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First Sale Doctrine

Aug 29, 2019 | Firm News

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In 2013, the United States Supreme Court heard the case of Kirtsaeng v. John Wiley & Sons, Inc., which involves the application of the copyright laws to the time-honored American tradition of buying cheap and selling dear.

The facts in Kirtsaeng were straightforward. A foreign graduate student studying mathematics at USC realized one day that he could buy educational textbooks in his home country – in English – at a fraction of the price the publisher was selling them for in the United States. He decided to capitalize on this price disparity by having his friends and relatives back home buy up a large number of the textbooks for him, which he then proceeded to sell on eBay (to U.S. students) as a means of financing his education. His project succeeded beyond his wildest dreams, and by some accounts (e.g., trial testimony) Kirtsaeng managed to pocket $900,000 before the publisher caught wind of what was going on and filed suit to enjoin this gross application of the “buy low, sell high” principle.

The theory behind the publisher’s lawsuit was that Kirtsaeng has violated Section 602(a) of the Copyright Act, which provides in pertinent part 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 [of the work] [subject to certain exceptions not relevant here].

In essence, Wiley asserted that it may sell the same textbook in Singapore for $10 that it sells in the United States for $50, and that no enterprising U.S. student should ever be permitted to go buy in bulk in Singapore and give his fellow students a price break. The tension created by the argument is the typical one heard when artificial regional (or international) price barriers have been erected:  i.e., the publisher claims that it is entitled to price as it sees fit in every separate jurisdiction according to what the market will bear, and the end-users claim that this is simple price-gouging. While the argument is not quite as simplistic as that – particularly since Section 109(a) of the Copyright Act allows the owner of a copy “lawfully made under this title” to resell it without the copyright holder’s permission – Wiley’s position had far-reaching implications that it glossed over, and that we would be foolish to ignore in this increasingly international internet age, where consumers can order virtually anything, from anywhere, at the click of a button.

Let us begin with the basic premise that most Americans like to buy things cheap. We are a nation of coupon clippers and sales shoppers, descending like starving models on Nordstrom the day after Thanksgiving and ruthlessly scouring the Gap for deals at our local mall. Our culture has given rise to Costco, Wal-Mart, and Home Depot, where buying in bulk and do-it-yourself are de facto credos of the enlightened self-enabled. In a nation of consumers, we have a plethora of websites dedicated to finding the best deals on everything, from travel (Expedia) to shoes (Zappos) to golf (Golfnow) to books (Amazon), and on and on as far as the mind can see. If you can conceive of a mechanism by which something can be compared, it is entirely likely that someone has developed an app around the concept. The present economic climate has resulted in the creation of applications such as GasBuddy, so that we can locate the cheapest gas within a five-mile radius, and PriceGrabber, so that we can comparison shop for Barbie dolls, bar mitzvahs and barbeques, among other things.

This is unsurprising, and a simple recognition that capitalism rewards those who understand how to save money. It is a hallmark of industry to be thrifty, to be frugal, and to make the best use of one’s capital. Companies move labor offshore and wealthy Americans travel to Germany to buy BMWs for exactly the same reasons:  to save money. And it is no great secret that everyone – rich, poor, or in between – likes to save money.

The case of Kirtsaeng v. Wiley is more than the simple vindication of the right to profit, however; it is more than a dispute over whether Kirtsaeng unfairly profited at Wiley’s expense, or whether Wiley artificially inflated prices to increase its own profits. The Supreme Court case concerned the “first-sale” doctrine in copyright law. In simple terms, the doctrine means that you can buy and sell the things you purchase. Even if someone has copyright over some piece of what you own, you can sell it without permission from the copyright holder because the copyright holder can only control the “first-sale.”

To use a classic example, suppose you buy Michael Connelly’s murder mystery, The Drop. Connelly owns the copyright to the book, so you can’t make a copy of it, but you own the book, and can sell your copy (or give it away) to anyone you like. You can donate it to the library, sell it on Amazon’s reseller page, or on eBay, or wander over to your local used bookstore and see if they want to take it off your hands. Since you bought a copy of the book, you can sell your copy to anyone who will pay you for it.

But the first sale rule doesn’t just make it possible to sell your books and other creative works (e.g., CDs, DVDs, art). In 1998, the Supreme Court ruled that the first-sale doctrine applies to any product manufactured and sold in the United States which bears copyrighted material (e.g., a label), even if the first sale by the copyright holder was abroad and the item was imported back into the United States. See Quality King v. L’anza Research Int’l, 523 U.S. 135 (1998).

The proper scope and application of the rule, however, has been in flux since 2010, when an equally divided Supreme Court affirmed the Ninth Circuit’s application of the first-sale doctrine in Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 990 (9th Cir. 2008). That decision, while not binding outside of the Ninth Circuit, is controversial because the appellate court found that the first sale doctrine did not apply to foreign-made goods, and barred Costco from buying Omega watches in the Philippines as a means of undercutting Omega’s preferred pricing in the United States.

With the Supreme Court’s decision in Kirtsaeng, we now have much-needed clarity, as under the Ninth Circuit’s current interpretation of the first sale doctrine, an argument could be made that you cannot re-sell that car you bought in Germany and imported to the U.S., or that book you bought in Paris when you were trying to get out of the rain, or that CD by your favorite band that you bought legally in the UK but was never released here. The implications for our culture if this is the rule are wide-ranging, as it creates a perverse incentive for manufacturers to take all production offshore, since their permission would have to be sought (and presumably a fee paid) for any re-sale of those commodities we commonly refer to as our own. Without raising the specter of the boy who cried wolf, this would be an absurd result to impose on the nation, and contrary to our basic notions of what it means to own property – whether it be watches, textbooks, or anything at all.

Thankfully, the Supreme Court agreed with Kirtsaeng, and we can rest easy. As long as the goods you’re selling aren’t illegal to sell or possess, you can sell what you bought anywhere, anytime, to anyone.