Changes Ahead in U.S. Copyright Statutory Damages Law

The U.S. Department of Commerce’s Internet Policy Task Force  (the Task Force), which is led by both the U.S. Patent and Trademark Office (USPTO) and the National Telecommunications and Information Administration (NTIA), published on January 28 a  White Paper on Remixes, First Sale, and Statutory Damages which addresses three issues:

1)      the legal framework for the creation of remixes;

2)       the relevance and scope of the first sale doctrine in the digital environment; and

3)      the application of statutory damages in the context of individual file-sharers and secondary liability for large-scale online infringement.

The Task Force had published a Green Paper, “Copyright Policy, Creativity, and Innovation in the Digital Economy” on July 31, 2013, which had identified these three issues warranting further review by the Task Force.  

The Task Force then published a Notice in the Federal Register seeking comment on these issues. It conducted a public meeting in December 2013 and also held roundtables around the U.S., before reviewing comments from stakeholders as diverse as rights holder organizations, Internet-based companies, public interest groups, libraries, academics, and individual authors and artists.

Remixes

Remixes use existing works, some of them still protected by copyright, to create new works, which may be compilations or derivative works under the Copyright Act, or collective works.  As noted by the Task Force, user generated content (“UGC”) “has become a hallmark of the Internet” (p.6).

Some of the remixes, such as fan fiction and fan videos, are created by non-professionals, while others, such as music mashups, are created by professionals and may even be sold. Several stakeholders noted that “the lines between amateur and professional, and between noncommercial and commercial, are often blurred” (p. 7). Others noted that “noncommercial activities can cause harm to the market for the original work or for licensed derivative works” (p.8).

Some remixes are fair use, some are not, and determining what is fair use or not is not easily determinable, even by attorneys or by courts, as noted by some stakeholders (p.10). The Copyright Office maintains an online fair use index to help determine whether a particular use may be fair or not, but this tool alone does not provide an absolute determination of whether a particular use is fair or not.

The Task Force did not believe that a compulsory license, such as the one provided by section 115 of the Copyright Act for phono records, would be advisable. At the time this compulsory license was enacted, one company had the monopoly on the piano roll market, and the Task Force has not seen evidence that a similar monopoly exists today for remixes or their licensing.

Also, such compulsory licenses would allow the creation of derivative works, whereas statutory licenses now only permit reproducing, distributing, and public performance of the licensed work, without alteration (p. 26). While the Task Force acknowledged that remixes are “valuable contributions to society… the record has not established a need to amend existing law to create a specific exception or a compulsory license for remix uses” (p. 4).

Instead, the Task Force recommends three goals to be pursued so that remixers would understand when a use is fair or not, and to understand how to obtain licenses.

These three goals are:  

1.       developing negotiated guidelines which would provide greater clarity as to the application of fair use to remixes;

2.       expanding the availability of a wider variety of voluntary licensing options; and

3.       increasing educational efforts aimed at broadening an understanding of fair use.

The guidelines could be developed independently or with the collaboration of the government (p. 28) and should be written in language easily understandable by the general public (p.29). The White Paper notes that such guidelines already exist, such as the Principles for User Generated Content Services which aims at “foster[ing] an online environment that promotes the promises and benefits of UGC Services and protects the rights of Copyright Owners.”

As licensing would remain voluntary, authors and rights holders would have the option to refuse granting a license, “especially when the prospective licensee is seeking permission for a use that the author or rights holder considers offensive” (p. 30).

A stakeholder gave the example of the Beatles Hey Jude song used to create an Anti-Semitic work (see note 44 of the White Paper). But such hateful use would probably be fair use, and protected by the First Amendment. Only granting authors a moral right would allow them to bar every use they find offensive. By the way, what is “offensive”?  The Beatles example would be considered offensive by many, if not all, but what about use of a protected work to comment on issues where opinions diverge more, such as political opinions?

First Sale Doctrine

The Task Force noted that works distributed online are often licensed, not sold, and “this could make the resale market obsolete” (p. 35). Some stakeholders noted that the contractual terms of such licenses are often “opaque” (p.39).

Libraries expressed concerns that their use of digital works may be limited, including eBook library loans (p. 47). Indeed, libraries may only lend books thanks to the first sale doctrine, but the Task Force believes that “early government intervention into the eBook market could skew the development of innovative and mutually beneficial arrangements” between eBook publishers and libraries. However, this may change if libraries are not able to “appropriately serve their patrons due to overly restrictive terms imposed by publishers” (p.4).

