Implications of Kirtsaeng for the Future Protection of U.S. Patents Reviewed by Momizat on . Copyright Protection and the “First-Sale” Exception In 1997 Supap Kirtsaeng, a citizen of Thailand, moved to the United States to study mathematics at Cornell U Copyright Protection and the “First-Sale” Exception In 1997 Supap Kirtsaeng, a citizen of Thailand, moved to the United States to study mathematics at Cornell U Rating: 0
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Implications of Kirtsaeng for the Future Protection of U.S. Patents

Copyright Protection and the “First-Sale” Exception

In 1997 Supap Kirtsaeng, a citizen of Thailand, moved to the United States to study mathematics at Cornell University. He paid for his education with the help of a Thai Government scholarship which required him to teach in Thailand for ten years on his return. Kirtsaeng successfully completed his undergraduate courses at Cornell, successfully completed a PhD program in mathematics at the University of Southern California, and then, as promised, returned to Thailand to teach. While he was studying at Cornell, Kirtsaeng asked his friends and family in Thailand to buy copies of foreign edition English-language textbooks at Thai book shops, where they sold at low prices, and mail them to him in the United States. Kirtsaeng sold these books and kept the profit. In 2008 Wiley brought a federal lawsuit against Kirtsaeng for copyright infringement. Wiley claimed that Kirtsaeng’s unauthorized importation of its books and his later resale of those books amounted to an infringement of Wiley’s §106(3) exclusive right to distribute as well as §602’s related import prohibition. 17 U.S.C. §§106(3) (2006 ed.), 602(a) (2006 ed., Supp. V). See also §501 (2006 ed.) (authorizing infringement action). Kirtsaeng replied that the books he had acquired were “‘lawfully made’” and that he had acquired them legitimately. Thus, in his view, §109(a)’s “first-sale” doctrine permitted him to resell or otherwise dispose of the books without the copyright owner’s further permission. This article discusses the U.S. Supreme Court’s opinion in this controversy.

patent-rightsOverview

A spectre is haunting U.S. patent law protection—the spectre of Kirtsaeng.  In 2013 the U.S. Supreme Court handed down a landmark ruling in Kirtsaeng v. John Wiley Sons, Inc. (Kirtsaeng), which held that a copyright owner’s rights to sue for infringement were finite and exhaustible under the so-called “first-sale” doctrine.

The “first-sale” doctrine was first recognized by the Court in 1908 (in Bobbs-Merrill Co. v. Strauss) and statutorily encoded by Congress in 1976.  This doctrine states that a knowing buyer of a copyrighted good may lawfully dispose of it however he or she chooses without impinging on the distribution interests of the original copyright holder.  Although the Court tailored the Kirtsaeng ruling specifically to the geographic reach of U.S. copyright law,[1] all the while treading carefully to avoid applying similar limitations on U.S. patent rights protection, Kirtsaeng’s exhaustion implications continue to loom large in the minds of patent community stakeholders.

Case Analysis

In Kirtsaeng, the U.S. Supreme Court concluded that copyrighted products lawfully made and sold abroad can be imported and resold here at home.  That ruling in some sense augured by the Court’s Quality King decision in 1998,[2]reversed the Second Circuit, which in 2011 upheld the trial court’s judgement finding Supap Kirtsaeng (Defendant), a former Cornell University student who had engaged in unlicensed U.S. resale of Thailand-imported textbooks, liable for infringement.  The lower court eventually awarded John Wiley & Sons, Inc. (“Wiley” or “Plaintiff”), a U.S. textbook publisher, total statutory damages of $600,000 (or $75,000 per infringed title).

According to Justice Breyer, who wrote for the majority, neither the statutory language nor the legislative and common law history of the first-sale doctrine, a legal principle codified in §109(a) of the 1976 U.S. Copyright Act, supported Wiley’s position that unauthorized importation of foreign-made textbooks for U.S. domestic distribution constituted copyright infringement.

We ask whether the “first-sale” doctrine applies to protect a buyer or other lawful owner of a copy (of a copyrighted work) lawfully manufactured abroad.  Can the buyer bring that copy into the United States (and sell it or give it away) without obtaining permission to do so from the copyright owner?…In our view, the answers…are, yes.  We hold that the “first-sale” doctrine applies to copies of a copyrighted work lawfully made abroad.

Put simply, the power to sell copyrighted “gray-market goods”—that is, goods that are sold in one market and are later imported and resold in another without the original owner’s consent—is not the power to infringe.

