In light of the U.S. Supreme Court's March 19 decision in Kirtsaeng v. John Wiley & Sons, 133 S. Ct. 1351, companies should review their distribution models and contracts, whether they sell books, music, videos, software licenses or any other products that come with copyrighted labels, or software.
This article is reprinted with permission from the May 2, 2013 edition of The Recorder.
by Lothar Determann
Until recently, companies were comfortable they could prevent unauthorized importation of products containing or bearing copyrighted materials based on U.S. copyright law. Intellectual property rights typically enable companies to time international releases and distinguish prices for different territories or regions (in the Europe for example, EEA-wide exhaustion tends to occur after a first sale of a product in any member state of the EEA, the European Economic Area). The United States has consistently opposed international exhaustion in global trade negotiations. However, in Kirtsaeng the court held that copies of books lawfully made and first sold abroad could be imported into the United States and resold without the U.S. copyright owner's consent.
Supap Kirtsaeng imported books from Thailand and asserted the "first sale doctrine" as a defense when a U.S. copyright owner, John Wiley & Sons Inc., sued him for copyright infringement. Lower courts had rejected the defense based on territoriality considerations: The first sale doctrine did not apply, because the copies were not made in the United States and no authorized first sale had occurred in the U.S. The Supreme Court reversed and found that an authorized first sale outside the U.S. counts, too.
While Kirtsaeng was about books, the Supreme Court examined a variety of factors favoring international exhaustion of the copyright owner's exclusive right of distribution, including the implications for products other than books. The court noted that many products these days contain or come with some copyrighted materials.
"[A]utomobiles, microwaves, calculators, mobile phones, tablets, and personal computers" contain copyrightable software programs or packaging. ... Many of these items are made abroad. ... 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." "The court worries about the resale of foreign-made consumer goods 'contain[ing] copyrightable software programs or packaging."
This ruling could affect other products, including software, particularly if U.S. courts look to foreign law to determine whether an importer or reseller owns a particular software copy for purposes of U.S. copyright law. For decades, software companies have stressed that they only license — never sell — software copies and that the first sale doctrine cannot apply to software copies that the copyright owner never sold. In the United States, software companies have largely prevailed with this position, but not everywhere else (See "Don't Judge a Sale by its License: Software Transfers Under the First Sale Doctrine in the United States and the European Community," Lothar Determann and Aaron X. Fellmeth, 36 U.S.F. L. REV. 1 ).
The EU Court of Justice, for example, has recently held in Oracle v. Usedsoft that transactions by which the user of a "copy receives, in return for payment of a fee, a right to use that copy for an unlimited period ... involve the transfer of the right of ownership of the copy of the computer program in question." (Judgment of July 3, 2012, Case C-128/11, para. 44-46; See also "Used Software Sales and Copyright Exhaustion, BNA Electronic Commerce Report," Lothar Determann and William Batchelor, 17 ECLR 2149 ). The EU Court of Justice held that the first sale doctrine would even allow a licensee to make a new software copy for resale and transfer purposes so long as the original software copy is made 'unusable,' a view that a U.S. District Court for the Southern District of New York has recently expressly rejected with respect to digital music files. Capitol Records v. ReDigi, 12 Civ. 95 RJS (S.D.N.Y. March 30, 2013).
Given the significant differences in viewpoints regarding the first sale doctrine, many countries around the world do not consider intellectual property rights under their laws to be "exhausted" by sales in other jurisdictions. The EU Court of Justice, for example, decided in 1998 that a trademark owner could prevent the import and sale in the EEA of trademarked eyewear products it had sold at lower prices in countries outside the EEA Common Market (Silhouette v Hartlauer, C-355/96); only a first sale within the EEA exhausts distribution rights. In a 2007 software copyright case, the EU Court of Justice went further, to say that member states are precluded as a matter of EU law from providing for international exhaustion in their domestic copyright statutes. Laserdisken APS v. Kulturministeriet, Case C-479/04 (The members of the World Trade Organization (WTO) provided in Article 6 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) that "nothing in this Agreement shall be used to address the issue of ... exhaustion.").
Kirtsaeng affects the U.S. position on international exhaustion. The question is how much? With respect to whether a defendant owns a copy as a matter of copyright law, courts in most jurisdictions around the world will look only to the copyright law that applies in their own jurisdiction. The scope of protection under intellectual property laws is determined by the law of the country where the alleged infringement occurred. U.S. courts are generally hesitant to decide cases based on foreign intellectual property laws — even where the U.S. court has personal jurisdiction over a defendant — because they do not want to interfere with the sovereignty of the foreign state that granted the IP right. In some cases involving infringement in the United States of works created abroad, U.S. courts have looked to foreign copyright law to determine copyright ownership, noting that the U.S. Copyright Act does not contain express conflicts of law rules. This results in a necessity to interpret and determine foreign laws regarding one part of the copyright law analysis (copyright ownership) and local laws regarding other parts (including copyrightability, infringement and defenses) and produces a "hornets nest" with a "host of issues" (See Nimmer on Copyright, §17.05[B]).
Courts may feel compelled to consider foreign laws regarding ownership where the foreign jurisdiction has the most significant relationship to — and policy interests in — the ownership question. Itar-Tass Russian News Agency v. Russian Kurier, 153 F.3d 82 (2d Cir. 1998), is one of the few cases where a U.S. court deferred to foreign law to determine the question of copyright ownership. In that case, the question arose whether copyrights to Russian newspaper articles republished in the United States were owned by the individual Russian authors or Russian newspapers, newspaper compilation services, news reporters or a news reporter's union. The answer depended on complex questions regarding contractual relations between newspapers and employees in Russia, which the U.S. court was not comfortable deciding under principles of U.S. law. While considering Russian law regarding copyright ownership, the court noted that U.S. copyright law applied to all other questions, including infringement and defenses. "On infringement issues, the governing conflicts principle is usually lex loci delicti."
With respect to copies sold in the U.S., the U.S. tends to have the most significant relationship to and interest in the question of ownership regarding the particular copies sold. Therefore, in the context of copyright law disputes, a strong argument lies that U.S. courts should decide the question whether an importer or reseller owns a copy with the rules developed under U.S. copyright law, regardless of who may be the owner as a matter of the laws of any other country where the copies at issue may have been licensed, sold, bought, stolen or leased before they show up in the United States. But we shall see — Kirtsaeng can be expected to encourage unauthorized importers to test the law on this.
WHAT CAN MANUFACTURERS DO?
Software manufacturers should review and revisit their distribution models and reconsider technological measures and contractual clauses that mitigate against sales treatment. This has become necessary last year because of EU law developments, but seems prudent now for U.S. purposes. Manufacturers of other products containing or bearing copyrighted materials need to prepare for the possibility that foreign made copies, purchased abroad, will arrive on the U.S. market. One reaction anticipated by the dissenting U.S. Supreme Court justices is that manufacturers will raise prices abroad to reduce the incentives for arbitrage. Another option for some companies is to be more strategic with respect to separating versions with text in different languages in and on products, manuals, labels and packaging (as opposed to including translations with every product). Many other alternatives are available for particular products, industries and market segments — and they are likely to come to a store near you.
Lothar Determann is a partner at Baker & McKenzie in Palo Alto, and teaches computer, data privacy and electronic commerce law at UC Berkeley, UC Hastings College of the Law and the Free University of Berlin.
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