In a much anticipated case, the U.S. Supreme Court ruled on March 19, 2013 in Kirtsaeng v. John Wiley & Sons that the "first sale" or "exhaustion" doctrine of U.S. Copyright law, which allows resale of copyrighted materials, applies even in the case of goods manufactured and sold abroad. Thus, the decision effectively establishes international copyright exhaustion.
Specifically, Supap Kirtsaeng arbitraged textbooks by purchasing them in Thailand at low cost and reselling them in the United States at a profit. John Wiley & Sons, a textbook publisher, brought suit against Kirtsaeng based on § 602(a)(1) of the Copyright Act, which prohibits importation of a copyrighted work into the United States without permission from the copyright owner. In defense, Kirtsaeng claimed that these were allowable re-sales under the first sale doctrine, which is codified in § 109(a) of the Copyright Act. Under § 109(a), "the owner of a particular copy" of a copyrighted work "lawfully made under this title," i.e., the Copyright Act, can lawfully "sell or otherwise dispose" of his or her copy without permission from the copyright owner. As a result, the Court had to decide whether copyrighted works manufactured overseas are "lawfully made under this title."
In a 6-3 decision, the Court rejected arguments that "lawfully made under this title" in § 109(a) imposed any geographical limitation—thus finding that Kirtsaeng was protected by the "first sale" or "exhaustion" doctrine. Among other reasons, the Court found that the language of § 109(a) itself supported Kirtsaeng because it said nothing about geography but simply applied to works made "in compliance with" the Copyright Act. The Court also examined and criticized the Ninth Circuit's hybrid-geographical interpretation under which the "first sale" doctrine applies to (1) copies manufactured in the United States and (2) copies manufactured abroad but first sold in the United States with the American copyright owner's permission. While the Court understood the second portion of the Ninth Circuit's test from a public policy standpoint, it found that such a "half-geographical/half-nongeographical interpretation" could not be reconciled with the language of the statute.
The Court also held that while the first sale doctrine is statutory, it is a codification of the common law. And according to the Supreme Court, the common law had long recognized exhaustion without any geographical distinctions, citing back to Lord Coke's Institutes of the Laws of England from the seventeenth century. Further, the Court found that many "ordinary scholarly, artistic, commercial and consumer activities" would be threatened if the import ban trumped resale permission. Under this analysis, libraries, museums, used booksellers, and sellers of goods that included embedded software would have to get special permissions, or cease their activities, if special copyright permissions were needed to sell imported works. Accordingly, the court held that "lawfully made under this title" does not impose geographical limitations, and thus effectively recognized international copyright exhaustion.
One issue to be seen is what effect this decision will have on U.S. patent law, which has a related "first sale" or "exhaustion" doctrine. While the Supreme Court has now found in favor of international exhaustion in the copyright context, appellate court decisions at the Federal Circuit have rejected international patent exhaustion – i.e., holding that the first sale doctrine does not apply in the patent context to goods manufactured and sold overseas.
Arguments can now be made that the Federal Circuit's cases are of questionable precedential value in light of the Supreme Court's decision in Kirtsaeng. As discussed above, the Supreme Court found that it could find no support in the common law for making geographical distinctions in applying the first sale doctrine. Thus, it is unclear why the law would be different for patents, particularly considering that the common law still governs in the patent context and has not been codified like it has for copyrights.
Interestingly, the defendant in Ninestar Tech. v. ITC petitioned the Supreme Court for writ of certiorari on this very issue. After the decision in Kirtsaeng, it was expected by some commentators that the Supreme Court would issue a GVR order – granting the petition, vacating the judgment below, and remanding for reconsideration in light of Kirtsaeng. Instead, the Supreme Court simply denied the petition.
While one may be tempted to read this as a sign that Kirtsaeng is limited to the copyright context, reading the tea leaves at the Supreme Court is a risky proposition. For example, it may simply be that the Supreme Court did not think Ninestar was a suitable vehicle to decide the issue. In fact, the government argued this "unsuitability" position in opposing Ninestar's petition. According to the government's opposition, Ninestar didn't simply import like Kirtsaeng but instead additionally reconstructed the article, which is in itself infringing under patent doctrine. Under this analysis, even if international patent exhaustion applies, Ninestar still infringed, and it could not argue otherwise because it had waived any argument that its acts were permissible repair by not raising the issue below. Moreover, Ninestar's petition was procedurally problematic because it had previously been civilly fined for violating a cease-and-desist order by the International Trade Commission, and the Supreme Court already denied certiorari on that issue. According to the government, granting certiorari based on Ninestar's previous petition could have resulted in an impermissible collateral attack.
For now, we will have to wait for the next case for greater certainty about international patent exhaustion.
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