Source: http://www.ipinbrief.com/the-wait-for-kirtsaeng-is-over/
Timestamp: 2019-04-26 12:14:54+00:00

Document:
The cloud lingering over the gray market industry since the Supreme Court split 4-4 in Costco just got a lot darker. Gray market goods are those made by the copyright holder abroad and then imported into this country without the permission of the copyright holder. Just last week it seemed the 2d Circuit would never decide John Wiley v. Kirtsaeng argued in May of 2010. See post here. Today in 2-1 decision the 2d Circuit affirmed the result below.
The 2d Circuit held that § 602 (a)(1) of the Copyright Act trumps the first sale doctrine in § 109(a) of that Act with respect to goods made abroad and then imported into this country. But the tension between § 602 (a)(1) and § 109(a) is far from over. Kirtsaeng admitted the case raised “a particularly difficult question of statutory construction” and the result was therefore a “close call” And Judge Murtha’s well-reasoned dissent in Kirtsaeng adds to the uncertainty.
This tension between these sections was at play in Kirtsaeng. Mr. Kirtsaeng was engaged in what some refer to as textbook arbitrage. He bought text books Wiley made aboard and intended for distribution abroad and without Wiley’s consent imported and sold them in this country at prices below what Wiley charged for the same texts it manufactured here.
Kirtsaeng sought refuge under the first sale doctrine. He argued that, once Wiley had sold these texts abroad, Wiley had exhausted its first sale rights and therefore he was free to resell them in the U.S. Kirtsaeng relied on the “subject to” language of section106 (3). That language gives the copyright holder the exclusive right to distribute “subject to” a number of sections of the Copyright Act, including section 109. Thus, Kirtsaeng asserted that, once Wiley exercised its first sale rights abroad, Wiley lost its exclusive right to control distribution of the goods under §§602(a)(1) and 106(3). In other words, Kirtsaeng stated that Wiley should not complain that he, as lawful owner of the goods, resold them here because Wiley had already received a fair return for those goods abroad.
The majority in Kirtsaeng opted for the first interpretation with considerable skepticism, recognizing that “lawfully made under this title” “is simply unclear.” The lack of clarity hobbles the opinion.
So, in view of this “particularly difficult question” of first impression, what prompted the Second Circuit to restrict the first sale doctrine to only those goods made in the U.S.?
The court also indicated that dicta in the Supreme Court’s earlier opinion in Quality King v. L’Anza seemed to suggest that § 602 “had a broader scope than § 109(a)” because § 602 applied to goods made “under the laws of some other country.” But the concepts of being lawfully made under the laws of another country and lawfully made under this title are not mutually exclusive. If a U.S. copyright holder makes goods in Brazil, then the copies are made in accordance with the Copyright Act (which gives the holder the right to make copies) and therefore those goods are lawfully made under this title as well as presumably under Brazilian law.
Kirtsaeng raises some troubling questions that are the subject of Mr. Kirtsaeng’s petition for en banc review. If the first sale doctrine no longer applies to any goods made abroad (as others have warned) even though imported with the permission of the copyright holder, has the Second Circuit given foreign manufacturers the right to destroy longstanding and enormously important secondary and rental markets in this country? In other words, does a Japanese car manufacturer who imports and sells a car in this country now have the section 106(3) right to direct the buyer not to resell it?
Further, the Second Circuit has yet to decide Pearson v. Arora, argued on January 19, 2011 (district court opinion here) and Pearson v. Kumar, argued March 21,2011 (district court opinion here) both of which raise identical issues.
But Kirtsaeng is now binding Second Circuit precedent that Arora and Kumar must follow. Only an intervening change in the law or en banc review will allow the Second Circuit to deviate from its holding in Kirtsaeng. Nevertheless, with the 4-4 split in Costco and Judge Murtha’s dissent in Kirtsaeng, there may be more to come.
For more discussion on the interplay between §§ 109 and 602 click here and here.

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