Letter from AmeriKat II: Is there some Omega v Costco-induced disquiet in the lower courts?

The Decision

Turning first to the statutory language, the Court focused on the meaning of the words "made" and "under". The word "made" was not a term of art in the Copyright Act and the word "under" was held in Kucana v Holder (2010) to be a "chameleon" form (picture, left) which the courts must draw its meaning from its context. Wiley, of course, interpreted "lawfully made under this title" to mean "lawfully made in the United States". Wiley submitted that this would be the logical consequence of the presumption against the extraterritorial application of statutes - a presumption that is explicitly applied to the copyright laws. To be made "lawfully under this title" means only, Wiley submitted, that the copyright works have to be physically made in the US.

The Court of Appeals stated that this was overly simplistic, especially because Title 17 takes into account activity occurring abroad. For example, section 104(b)(2) provides that the works are subject to provisions "under this title" if the works is published in the US or abroad (subject to the foreign country being a treaty party . It is possible, the Court of Appeals stated, to interpret section 109(a)'s "lawfully made under this title" to mean 'any work that is subject to the protection under this title." Indeed, had Congress intended that the first sale doctrine apply to only works made in the US, it could have easily written into the statute to say precisely that -but tellingly it did not.

That being said, the above argument in favor of the reverse interpretation of "lawfully made" does not automatically prevent Wiley's enjoyment of its argument as to its meaning; all it does is point to the fact that the relevant text is simply unclear. However, the Court of Appeals, in a quick sprint to finishing in line with Supreme Court dicta, held that section 602(a) would have no force in the vast majority of cases if the first sale doctrine was interpreted to apply to works manufactured abroad that was made subject to protection under Title 17.

"Accordingly, while perhaps a close call, we think that, in light of its necessary interplay with section 602(a)(1), section 109(a) is best interpreted as applying only to works manufactured domestically. . . In adopting this view, we are comforted by the fact that our interpretation of section 109(a) is one that the Justices appear to have had in mind when deciding Quality King. There the Court reasoned, admittedly in dicta, that section 602(a)(1) had a broader scope than section 109(a) because, at least in part, section 602(a)(1) "applies to a category of copies that are neither piratical nor 'lawfully made under this title'. That category encompasses copies that were 'lawfully made' not under the United States Copyright Act, but instead, under the law of some other country."

The Court of Appeals for the Second Circuit therefore concluded that the District Court correctly decided hat Kirtsaeng could not avail himself of the first sale doctrine under section 109(a) because the books in question were manufactured outside the U.S.

However, all were not happy with this decision. District Judge J Garvan Murtha, who was sitting with the Court of Appeals, issued an 8-page dissenting opinion that boiled down to the fact that courts have split over the meaning of "lawfully made under this title" with some holding it means legally manufactured in the US and others holding that it means lawfully made as a function of US copyright law (i.e. under Title 17). The latter interpretation is, Judge Murtha argued, supported by the Copyright Act as a whole because Congress used the phrase "under this title" in multiple sections of the Act to describe the scope of the rights crated by the Act. Again, if Congress intended to limit section 109(a)'s scope to items "manufactured" in the US, it could have easily done so. Further, Judge Murtha stated:

"Economic justifications also support applicability of the first sale doctrine to foreign made copies. Granting a copyright holder unlimited power to control all commercial activities involving copies of her work would create high transaction costs and lead to uncertainty in the secondary market. An owner first would have to determine the origin of the copy --either domestic or foreign -- before she could sell it. If it were foreign made and the first sale doctrine does not apply to such copies, she would need to receive permission from the copyright holder. Such a result would provide greater protection to copies manufactured abroad than those manufactured domestically. . . .I do not believe Congress intended to provide an incentive for US copyright holders to manufacture copies of their work abroad."

It seems apparent to the AmeriKat, that affirming and dissenting opinions alike, the Court of Appeals is signalling their unease with the status of the statutory text in section 109(a) and may be, like the Supreme Court did in their 4-4 split, flagging to Congress that this provision desperately needs legislative clarification. Or, will we be lucky enough to have an appeal to the Supreme Court again to finally rule on this issue? The AmeriKat hopes so, because given the historical origins of section 109(a) and its statutory interpretation against the backdrop of other provisions under Title 17 these factors do not sit squarely with a reading that "lawfully made under this title" means "lawfully made in the U.S.". Justice Scalia, admittedly not the AmeriKat's favorite Justice, even questioned during oral arguments in Omega v Costco why Congress didn't say that if that is what it intended.

In the final paragraph of the Court of Appeals decision on the first doctrine issue the Court in fact invited Congress to correct their judgment

"If we have misunderstood Congressional purpose in enacting the first sale doctrine, or if our decision leads to policy consequences that were not foreseen by Congress or which Congress now finds unpalatable, Congress is of course able to correct our judgment."

Here Congress, Congress, Congress.....Congressional activism is equally likely and unlikely given the US economic climate, but perhaps one way to stimulate the economy is to allow retailers like Costco to start drumming up business in the grey goods market without the fear of legal action? Could such a change to the US grey goods market only be a matter of time? (picture, left - an Omega watch subject to the Costco dispute)

The AmeriKat would like to thank C E Petit for bringing this decision to the Kat's attention.