In order to preserve the first sale doctrine in the online environment, the Task Force believes it is not advisable to extend the first sale doctrine to digital transmissions of copyrighted works, because of the risks that would cause to copyright owners’ primary markets. 

The Task Force noted that digital works are offered at lower prices than the hard copies of the works and thus deliver the benefit offered by the first sale doctrine to consumers who may purchase used books and used copies of protected works at a lower price (p.58).

While consumers are not allowed to resell their digital copies, “[i]t is difficult… to determined the value of this lost benefit” as the Task Force does not have “sufficient data to conduct an authoritative  cost-benefit analysis of the trade-offs between the consumer benefits from the first sale doctrine and from licensed online services”(p. 59).

So U.S. law is not (yet) ready to authorize the resale of digital goods.  

Statutory Damages

Statutory damages have been applied against individuals sharing files online and against online services found to be secondarily liable for such infringements. Remix artists often refrain from using a protected work, even they believe their use is fair, as fair use can not be accurately predicted and “the threat of high statutory damages can stifle lawful activity” (p.33). Some stakeholders also argued that statutory damages have a chilling effect on innovation and investment (p.80), an assessment disputed by some right holder groups (p. 81).  

Statutory damages have also allowed the development of a noxious “business model” of massive copyright infringement suits (aka copyright trolls), which abuse the litigation process by filing hundreds of boilerplate copyright infringement suits, using the subpoena power of the courts to find the identity of Internet users. These suits are, however, rarely litigated, but instead are settled after intimidating correspondence (p. 74).

The Task Force recommends three amendments to the Copyright Act so that the needs of copyright owners, users, and intermediaries may be better balanced:

First, the Task Force recommended that Congress add a new paragraph in Section 504 of the Copyright Act to provide a list of factors for courts and juries to consider when determining the amount of a statutory damages award. It proposed the insertion of this new clause in subsection Section 504(c): (p.87)

FACTORS TO CONSIDER -- In making any award under this subsection, a court shall consider the following nonexclusive factors in determining the appropriate amount of the award:

(1) The plaintiff’s revenues lost and the difficulty of proving damages.

(2) The defendant’s expenses saved, profits reaped, and other benefits from the infringement.

(3) The need to deter future infringements.

(4) The defendant’s financial situation.

(5) The value or nature of the work infringed.

(6) The circumstances, duration, and scope of the infringement, including whether it was commercial in nature.

(7) In cases involving infringement of multiple works, whether the total sum of damages, taking into account the number of works infringed and number of awards made, is commensurate with the overall harm caused by the infringement.

(8) The defendant’s state of mind, including whether the defendant was a willful or innocent infringer.

(9) In the case of willful infringement, whether it is appropriate to punish the defendant and if so, the amount of damages that would result in an appropriate punishment.

The Task Force explained that these factors “should be weighted holistically” (p. 88).

Secondly, the Task Force recommended amending Section 401(d) and 402 (d) of the Copyright Act to expand eligibility for the lower “innocent infringement” statutory damages awards (p. 97).

Thirdly, the Task Force recommended giving courts discretion to assess statutory damages other than on a strict per-work basis in cases of non-willful secondary liability for large scale online services (p. 97).

Small Claims Tribunal

The Task Force is also in favor of establishing a small claims tribunal, as it believes this “could help diminish the risk of disproportionate levels of damages against individual file-sharers” (p.5). This has been proposed by the Copyright Office itself.

The tribunal would be centralized, in a single location, and would provide for a cap on awards of both statutory and actual damages. There would be limited discovery and counterclaims, and all relevant defenses could be asserted, including fair use. Also, it would not be mandatory to be represented by an attorney, and the tribunal could award costs and fees against frivolous litigants (p. 99). This is a very interesting proposal and I hope it will be implemented soon. 

Omega attempt to block resales falls foul of the first sale doctrine - and possibly copyright misuse too

In the U.S. the 9th Circuit Court of Appeals has ruled that watchmaker Omega's attempt to use copyright laws to block the sale of Omega watches at discounted prices Costco will just not work.

By way of background, Costco had bought a quantity of Omega watches intended for sale in Europe, not the US. Costco then imported those watches into the USA and put them on sale in its stores, discounting the prices Omega itself normally sells its watches at. Omega, in an attempt to block this, had inscribed a tiny globe on the back of the watch,  a copyrighteded image, and sued Costco for infringement.

