The Supreme Court heard oral arguments Monday in Kirtsaeng v. John Wiley & Sons, Inc., a case addressing whether textbooks — and other copyrighted works — made abroad can be imported and sold in the United States without the copyright holder’s permission.

The Court’s decision will clarify to what extent § 109(a) of the Copyright Act — also known as the first-sale doctrine — applies to copyrighted works made outside the U.S.  The first-sale doctrine permits the legal owner of a copyrighted work to dispose of the work without the copyright holder’s approval.

The Need for Clarity on the First-Sale Doctrine

Whether the first-sale doctrine applies to foreign-made goods has been an open question since the Court decided Quality King Distributors, Inc. v. L’anza Research Int’l, Inc. in 1998.  In that case, the Court held that “round-trip” products made in the U.S., sold abroad, and then imported back into the U.S. are subject to the first-sale doctrine, but left unanswered whether the doctrine also applies to copyrighted products made outside the U.S.

After Quality King Distributors, the lower courts developed different approaches to this question.  The 2nd Circuit held in Kirtsaeng that the first-sale doctrine does not apply to copyrighted products made abroad, while the 9th Circuit, in Omega v. Costco Wholesale Corp., concluded that the first-sale doctrine does apply to such products, but not until they have been sold once in the U.S. with the copyright holder’s permission.

Omega offered the Supreme Court its first opportunity to fully clarify the reach of the first-sale doctrine in 2010.  The Court split 4-4 in that case as Justice Kagan recused herself because of her prior involvement in the case as U.S. Solicitor General.  The stalemate in Omega and Justice Kagan’s prominent role in Monday’s oral argument suggest that she is the likely swing vote in Kirtsaeng.

Oral Argument Highlights

The key question at oral argument was how to reconcile the rights that § 109(a)’s first-sale doctrine affords to legal owners of copyrighted works with § 602(a) of the Copyright Act, which prohibits importation into the United States of a copyrighted work without the copyright holder’s approval.  The answer to this question turns on what constitutes a work “lawfully made under [the Copyright Act],” in § 109(a) because that phrase articulates the scope of the first-sale doctrine.

Counsel for Petitioner Kirtsaeng urged the Court to interpret “lawfully made under [the Copyright Act]” to mean that a copyrighted work is covered by the first-sale doctrine regardless of where it is made if it is “made in compliance with U.S. copyright law.”  In other words, the inquiry is not where the good was made or whether the Copyright Act actually applies to the manufacture of the good, but rather whether the copyrighted good was manufactured in accordance with the rules laid out in the Copyright Act.  Petitioner’s counsel argued that such an interpretation 1) is a better reading of the plain meaning of the statutory language, 2) is consistent with how the phrase “lawfully made under [the Copyright Act]” is used elsewhere in the statute, and 3) does not negate the significance of § 602’s ban on unauthorized imports.

Justices Sotomayor and Breyer appeared to be sympathetic to this position, while Justice Ginsburg expressed concern that such an interpretation would undermine what she viewed as Congress’s intent to allow copyright holders to preserve market segmentation across national borders, that is, to limit the sale of certain goods to certain national markets.  For her part, Justice Kagan was mostly neutral, although she pressed Petitioner’s counsel on language from Quality King that suggested a narrower reading of “lawfully made under [the Copyright Act],” which she characterized as “unfortunate to [Petitioner’s] position.”  In response, Petitioner’s counsel sought to frame the Quality King language cited by Justice Kagan as dicta.

Counsel for Respondent Wiley argued that the Court should interpret “lawfully made under [the Copyright Act]” to effectively mean “lawfully made in the United States.”  He sought to address the concern that this interpretation would encourage outsourcing of U.S. manufacturing jobs by arguing that there is no indication that such an outcome would result, and even if it did, it was the province of Congress, and not the Court, to worry about and address that problem.

More so than Petitioner’s counsel, Respondent’s counsel was met by a hot bench, particularly Justices Sotomayor and Breyer, who repeatedly inquired as to the practical consequences of the interpretation Respondent advocated.  At one point, Justice Breyer wondered whether Respondent’s interpretation would prevent him from buying multiple copies of the same book in the United Kingdom to bring home to the U.S. as gifts for his family without the publisher’s permission, or make it illegal for a car owner to sell their foreign-made Toyota in the U.S. without first seeking approval from all those who hold copyrights in the products incorporated into the vehicle.  Justice Kagan remained more neutral in her inquiries, though she did suggest that one could view “lawfully made under [the Copyright Act]” as a simple re-wording of earlier statutory language under which Respondent “would clearly lose.”

The U.S. Government also appeared as amicus curiae supporting the Respondent, though it urged the Court to adopt a middle ground that would allow copyright holders to prevent the unauthorized import of copyrighted goods made abroad without gaining permanent control of the “downstream” distribution of such goods.  This is effectively the result the 9th Circuit has provided for, although by different reasoning, most recently in Omega.

The Government indicated that achieving this result would be jurisprudentially complicated, as it would require either overturning Quality King, an approach that the Government did not advocate, or, alternatively, finding that the key language in § 109(a) is essentially co-extensive with the common law first-sale doctrine, which § 109(a) was intended to codify anyway.  Justice Alito expressed some skepticism about this latter approach, and asked the Government if it preferred the consequences associated with Petitioner’s or Respondent’s interpretations, if those were the only two alternatives, to which the Government responded that it would prefer Petitioner’s interpretation.  Notably, Justice Kagan appeared to be receptive to the Government’s compromise approach.

Anticipated Ramifications of the Court’s Decision

The Court’s decision in this case will have significant ramifications for copyright holders and retailers alike.  A decision in favor of Wiley could come in two forms.  The first would embrace Wiley’s position by affirming the 2nd Circuit holding that the first-sale doctrine never applies to copyrighted goods made abroad.  The second would embrace the outcome advocated by the Government and previously adopted by the 9th Circuit by allowing copyright holders to prevent the unauthorized import of copyrighted goods made abroad, but not allowing them to control the sales and distribution of such goods once they have entered the U.S. market with the copyright holder’s permission.  Either approach would preserve the first-sale doctrine for U.S.-made goods, while giving copyright holders enhanced control over the U.S. sale of goods they manufacture abroad.

By contrast, a decision in favor of Kirtsaeng would expand the first-sale doctrine to cover copyrighted goods made outside the U.S. regardless of whether the copyright holder has approved the sale of such goods in the U.S.  This could encourage the importation and sale of lower-cost goods made abroad, thus increasing competition faced by higher-cost, U.S.-made copyrighted goods.  Over time, such a decision may also result in less market segmentation by copyright holders, and an increase in the cost of copyrighted works globally.  It could also diminish the value of U.S. copyrights by leading to consumer dissatisfaction with lower-cost goods made abroad and then re-sold by third parties in the U.S. since such goods can differ in design, quality, and intended usage from goods made specifically for U.S. consumers.  Some have argued that such a result would do a disservice to copyright owners who have invested substantial resources to generate recognition and goodwill for their copyrighted works, and would allow third-party re-sellers to unfairly free-ride on such investment.

Regardless of the Court’s decision in this case, Congress may have the final say on how U.S. copyright law treats copyrighted goods made outside the U.S.  Reports last week suggested that both sides would be prepared to seek a legislative solution to this issue if they did not prevail before the Court.