Kirtsaeng v. John Wiley & Sons: Regulatory Arbitrage vs. Market Arbitrage

The U.S. Supreme Court is going to hear today oral arguments in  Kirtsaeng v. John Wiley & Sons, Inc. today. I am particularly excited about that because I am one of the signatories of a law professors’ amicus brief supporting the Petitioner. The question in this case is whether the first-sale doctrine, codified in s. 109  of the US Copyright Act, applies to copies of works made outside the United States. More directly, the question is whether a U.S. copyright holder can prevent the importation of copies lawfully made and first sold abroad. That is, wether the Copyright Act allows copyright owners to prevent parallel importation of genuine goods made abroad. Ronald Mann provides a very good overview of the case and the main arguments at SCOTUSblog. As he explains:

The case involves the interplay of three related provisions of the Copyright Act.  Because the dispute turns almost entirely on a close reading of those provisions, the text warrants close attention.  First, Section 106(a)(3) grants copyright holders the exclusive right to “distribute copies . . .  of [any] copyrighted work to the public by sale.”  Second, Section 602(a)(1) provides that “[i]mportation into the United States, without the authority of the owner of copyright . . . , of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies . . . under section 106.”  Third, Section 109(a) provides: “Notwithstanding the provisions of Section 106(3), the owner of a particular copy . . . lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell . . . that copy.”

The question, therefore, is whether the words “lawfully made under this title” limit the first-sale doctrine to copies “lawfully made in the United States”. As a matter of policy, John Wiley & Sons and its supporters exalt the benefits of price discrimination. They argue that they should be given the power to set different prices in different countries, and therefore should be given the power to prevent parallel importation, which undermines the ability to set higher prices in the U.S. Without the ability to prevent this market arbitrage, the argument goes, they would refrain from setting lower prices in low-demand countries (often poorer countries). If that happens American consumers will not be better off while consumer in low-demand countries will be worse off.

In a recent paper I discuss the economic justifications for the first-sale doctrine and show that the various legitimate reasons behind copyright owners’ desire to control the downstream distribution or use of their works (price discrimination is one of them, but there are others) do not justify making those restrictions enforceable by means of copyright infringement actions. In this post, however, I’m going to focus on questions of statutory interpretation because while the economic policy arguments are undoubtedly important for the Court’s decision, the language of the Act will probably play an equally, if not more, important role.

The statutory language of the relevant provisions is far from being a model of clarity, and this probably reflects that fact that the question of parallel importation has always been highly contentious. Therefore, I think it would be useful to acknowledge that the search for a killer interpretation of the statutory language is futile. Some interpretations may seem tight but leave unanswered policy questions (e.g., notwithstanding the Court’s decision in Quality King v. L’Anza, can I still prevent a round-trip of my U.S.-made shampoo if I outsource the printing of the label to a printer in Mexico?); while others may offer a more coherent policy prescriptions but leave some lingering puzzles about the statutory language (“if this is what Congress meant, why didn’t it simply say so?”).

I think that the problem is that the issue of importation involves two conceptually distinct issues: one involves the issue of sovereignty, or the integrity of the importing country regulatory system (the U.S.); the other involves the integrity of a copyright owner’s distribution system. In other words, one issue is controlling regulatory arbitrage; the other, controlling market arbitrage.

The issue of regulatory arbitrage arises from the fact that copyright law isn’t fully harmonized internationally, and therefore the rules with respect to many issues, such as the term of protection, the scope of protection, or who is the first owner, may vary (and indeed vary) among countries. Therefore, it makes perfect sense for the U.S. (or any other country) to be concerned about end-runs around the rules that it chose to adopt as a sovereign country. I would submit that s. 602 is designed to prevent regulatory arbitrage, but not market arbitrage. Consider the following examples:

