Last Rites for First Sale Doctrine's Protection of Grey Market Goods?

On the last Monday in October, October 29, the U.S. Supreme Court will again take up the "first sale doctrine," which has been repeatedly narrowed recent years with respect to grey market goods.  In the current term, the Supreme Court may limit it further, in Kirtsaeng v. John Wiley & Sons, Inc.

In copyright law, the first sale doctrine permits the owner of a lawfully purchased copy of a copyrighted work to resell it regardless of whether the copyright owner consents. It was originally a judicially created doctrine but was later codified in section 109(a) of the Copyright Act. 

Section 109(a) provides, in pertinent part, "the owner of a particular copy ... 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...." However, section 602(a) of the Copyright Act also prohibits importation of copies of copyrighted works acquired abroad without the authorization of the copyright holder.

In 1998, the Supreme Court had held the first sale doctrine applied to exported copies of goods manufactured domestically and re-imported "round trip" back into the United States for sale without the copyright owner's permission, in Quality King Distributors, Inc. v. L'anza Research Int'l, Inc. Since then, however, there has been uncertainty in the lower courts as to how to treat foreign-made products and whether they should be considered works that are "lawfully made" under the Copyright Act" in the first place, as required under section 109(a).

In 2008, the Ninth Circuit Court of Appeals decided Omega S.A. v. Costco Wholesale Corp. In that case, a Swiss watch manufacturer sued the warehouse club retailer Costco for selling watches in the U.S. that Omega had manufactured abroad and had only authorized their sale outside the United States. (The watches included an engraving of an "Omega Globe Design" that was protected under U.S. copyright law.)

In its lawsuit, Omega claimed Costco had violated section 602(a). Costco argued its conduct was permitted under the first sale doctrine. The trial court ruled in favor of Costco on a motion for summary judgment. However, the Ninth Circuit reversed, holding the first sale doctrine did not protect Costco because the doctrine does not apply to works manufactured outside of the United States unless they previously have been imported and sold in the United States with the copyright holder's permission. Because the watches were manufactured abroad and did not meet this exception, the court ruled the first sale doctrine did not provide a defense to the section 602(a) violation. An equally divided Supreme Court affirmed the Ninth Circuit's opinion. (Justice Kagan recused herself, apparently due to her previous involvement in the case as solicitor general.)

The case now pending before the Supreme Court, and set for oral argument later this month, is an appeal of a 2011 Second Circuit ruling in John Wiley & Sons, Inc. v. Supap Kirtsaeng.  In the late 1990s, Supap Kirtsaeng moved from Thailand to the United States to attend Cornell University to pursue an undergraduate degree in mathematics. He later moved to California to pursue a doctoral degree. To help fund his education, he arranged for his family and friends abroad to ship him foreign editions of textbooks.  He then resold them online in the United States. John Wiley & Sons, Inc., an international publisher, filed suit.

Among other things, Wiley alleged that Kirtsaeng's conduct violated section 602(a)of the Copyright Act. Kirtsaeng argued his conduct was authorized under the first sale doctrine. However, the Second Circuit disagreed. The court acknowledged the tension between sections 109(a) and 602(a)(1) but held that the first sale doctrine only applies to copyrighted copies of works manufactured domestically.  The Second Circuit declined to recognize the Ninth Circuit's exception in Omega, by which the first sale doctrine could apply to foreign manufactured goods as long as they previously were imported and sold in the United States with the copyright holder's permission.

The Supreme Court is expected to address the disagreement between the Second and Ninth Circuits on this issue, and may further narrow the scope of the first sale doctrine's protection with respect to gray market goods, when it issues its decision in Kirtsaeng. The Supreme Court's ruling is expected by next Spring.

The Supreme Court's opinion in Quality King Distributors, Inc. v. L'anza Research Int'l, Inc. is available here. The Second Circuit's opinion in John Wiley & Sons, Inc. v. Supap Kirtsaeng is available here.  Ninth Circuit's opinion in Omega S.A. v. Costco Wholesale Corp. is available here.