [including legal exhaustion, muses Merpel] will promptly recollect, this case had to deal with the question whether the first sale doctrine as per 17 USC Section 109(a) was applicable to copies of a copyright-protected work lawfully made abroad. On a 6-3 vote - and contrary to what had been previously decided by the US District Court for the Southern District of New York and the Court of Appeal for the Second Circuit -, the US Supreme Court responded to the question affirmatively.

As US copyright students know, the exclusive rights that the owner of copyright has to distribute copies of the copyrighted work to the public by sale pursuant to 17 USC Section 106(3) are subject to a series of limitations. Among other things, Section 109(a) sets out the first sale doctrine, which provides that

"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."

Pursuant to 17 USC Section 602(1)(a), the unauthorised importation into the US of copies of a work that have been acquired abroad is an infringement of the exclusive right of distribution. While in Quality King v L’anza, the US Supreme Court held that a copyright owner cannot prevent re-importation into the US of products that it had authorised for export, it remained uncertain whether the first sale doctrine applied to works lawfully produced abroad and then imported into the US against the express will of the relevant rightholder. 

The Kirtsaeng case was like Quality King but for one important fact. The copies at issue here were manufactured abroad.

The first sale doctrine is invariably regarded
as a sexy topic of conversation

This was important because Section 109(a) says that the first sale doctrine applies to “a particular copy or phonorecord lawfully made under this title.” What was controversial was indeed whether this phrase ought to be intended as limiting the geographical application of the first sale doctrine to copies made in the US only. The Court held that “lawfully made under this title” in the language of Section 109(a) does not impose any geographical limitation which would prevent application of the first sale doctrine to works lawfully made abroad. This is because the phrase “lawfully made” suggests an effort to distinguish copies that were lawfully made from those that were not, and “under this title” is to be intended as setting forth the standard of lawfulness, this being that of the US Copyright Act. Both historical and contemporary statutory context indicate that Congress did not wish to limit application of the first sale doctrine to copies made in conformance with the US Copyright Act where this is applicable.

A few days have passed since this decision and this Kat could not but think about it day and night (of course!). Among other things, the results of such attentive speculations are that the ruling of the US Supreme Court appears to confirm the different legal treatment of analogue and digital copies of works. This can be of particular concern to both creative industries and consumers.

The following thoughts are an extract from a Current Intelligence note I prepared for the Journal of Intellectual Property Law & Practice:

Something you own ...

As recognized by Justice Kagan in her concurring Opinion (to which Justice Alito joined), the combination of this decision and the stance adopted in Quality King constricts Section 602(a)(1)’s ban on unauthorised importation. Indeed, with its ruling the US Supreme Court appears to have legitimised grey market goods, these being products which are traded through distribution channels which are not authorised by the producer or manufacturer of such goods, thus taking advantage of price differentials between the domestic and foreign markets.

The legitimisation of grey market goods, while impairing copyright owners’ ability to engage in price discrimination across different countries, possibly advantages users of copyright-protected contents. As reported by Justice Breyer in his Opinion, US library collections contain at least 200 million books published abroad, along with many other books which were first published in the US but printed abroad because of lower costs. Should the Court have opted for a geographical interpretation of the first sale doctrine (as had been invoked by Wiley), this could have resulted in libraries having to obtain permission before circulating or otherwise distributing these books. This could have proved particularly problematic, especially when having to locate copyright owners of foreign books written decades ago.

... and something (the musical files,
not the iPod) you don't 

Besides debates on whether, as affirmed by Justice Ginsburg in her Dissenting Opinion, the ruling in Kirtsaeng has launched US copyright law into an unprecedented regime of international exhaustion, from a content industry perspective the ruling appears interesting because it confirms the different legal treatment of analogue and digital copies of a work. In his Opinion Justice Breyer recalled that, while Section 41 of the US Copyright Act1909 (predecessor to Section 109) referred to those who are not owners of a copy, but mere possessors who lawfully obtained it, the present version of the first sale doctrine covers only those who are owners of a lawfully made copy. Those who are lessees cannot therefore take advantage of Section 109(a). 

This stance confirms, among other things, the validity of the Wall Data test and, therefore, the inapplicability of the first sale doctrine to software licences (Vernor v Autodesk) and, more generally, digital files obtained through online marketplaces like Amazon or iTunes [but see IPKat here]. This is because the relevant terms and conditions of the latter two expressly state that no ownership right over the relevant content is acquired [here and here]. 

The ruling in Kirtsaeng thus validates the different legal regulation of analogue and digital copies of works. While those who trade in second-hand analogue copies of works will be able to invoke the first sale doctrine and take full advantage of price discrimination practices, those who possess digital files remain unable to regard themselves as proprietors of such copies and, as a result, are not entitled to re-sell them. This means that the creation of marketplaces for second-hand digital files might be considered still illegal under US copyright.

From the perspective of rightsholders, by confirming the possibility for sole owners (and not also lessees) of a copy to invoke successfully the first sale doctrine, the Kirtsaeng ruling can be seen as incentivising the drafting of relevant terms and conditions as mere rights of use, rather than transfers of ownership. This has the potential to increasingly transform US consumers from proprietors of goods into mere lessees.

Any comments from IPKat readers would be most welcome.