1. The US has copyright law, but Afghanistan does not. It would be an infringement to reproduce a book in the US without the copyright owner’s consent, but it’s perfectly legal to reproduce the book in Afghanistan. The copy made in Afghanistan isn’t an infringing copy, but if the U.S. decided to grant copyrights, it would make perfect sense to prevent the importation from Afghanistan; otherwise, Afghanistan’s sovereign decision not to grant copyright would apply extraterritorially into the U.S. and undermine U.S. sovereign choice to grant copyright. To prevent this type of regulatory arbitrage, the language “or which would have constituted an infringement of copyright if this title had been applicable” in s. 602(a)(2) is necessary.
2. The copyright term in the US is life+70. In Canada it is life+50. Suppose that someone wishes to import and distribute in the US a book that is no longer under copyright in Canada. Reproducing the book in Canada is perfectly legal, but again, it would make perfect sense for the US to ban its importation, and, again, this would be prevented by s. 602(a)(2).
3. Reverse example: In 1996, a decision of the Federal Court of Canada held that fair dealing under the Canadian Copyright Act did not apply to a parody. That court explicitly declined to follow the U.S. Supreme Court decision in Campbell v. Acuff-Rose. The decision was not appealed, and it probably doesn’t reflect Canadian law, but let’s assume for the moment that it was correctly decided. As a result, although 2 Live Crew didn’t infringe the copyright in Pretty Woman when it recorded the song in the U.S., and 2 Live Crew’s sound-recordings are legal in the U.S., they may be infringing in Canada. If it is indeed the case that Canada has decided to grant Acuff-Rose stronger protection than that available to it in the U.S., it would make sense for Canadian law to prevent the importation of those sound recordings, otherwise it would be effectively governed by U.S. law.
4. Assume that the sound recordings from the previous example were produced in Canada without the consent of Acuff-Rose. Facing a threat of litigation in Canada, 2 Live Crew ships the sound recordings and distributes them in the U.S. Can Acuff-Rose prevent their importation and distribution? Plain reading of s. 602(a)(1) suggests that the answer is yes: Acuff-Rose is the owner of the copyright in Pretty Woman, the sound recordings were acquired in Canada, and Acuff-Rose did not authorize their importation. But that would be an absurd. If the making and distributing the sound recording is perfectly legal in the U.S. despite Acuff-Rose’s objection, why would it be able to prevent their importation simply because they were made in Canada? Giving it this power would effectively mean that the distribution of the sound recordings in the U.S. is governed by Canadian law.
5. Suppose that a publisher plans to issues a new novel, but since it doesn’t own printing facilities it outsources the printing to another firm. Suppose that the license agreement with the printer stipulates that the books should not be distributed to bookstores prior to a specified (and carefully chosen) release date. It makes sense that if the printer distributes the books prior to the specified date and books are offered to the public earlier than what had been agreed, the publisher would be able to sue for an infringement of its exclusive right “to distribute copies … of the copyrighted work to the public” under s. 106(3). It also makes sense that the publisher will have the power to enjoin the distribution before it occurs. Even if the printer or the bookstore are the owners of the printed copies, and even though the copies were “lawfully made under this title” it seems to me that s. 109 will not apply, despite the fact that it literally does.
6. Suppose that the printer from the previous example is located in Toronto, and that the publisher learns that they have been sent prematurely for distribution in the U.S. Can the publisher prevent the importation and prevent the books from reaching the stores? S. 602(a)(2) would not apply because the copies are not infringing copies: they were made with the authorization of the U.S. copyright owner, but s. 602(a)(1) would apply and would put the publisher on equal footing as if the printer was based in the U.S. instead of Canada. However, s. 602(a)(1) should not give the publisher the power to control the downstream distribution of the books after they have been lawfully distributed to the public, regardless of the country where they had been printed, just as s. 106(3) does not give it this power with respect to copies made in the U.S.

All of these example demonstrate that rather than creating different rules based on the place were copies are made, s. 602 is designed to render the location of the making of the copy irrelevant. Non-owners cannot evade the protections afforded by the Copyright Act by making copies abroad and then exporting them to the US, and owners cannot evade the limitations of the Copyright Act by choosing an offshore location to make their copies. S. 602(a)(2) rounds out the reproduction right by preventing the importation of infringing copies or copies that would be infringing had the U.S. Copyright Act apply in the country where they were made. S. 602(a)(1) rounds out the distribution to the public right by allowing copyright owners to prevent premature distribution even when they choose to produce the copies abroad. But s. 602 does not give copyright owners greater powers with relation to copies of their works made abroad than those granted to them with respect to copies made in the U.S. The purpose of s. 602 is to prevent regulatory arbitrage and preserve the integrity of U.S. sovereignity.

It should now be clear that parallel importation involves an entirely different issue. The importer doesn’t try to arbitrage differences in the copyright laws the US and other countries. Rather, it tries to take advantage of the differences in prices, which may reflect different market conditions (lower demand becuase consumers in another market have less ability to pay, or less willingness to pay because they have different preferences, or because the foreign market is more competitive). This may upset the copyright owner who attempts to set different prices in different countries, and it could undermine the integrity of its pricing system, but this kind of market arbitrage does not undermine the ability of the U.S. to decide what copyright rules to adopt and implement. Rather, this kind of arbitrage is the engine of competitive markets. It’s legality allows consumers to seek the lower prices available and allows intermediaries to aid them.

Congress clearly intended to make sure that copyright does not prevent this market arbitrage when it codified the first-sale doctrine. It would seem strange that the very provisions that were enacted to prevent regulatory arbitrage would be used open the door for an end run around the first-sale doctrine.

Image by wallyg on Flickr, (under CC BY-NC-ND 2.0 license)