Wiley argued (among other things) that Defendant’s arbitrage—the practice of buying low in one market and selling high in another, and netting the difference as profits—would hobble, severely and cripplingly, to the detriment of consumers’ welfare, publishers’ ability to divide foreign and domestic markets, and set price differentials.[3]  Further, Wiley suggested that if the Court were to adopt Defendant’s “nongeographical” interpretation of the first-sale doctrine, under which copyright holders would have less latitude to sue in U.S. courts, then U.S. copyright law would be launched into “unprecedented regime of ‘international exhaustion’.”  As noted by Gautam (2014):[4]

The importance of this geographic scope of the first-sale doctrine springs from the desire of copyright-holding suppliers, such as John Wiley Sons, to effect geographic price discrimination—the practice of charging different prices for identical products based on the geographic region in which the sale occurs—with a view toward increasing profits.

Six Justices disagreed with Wiley.

In granting first-sale protection to foreign imports of copyright-protected goods, the Court interpreted a key phrase in §109(a)—“lawfully made under this title”—to mean that there were extraterritorial limits to U.S. copyright protection.  So construed, the Court was led to reject Wiley’s contention that resale of foreign-made copyrighted books by unauthorized importers “amounted to an infringement of Wiley’s…exclusive right to distribute” and import.  As Justice Breyer reasoned:

A geographical interpretation would prevent the resale of, say, a car, without the permission of the holder of each copyright on each piece of copyrighted automobile software.  Yet there is no reason to believe that foreign auto manufacturers regularly obtain this kind of permission from their software component suppliers…A geographical interpretation would subject many, if not all, of them to the disruptive impact of the threat of infringement suits.  (Emphasis added).

What is noteworthy here is Justice Breyer’s slippery-slope argument.  To the Court, the most natural interpretation—linguistic, contextual, and statutory—of §109(a)’s five-word phrase does not recognize an absolute ownership of copyrighted works.  But, even if it does, the consequences would be far too grave to permit, for it would open a Pandora’s Box of frequent, frivolous, financially crushing litigation.  Therefore, the Court concluded, the first-sale doctrine does not prohibit lawful buyers of a copy (of a copyrighted work) from disposing of it as they see fit—by lending, renting, or selling it to anyone anywhere without the permission of the copyright holder.

This drew the ire of Justice Ginsburg, with whom Justice Scalia and Justice Kennedy joined in forceful dissent.  Scolding the Court’s majority, Ginsburg scoffed at the “imaginary” and “absurd” “parade of horribles” predicted in the Breyer opinion, writing:

If, as the Court suggests, there are a multitude of copyright owners champing at the bit to bring lawsuits against libraries, art museums, and consumers in an effort to exercise perpetual control over the downstream distribution and public display of foreign-made copies, might one not expect that at least a handful of such lawsuits would be filed over the last 30 years?  The absence of such suits indicates that the “practical problems” hypothesized by the Court are greatly exaggerated.

Justice Breyer’s reasoning in Kirtsaeng appears to place the Court on a collision course with the Jazz Photo precedent established by the Federal Circuit.  In 2001 the Federal Circuit held in Jazz Photo v. International Trade Commission that sales of “products of foreign provenance” did not terminate all U.S. patent rights.  The Federal Circuit would adopt this position in Fuji Photo Film v. Jazz Photo in 2005 and reaffirm it in 2012, in Ninestar Technology v. International Trade Commission.  Although the Supreme Court has not directly addressed international exhaustion of U.S. patent rights since 1890 (in Boesch v. Graff) and has remained relatively reticent on the issue for over a century,  it is hard to see how the Court can go on avoiding venturing into this minefield in light of the Federal Circuit’s recent  decision in Lexmark v. Impression Products (Lexmark).