The case was first fought on 'first sale' grounds, with the 9th Circuit originally siding with Omega, wo had argued that because the globe wasn't "lawfully made under this title" (because it was made in Europe, not under US law), "first sale" rights didn't apply. The case went up to the Supreme Court which ended in a 4-4 tie, because Justice Kagan didn't sit (as she had filed an amicus brief in the case while she was Solicitor General). The case then went back down to the District Court to determine whether or not it was still copyright misuse, even if first sale wasn't an issue.

The District Court agreed that it was a misuse of copyright.  Omega appealed (of course) and now the 9th Circuit has sided with the lower court, by revising its first sale opinion, thanks to the intervening Kirtsaeng ruling in the Supreme Court - which found that textbooks and other goods made and sold abroad could be re-sold online and in discount stores in America without violating U.S. copyright law.

In reviewing the current case, the 9th Circuit amended its original opinion,a nd followed Kirtsaeng, finding that Costco's actions fell within the First Sale doctrine:

It is clear, then, that Omega has no infringement cause of action against Costco. Omega’s only allegation is that Costco violated Omega’s copyright-based importation and distribution rights by selling gray market watches without a prior authorized first sale in the United States. Omega concedes that it authorized a first sale of the watches in a foreign jurisdiction. Omega’s right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement. Kirtsaeng, 133 S. Ct. at 1366; 17 U.S.C. § 109(a). Thus, application of the first sale doctrine disposes of Omega’s claim, resolves this case in Costco’s favor, and conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market.

The copyright misuse claim did not really feature: However, in a concurring opinion, Judge Wardlaw said that copyright misuse would apply, even if the First Sale doctine didn't:

The district court correctly held that Omega misused its copyright “by leveraging its limited monopoly in being able to control the importation of [the Globe Design] to control the importation of its Seamaster watches.” The district court did not clearly err in finding that: (1) Omega copyrighted the Globe Design, at the advice of its legal department, to control the importation and distribution of Omega watches into the United States; and (2) Omega told its authorized distributors that the purpose of suing Costco was to “stem the tide of the grey market” and the “unauthorized importation of Omega watches into the U.S.” In other words, Omega attempted to use the copyrighted Globe Design to decrease competition in the U.S. importation and distribution of its watches by it and its authorized dealers—an obvious leveraging of a copyright to control an area outside its limited monopoly on the design. 

Omega argues that its anti-competitive motives are irrelevant to the issue of copyright misuse. According to Omega, our inquiry should instead focus on the copyright holder’s objective conduct or use. But Omega’s semantic hairsplitting is unpersuasive. By definition, “use” includes an inquiry into purpose.... However, we need not decide whether Omega’s motives are sufficient to establish copyright misuse. The undisputed record shows that before this lawsuit consumers were able to a buy a genuine Omega Seamaster watch from Costco for 35% less than Omega’s suggested retail price. This is no longer the case. Thus, at least one consequence of Omega’s lawsuit has been a reduction of intrabrand price competition for uncopyrightable Omega watches in the United States.

Later noting:

The Copyright Office granted Omega the exclusive right to control the importation and distribution of the Globe Design into the United States. It did not empower Omega to restrict competition from unauthorized retailers selling genuine, gray market Seamaster watches in the United States. Although the Globe Design engraved on the underside of the Seamaster watches was copyrighted, Omega misused its copyright when it used its intellectual property protection to obtain a copyright-like monopoly over uncopyrightable Seamaster watches.... Omega’s expansion of its copyrightlike monopoly eliminated competition from unauthorized watch retailers like Costco, thereby allowing Omega to control—through its exclusive distributor, Swatch U.S.A.—the retail pricing of Seamaster watches sold in the United States. If the copyright law allowed Omega to use its copyright to combat the importation and sale of all gray market watches that are stamped with the Globe Design, it would effectively grant Omega a copyright-like monopoly over the distribution and sale of Omega watches in the United States. Because such an outcome directly controverts the aims of copyright law, it is impermissible.

And, finally, it concludes:

“The limited scope of the copyright holder’s statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts.” Twentieth Century Music Corp., 422 U.S. at 156 [footnote omitted]. Omega’s attempt to expand the scope of its statutory monopoly by misusing its copyright in the Globe Design upset this balance. The watchmaker’s anticompetitive acts promoted neither the broad public availability of the arts nor the public welfare. Instead, they eliminated price competition in the retail market for Omega watches and deprived consumers of the opportunity to purchase discounted gray market Omega watches from Costco. Omega misused its copyright by engraving the Globe Design on the underside of its watches, and attempting to use copyright law to eliminate intrabrand competition from Costco in the retail watch market. Because the District Court correctly held that Omega misused its copyright in the Globe Design by attempting to leverage its limited monopoly over the design to control the importation and sale of Seamaster watches, I would affirm the District Court on the issue of copyright misuse.