Letter from AmeriKat I: Is there some Omega v Costco-induced disquiet in the lower courts?

div>The AmeriKat walked down Bedford Row early last week, wrapping her coat tightly around her as the chilling wind whipped up auburn leaves around her paws. (picture, left) Later in the week, walking past Wildy & Sons, she was faced with having to discard said coat as the sun beamed down on the glistening fountain in Lincoln's Inn. Perhaps, she thought, there are some last few days of summer to be had? Wishful thinking, she concluded. The signs of the impending seasonal change have truly begun to weave its signature signs into the patchwork quilt that has been the London summer. During last year's weeks of seasonal transition, the AmeriKat was writing about the impending first sale doctrine US Supreme Court ruling in the Omega v Costco case. Now a year later she is again writing about the decision, but this time in relation to its after-effects being felt in the lower courts.

Is all still not well after Omega v Costco? Of course not....

Last Monday the Court of Appeals for the Second Circuit issued their decision in John Wiley & Sons, Inc v Supap Kirtsaeng which examined the status of the first sale doctrine following Omega v Costco. The Appeals Court upheld the interpretation under Quality King and last year's decision in Costco v Omega which held that copyright goods manufactured abroad were not goods "lawfully made under" Title 17 (US copyright law statute) and therefore were not subject to the first sale doctrine. That it is to say, copyright proprietors could control if and the manner in which their goods are imported and sold in the US as long as those goods were manufactured abroad. However, the Supreme Court's "decision", if one can even call it that, was a 4-4 per curiam split after Justice Kagan recused herself was considered a big setback for US retailers and inappropriately encouraged the foreign manufacture of goods.

The Parties

John Wiley & Sons is a publisher of academic, scientific and educational journals and books, including textbooks for sale in domestic and international markets. Wiley's wholly-owned subsidiary manufactures books for sale in foreign countries. The books are largely similar or identical, but can differ in design and content. The foreign editions are marked with a disclaimer stating that they are to be sold only in a particular country or geographic region. Supap Kirtsaeng moved to the US from Thailand in 1997 to study a degree in mathematics at Cornell University and later moved to California to pursue a doctoral degree.

To help subsidize his degree, Kirtsaeng's friends and family shipped him foreign edition textbooks printed by Wiley's subsidiary. He in turn sold them on eBay.com (where else?) and after reimbursing his friends/family for the costs kept the profit. In September 2008, Wiley filed copyright infringement, trade mark infringement and unfair competition actions against Kirtsaeng, but later dropped all but the copyright infringement claims. Kirtsaeng submitted proposed jury instructions charging that the first sale doctrine was a defense to copyright infringement. The District Court prohibited him from raising this defence holding that

"[t]here is no indication that the imported books at issue here were manufactured pursuant to the US Copyright Act. . . [and,][t]o the contrary, the textbooks introduced as evidence purport, on their face, to have been published outside of the United States."

The jury ultimately found Kirtsaeng liable for willful copyright infringement of all eight works subject to the proceedings and imposed damages of $75,000 for each of the works.

The Question

The question before the Appeals Court was whether the District Court correctly determined that the phrase "lawfully made under this title" does not include copyrighted goods manufacutered abroad.

The Law

The Copyright Act of 1976 enacted 17 USC section 602(a)(1) which provides that

"Importation into the United States, without the authority of the owner of copyright under this title, of copies ... 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"

However, section 109(a) - the codification of the first sale doctrine - provides that

"Notwithstanding the provisions of section 106(3) [of the Copyright Act], 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."

The Court, in its footnotes, examined the origin of the first sale doctrine. The first sale doctrine was first endorsed in the Supreme Court case of Bobbs-Merrill Co v Straus (1908) where the Court held that

"The purchase of a book, once sold by authority of the owner of the copyright, may sell it again, although he could not publish a new edition of it. . . . In our view the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract."

Congress then codified the Bobbs-Merrill holding in the 1909 Copyright Act which became known as the first-sale doctrine. The current version of the doctrine codified in section 109(a) differs, the Court said, in two ways. First, under current copyright law the exclusive right to "vend" granted to copyright holders has been replaced by the exclusive right to "distribute" - but in Quality King it was noted that nothing turns on this alteration. The second change, is that the first sale doctrine no longer applies to "any copy of a copyrighted work" but only to any copy "lawfully made under this title." And this is where the trouble begins....(picture, left - the AmeriKat with a purchased book that has been "lawfully made under this title", or has it....?)

The Court recognized that there is tension between s.109(a) and s.602(a)(1) in that the latter seeks to give copyright holders broad control over the circumstances in which their copyright works may be imported into the US, and the former which limits the extent to which a copyright may control distribution following an initial sale.