In Lexmark the Federal Circuit was asked to decide en banc whether an initial authorized sale of a patented article overseas terminates, or exhausts, the patentee’s exclusive rights to distribute.  The Federal Circuit majority’s answer, we learn, was no:

Kirtsaeng is a copyright case…There is no counterpart of that provision in the Patent Act, under which a foreign sale is properly treated as neither conclusively nor even presumptively exhausting the U.S. patentee’s rights in the United States.[5]

Judge Timothy Dyk, who wrote the Lexmark dissent, joined by Judge Todd Hughes, “agree[d] with the majority that…due to the differences between copyright and patent law,” Kirtsaeng and Jazz Photo were not doctrinally comparable.  Nevertheless, Judge Dyk “think[s] that Kirtsaeng provides significant guidance and cannot be dismissed as simply a copyright case, or as limited to the ‘first-sale’ provision of the Copyright Act [of 1976].”[6]  Calling for an “accommodation between the interests of the rights of holder and the unsuspecting buyer,” Judge Dyk concluded:

I would…overrule Jazz Photo to the extent that it imposes a blanket ban on foreign exhaustion.  I would recognize foreign exhaustion where the U.S. rights holder has not notified the buyer of its retention of the U.S. patent rights.[7]

The Federal Circuit’s conflicting opinions in Lexmark means that the Supreme Court will be forced to intervene, probably within the next year, to settle the uncertainty and competing interpretations of Kirtsaeng as it relates to a patentee’s U.S. rights to control importation and domestic resale of U.S.-patented products sold abroad.

 

Conclusion

At the heart of any discussion on U.S. patent rights protection lurks the shadows of Kirtsaeng.  Like some flesh-eating zombie that rises from the grave and prowls the street on a feasting night, terrorizing the patent owners of America and their attorneys, Kirtsaeng refuses to stay buried.  It haunts U.S. patent law because of its implications for the future protection of U.S. patent rights.

In the era of globalization, as goods are flowing across ever-more porous and permeable national borders with increasing frequency, rapidity, and volume—and as e-commerce giants like Amazon and eBay are knitting together far-flung markets by virtually eliminating transaction costs, like search, coordination, and transportation, that were once barriers to parallel trade (arbitrage)—the Court’s final say on international patent exhaustion will reverberate across resellers’ markets everywhere.  Should the Court side with the Federal Circuit’s majority in Lexmark, owners of lawfully purchased U.S. patent-protected goods will be forced to negotiate terms of contract with patent holders in order to mitigate or obviate infringement risk and liability for downstream sales and distributions.  The costs associated with such negotiation can potentially inhibit future value-adding resellers or kill off current ones, leaving consumers with a narrower selection of products and prices.  Ultimately, it is the consumers who will lose if the Federal Circuit’s Lexmark ruling were to prevail at the Supreme Court.

[1] Following Kirtsaeng, the Court addressed the patent exhaustion question in a separate case, in Bowman v. Monsanto Co.  In Bowman, the Court addressed whether a person can lawfully replant and re-harvest patented genetically modified soybeans without the patent owner’s permission, and concluded unanimously that he cannot under the patent exhaustion doctrine See Bowman v. Monsanto Co. et al., No. 11-796 (U.S. decided May 13, 2013).

[2] See Quality King Distributors, Inc. v. L’Anzaresearch International, Inc., No. 96-1470 (U.S. decided May 9, 1998).  For a brief discussion of Quality King within the context of Kirtsaeng, See Sandra Yoo’s “Determining Rights to Resell: Kirtsaeng v. John Wiley & Sons.” (http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1095&context=djclpp_sidebar, accessed July 31, 2016).

[3] For a fuller argument, see Testimony of Stephen M. Smith, President and Chief Executive Officer, John Wiley & Sons, Inc. before the Subcommittee on Courts, Intellectual Property and the Internet of the U.S. House of Representatives Committee on the Judiciary hearings on “First-Sale under Title 17” (2 June 2014).

[4] Gautam, S. Zubin. “The Murky Waters of First-Sale: Price Discrimination and Downstream Control in the Wake of Kirtsaeng v. John Wiley Sons, Inc.” Berkeley Technology Law Journal 29, no. 11 (2014): 717-758.  http://dx.doi.org/doi:10.15779/Z38ZX2R  (accessed December 13, 2015).

[5] See Lexmark International, Inc. v. Impression Products, Inc. (Fed. Cir. 2016)  at http://www.finnegan.com/files/Publication/39e12032-91c8-4f8e-ae77-f58111271ad2/Presentation/PublicationAttachment/16b43f10-a490-439b-9db5-f6c7b97d42e4/14-1619%2002-12-16.pdf, accessed September 19, 2016.

[6] Ibid., 26.

[7] Ibid., 30.

Huy Q. Dang, MA, is an Associate Analyst with NERA’s San Francisco Intellectual Property Practice Group.
Mr. Dang can be reached at: (415) 291-1039 or by e-mail to: Huy.Dang@nera.com.

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