Some would like to gave seen more on misuse: Writing on TechDirt,  Mike Masnick opines: "While I understand why the majority ruling just went with the easy out with First Sale, it's too bad that this concurring ruling isn't the majority ruling, as we could use more useful opinions like this one when it comes to copyright misuse. Either way, kudos to the court for properly recognizing that even if you buy a watch outside the US, you should actually own it, and that copyright law shouldn't be able to get in the way of those property rights."

And more on Gigaom here

Patently interesting developments in the ReDigi case

An interesting update on the ReDigi case: You will remember back in April 2013 Judge Richard Sullivan blocked ReDigi's interesting business model, holding that the first sale doctrine did not apply to digital goods - here music files. In his judgment he said “The novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine. The court determines that it cannot”.  The reason, the judge ruled, is because copying, or an illegal “reproduction” of a music file, must take place, despite ReDigi’s claims to the contrary.   Judge Sullivan added “Because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the internet, the court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act. The judge agreed with the claimant's (Capitol Records) claims that the service was guilty of direct, contributory, and vicarious infringement of Capitol’s reproduction rights, and said ReDigi had no fair-use defence to the infringement as the service was not "capable of substantial non-infringing use"s."

ReDigi had stressed that it “migrates” a file from a user’s computer to its Cloud Locker, so that the same file is transferred to the ReDigi server and no copying occurs. However, even if that were the case, the fact that a file has moved from one material object — the user’s computer — to another — the ReDigi server — meant that the court found that a reproduction has occurred. BUT, and its a big but, according to ReDigi the company has a newly awarded US patent that covers a method for “atomic transaction": a "cloud-based mechanism that instantaneously transfers an ‘original’ good from one owner to the next, without making a copy". Re-Digi had already alerted the World to it's soon to be launched '2.0' version with 'patent pending' technology when it lost the first round court case - well the pending is over and it's here - and it seems ReDigi’s patent also covers a “verification engine: a mechanism that analyzes each digital media file that enters the ReDigi system to ensure that it is legally eligible for resale” along with a “removal and monitoring mechanism: a digital management application that helps sellers identify and ensure personal-use copies of the sold media are removed.” Seemingly this technology took almost five years of research and testing before the United States Patent and Trademark Office granted ReDigi’s patent. will it make a difference? Well, an appeal against Judge Sullivan's ruling is expected by ReDigi, so watch this space!

More on Computerworld including an interview with Re-Digi's John Ossenmacher here

Second hand books: US Supreme Court considers the first sale doctrine

Today the US Supreme Court hears the opening arguments in Kirtsaeng v. John Wiley & Sons Inc., labelled as one of the most important copyright cases of the decade. The case is about whether works manufactured outside the US can be resold in the US without the permission of the copyright owner.



Freefoto.com

The case will deal with two apparently conflicting provisions in the US Copyright Act. Section 602(a)(1) says that (without permission) importation into the US of copies of a protected work is an infringement of the exclusive right to distribute copies under section 106. This protects the copyright owner's importation right.

In practice, this does not prevent parallel imports: indeed the grey market in the US was valued by Deloitte at USD 63 billion in 2009. Importers rely on section 109(a) of the US Copyright Act which says that anyone who buys a work which is "lawfully made under this title" (meaning under the Copyright Act), may re-sell that work without the permission of the copyright holder. This is the first sale doctrine, which is similar to the principle of exhaustion in Europe, both of which aim to allow a second hand market for goods.

In this case Supap Kirtsaeng, originally from Thailand, realised that he could import textbooks from Thailand and sell them in the US, on eBay, at a profit. John Wiley & Sons a textbook publisher noticed that Kirtsaeng was re-selling some of its textbooks. These were editions intended for distribution outside the US. They were of slightly lower quality and were of course sold at a much lower price, enabling Kirtsaeng to make a profit of USD 37,000.

Wiley sued Kirtsaeng for copyright infringement, and the judge at first instance barred Kirtsaeng from relying on the first sale doctrine as the books were manufactured outside the US. The first instance judge found in Wiley's favour and awarded damages of USD 600,000. This was upheld on appeal: the 2nd US Circuit Court of Appeals held that the first sale doctrine was inapplicable because the wording "lawfully made under this title" at section 109(a) referred only to copies manufactured in the US. The case now proceeds to the Supreme Court.