The Supreme Court had their first occasion to consider the interplay of these two provisions in the Quality King Distributors, Inc v L'Anza Research International, Inc. (1998). In that case, L'Anza manufactured and sold shampoos, conditioners and other hair care products. (picture, right - the AmeriKat after her weekday morning shampoo) L'Anza sold its products domestically and internationally, but its prices to foreign distributors were 35% to 40% lower than the prices charged to its domestic distributors. L'anza sued Quality King Distributors after Quality King purchased L'anza's products from one of L'anza's foreign distributors and then reimported the products into the US for re-sale. The Supreme Court heard the case to decide the question of whether the first sale doctrine endorsed in section 109(a) is applicable to imported copies.

In an unanimous opinion, the Supreme Court held that section 109(a) limits the scope of section 602(a). However, the Quality King case was concerned with goods manufactured in the US, not goods manufactured abroad. Justice Ginsburg also noted that this distinction

"This case involves a 'round trip' journey, travel of copies in question from the United States to places abroad, then back again. I join the Court's opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad."

Although, as stated above, the Supreme court did not address the question whether section 109(a) can apply to items manufactured abroad, the decision did contain instructive dicta. For example, the Supreme Court "took pains" to explain the ways in which the two provisions overlap and suggested that copyrighted material manufactured abroad cannot be subject to the first sale doctrine contained in section 109(a) as shown by their example below:

"If the author of the work gave the exclusive U.S. distribution rights–enforceable under the Act–to the publisher of the U.S. edition and the exclusive British distribution rights to the publisher of the British edition, however, presumably only those made by the publisher of the U.S. edition would be “lawfully made under this title” within the meaning of §109(a). The first sale doctrine would not provide the publisher of the British edition who decided to sell in the American market with a defense to an action under §602(a) (or, for that matter, to an action under §106(3), if there was a distribution of the copies)."

In Omega v Costco the Supreme Court was poised to turn this dicta into a holding, but the case law was not advanced after the Supreme Court was split equally. Without any further guidance from the Supreme Court the Court of Appeals had to consider the extent to which section 109(a) applied to items manufacture red abroad.

Click here for Part II 's discussion on the Court of Appeals decision.

Singing the White Shark Grey Goods Blues ...

Great White Sharks can be pretty scary ...

From the IPKat's Australian friends at Allens Arthur Robinson comes news of a recent decision that might appeal to his trade mark readers.  It's Sporte Leisure Pty Ltd v Paul's International Pty Ltd (No 3) [2010] FCA 1162, of 20 October 2010.  In this dispute Nicholas J, in the Federal Court of Australia, held that Paul's Retail infringed some 'Greg Norman' registered trade marks held by Great White Shark Enterprises (GWSE) -- even though the allegedly infringing merchandise was made by and bought from an authorised licensee.  Readers will instantly sense the problem here -- parallel importation.  The judge rejected Paul's Retail defence under section 123(1) of the Trade Marks Act 1995 (consent of the trade mark owner) because the licensee of the trade marks was not allowed to sell the goods it made outside the Union of India without consent and knew in advance that the goods made for Paul's Retail were to be sold outside India.

There are three key points to appreciate here:

1. According to the judge, when the registered owner of a trade mark consents to another person applying that mark to goods on condition that those goods must not be supplied outside a designated territory, the trade mark owner is not usually regarded as having consented to the application of the mark to goods which the other person knows, when the mark is applied, are to be supplied outside the territory. However, this a principle may be restricted to the specific facts of this case, because the evidence demonstrated that the licensee only made the goods after receiving a purchase order for them which was to be delivered outside the territory. It is not clear if the same conclusion would apply if the licensee was unaware of the destination of the goods or if the order was met from an existing stockpile.

2. In considering the authorities and concluding that the sole director of Paul's Retail, Paul Dwyer, was not liable for trade mark infringement as a joint tortfeasor, the Court considered that if a director is to be liable as a joint tortfeasor, something more than a finding that the director caused or directed his company to perform infringing acts is required. The extent of the director's personal involvement and his state of mind is important.  Whether the director held an honest belief that the acts which he directed or procured were not unlawful is also a significant (and, in this case, decisive) consideration.

3. Obiter, the court rejected Paul's Retail's submission that there is an onus on GWSE to show that the consent defence under section 123 of the Act does not apply. As a matter of construction, because section 123 of the Act creates an exception to infringement, the burden of proof lies on the person invoking the section.  However, in certain circumstances, it may take little for the evidential burden to shift to the registered owner.

... but the IPKat is not
easily intimidated

So now you know.  Says the IPKat, in the European Union -- where trade mark enforcement cannot be separated from principles of competition law and protection of the integrity of the single market -- the burden of proof of consent to marketing trade mark-protected goods is a complex issue. In Case C-244/00 Van Doren + Q GmbH v Lifestyle + Sportswear Handelsgesellschaft mbH [2003] ETMR 75, the Court of Justice of the European Communities (as it then was) fixed the burden of proof on the alleged infringer, unless that party could demonstrate that the effect of that burden was to enable the trade mark owner to partition the single market, in which case the burden would shift to the trade mark owner.  The Australians have spared themselves this horror, but there still seem to be some grey areas in grey area consent, as the comments on this decision show.

Great White Shark here
Great White Sharks here
Great White Shark recipe here
Three Little Fishes here [not-to-be-missed performance by Frankie Howerd]