This is not the first time that this issue has reached the Supreme Court: in 2010, it upheld a 9th Circuit decision that the first sale doctrine did not apply to works manufactured outside the US (in relation to Costco's sale of grey market Omega brand watches). Unhelpfully however there was no opinion as the decision was the result of a 4-4 tie.

This time around Kirtsaeng's legal team is arguing that if the appeal is dismissed by the Supreme Court any businesses which rely on resales (such as eBay), as well as second hand cars (containing copyright protected software), second hand bookshops and DVD rentals, and also libraries and museums which acquire works from around the world, will be affected. The Library Copyright Alliance (LCA) filed an amicus curiae brief with the US Supreme Court in support of Kirtsaeng.

Wiley argues however that the court does not need to address what happens to the first sale doctrine in the event of an authorised importation and that it should focus on unauthorised import and sale.

EMI v ReDigi: US digital music resale hearing begins

On Friday the district court in Manhattan, New York, heard opening arguments by EMI that ReDigi's resale of second-hand MP3s infringes copyright.

Readers may remember that back in October 2011, US company ReDigi was launched. ReDigi's business model is based on the resale of digital content, and it bills itself as being the first legal online marketplace for second-hand digital material. At the time Ben commented on the legal issues that arise from the concept in the US, and sure enough the music industry decided to question those issues in court: in January of this year Capitol Records (a subset of EMI) sued ReDigi for copyright infringement.

In February EMI failed to get summary judgment, meaning that the case has proceeded to a full court hearing, which began on Friday. ReDigi is relying on the "first sale doctrine" (which is similar to the principle of exhaustion in Europe) which it argues applies to digital files in the same way that it applies to CDs and cassettes.

EMI claims that the first sale doctrine does not apply to digital files as the only way to move those files is to make duplicates, and there is no guarantee that the original file has been deleted on resale. EMI says that it owns the "exclusive rights" to manufacture, reproduce, distribute and sell digital versions of the copyright protected works of its artists, and refers to agreements signed with authorised services such as Apple's iTunes and Amazon's MP3 in support of its argument.

ReDigi says that EMI's distribution rights are limited to material objects, and if digital files are judged to be material objects it can invoke the first sale doctrine which permits resales.

A secondary claim by EMI is that 30 second clips of songs offered by ReDigi and stored on users' hard drives constitute another act of unauthorised copying. It will be interesting to see what (if any) impact the Supreme Court of Canada's ruling in SOCAN v Bell will have. In that case the Canadian Supreme Court held that 30 to 90 second music clips offered by online music stores such as Apple constituted fair dealing, which is a more narrow exception than fair use in the US.

ReDigi also argues that the songs are only loaded into a computer's RAM memory so that they "disappear" after the track has stopped playing. That sounds to this blogger like an argument that the copies are temporary; an argument which would not succeed in the UK following the Court of Appeal's judgment in NLA v Meltwater (although the Supreme Court may yet find otherwise).

EMI says that given the widespread piracy of sound recordings it is questionable whether ReDigi can effectively determine that digital files have been legally obtained in the first place. To this ReDigi responds that the only files eligible for resale are those originally downloaded from iTunes and that it excludes from its service tracks which have been ripped from CDs or taken from other stores. This method, it says, allows it to use software to validate ownership.

Finally EMI notes that ReDigi has acknowledged that there is no way to ensure that users do not retain copies of the files they upload. Even though ReDigi's software is designed to run "continuously" in the background to detect songs on any device attached to the user's computers at a later date, users could presumably back content up on an external hard drive or other device.

It is not clear what the outcome of the case would be in Europe. The CJEU's recently held, in UsedSoft, that an author of software cannot oppose the resale of his "used" licences allowing the use of his programs downloaded from the internet. The exclusive right of distribution of a copy of a computer program covered by such a licence is exhausted on its first sale.

Indeed, one 1709 blog reader commented at the time: "Very interesting, I expect software companies will respond by simply moving some of the functionality server-side, but it does hold out the intriguing possibility of re-selling used MP3 files in the EU."

Prior to the CJEU's ruling in UsedSoft, downloading digital content was seen as a service and therefore the principle of exhaustion did not apply. Whether UsedSoft changes that analysis, given that MP3 files are not the same as computer programs, remains to be seen.

Google has written a letter to the New York judge making public its "specific and vital interest" in the outcome of the EMI v ReDigi case, which will set an important precedent in the music industry.

US library lending "under threat", says LCA

The Library Copyright Alliance (LCA), which consists of the American Library Association (ALA), the Association of College & Research Libraries (ACRL) and the Association of Research Libraries (ARL), has filed an amicus curiae brief with the US Supreme Court in support of Supap Kirtsaeng in Kirtsaeng v Wiley & Sons (first noted on the 1709 Blog here).

Textbook publisher Wiley claims that Kirtsaeng infringed its copyrights by reselling in the US cheap foreign editions of its textbooks which his family lawfully purchased abroad. The LCA believes an adverse decision in this case could affect libraries’ right to lend books and other materials manufactured abroad. Kirtsaeng maintains that he is entitled to do this under the US equivalent of the European doctrine of "exhaustion of rights", the “first-sale doctrine”. By this provision, anyone who buys a lawful copy of a book or other copyright protected work is entitled to sell or lend that copy. The US Court of Appeals for the Second Circuit ruled that the first-sale doctrine applied only to copies manufactured in the United States. This odd interpretation of the law effectively strips libraries of their first sale right to lend their own copies of works made abroad, says the LCA. In its amicus brief, the LCA asks the Supreme Court to reverse that decision and apply the first-sale doctrine to all copies manufactured with the lawful authorization of the holder of a work’s U.S. copyright.

There's a lot riding on the outcome of this case so far as libraries are concerned, since a significant portion of US library collections is said to consist of resources that were manufactured overseas. More than 200 million books in US libraries have foreign publishers, and many books published by US publishers were actually printed in other countries; these books do not always indicate where they were printed. If a book does not specify that it was printed in the United States, a library would not know whether it could lend it without being exposed to a copyright lawsuit.

Thanks, Chris Torrero, for the link.

More Scrutiny for First Sale

First comes suit, then comes jury, then comes appeal after appeal after appeal.

A defendant previously found liable for copyright infringement has filed an appeal for an en banc rehearing of his last appeal.  A jury found Supap Kirtsaeng was liable for willful infringement of eight copyrighted works belonging to John Wiley and Sons.  Faced with a rather large damages bill ($600,000), Kirtsaeng did the usual thing and appealed.  The Second Circuit affirmed, in a 2-1 majority, the District Court.  Now Kirtsaeng has filed another appeal, asking for an en banc rehearing in the Second Circuit.

Infringing Acts

Kirtsaeng, a Thai student studying in the US, had friends and family ship him books legally printed in other countries but not authorized for importation into the United States.  He then sold those books on eBay, reimbursed his friends and family for their trouble and kept the remainder of the proceeds.  We’re not talking small change here where the books were used for his studies and then sold after the semester.  Kirtsaeng took in somewhere between $900,000 and a million dollars doing this.

First Sale – What does “made under” mean?

The first sale doctrine in the US Copyright Act allows people to resell copyrighted works “lawfully made under this Act.”  The Second Circuit held that “made under” means made domestically and so the reselling copyrighted items made elsewhere is not protected by the first sale doctrine.  This is the same issue that came up in Costco where the Supreme Court upheld the 9th Circuit on a 4-4 split.

The Second Circuit looked at Costco and found it rather unhelpful, being a Supreme Court 4-4 split.  The court also tried to do a statutory analysis of the “made under” clause and decided the statute was rather ambiguous.  In the end, the court’s decision that “made under” means made domestically rests on language from a 1998 Supreme Court case, Quality King Distributors, Inc. v. L’anza Research International and some jockeying with the Copyright Act trying to make sense of the first sale doctrine language (§ 109(a))  in conjunction with part of the Act prohibiting unauthorized importation (§ 602(a)(1)).  Then the court punted:

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.

Kirstaeng’s New Appeal

In his appeal for en banc, Kirstaeng argues that Quality King was misinterpreted and that the Second Circuit’s decision is in conflict with decisions from other Circuits (note: as a matter of legality, this is allowed but it is often grounds for a Supreme Court review of the issue).

Kirstaeng argues that the text of the first sale doctrine is not ambiguous because the Supreme Court found that it was “unambiguous” in Quality King.  Basically, Kirstaeng attempts to show the court’s arguments are really in favor of allowing the first sale doctrine as a defense for imported goods but the court just didn’t want to admit it.

The majority’s opinion conflicts with the text, history, and purpose of the Copyright Act, as well as the Supreme Court’s reading of those sources in Quality King. The opinion’s most remarkable feature, however, is that the majority all but conceded those points. Indeed, it repeatedly expressed deep skepticism about the correctness of its own interpretation. It offered a decision at odds with itself.

We’ll keep you posted if the en banc rehearing is granted.