Feb 212012
 

Dissatisfied with the exclusive right to set the price at which copies of their works are first sold, copyright holders have been trying, for over 150 years, to bolster the resale prices at which copies of their works are re-sold, in order to protect them from the normal pressures of free market price competition. Since they no longer own the copies, they have tried extending the reach of their exclusive right to “distribute” copies to encompass copies they no longer own. For just as long, the courts and Congress have rebuffed those efforts. Today, however, the United States Trade Representative is negotiating with foreign countries to obligate Congress and the courts to give them that power, even as their latest in a series of efforts to extend the existing distribution right is pending before the Supreme Court.

When Mark Twain tried to prevent dealers in his books from offering discounts to retailers, he lost. Clemens v. Estes, 22 Fed. 899 (C.C.D. Mass. 1885). When the publisher of The Castaway tried to use its copyright to prevent Macy’s from reselling the books for less than a dollar, it lost. Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908). The following year, Congress said “it would be most unwise to permit the copyright proprietor to exercise any control whatever over the article which is the subject of copyright after said proprietor has made the first sale.” H.R. Rep. No. 2222, 60th Cong., 2d Sess., at 28-29 (1909), and wrote that principle into law. Going beyond the judicially created “first sale” doctrine, Congress decreed that anyone in lawful possession of a copy was free to distribute it without the copyright owner’s permission, and established the copy/copyright dichotomy that ownership of “copyrights” is distinct from ownership of “copies,” such that ownership of one has no bearing on ownership of the other. (Section 41, Copyright Act of 1909.)  After courts wrestled with that a bit, and determined that Congress probably did not mean for it to apply, literally, to someone in lawful possession of a pirated copy, or to someone holding a copy in trust for someone else (see, e.g., Platt & Munk Co. v. Republic Graphics, Inc., 315 F.2d 847 (2d Cir. 1963)), the Copyright Act of 1976 clarified the statute, placing the copy/copyright dichotomy into the new Section 202, and explaining, in Section 109, that the “owner” of a copy, “lawfully made under this title,” is entitled to redistribute it without the consent of the copyright holder.

For the next several years, the law seemed clear enough that even the Motion Picture Association of America conceded that it could not prevent entrepreneurs from buying their expensive new videocassettes and renting them to the public. In the 1980s, it turned to Congress to neuter the doctrine, but failed in its efforts to control rental of videocassettes (resulting in a financial bonanza for the studios from sales to video rental stores). Just as the price of a new car factors in the “resale value” and whatever value is derived from freedom to rent it or lend it to others, so, too, the copyright industries settled into accepting that whatever price they charged would be calculated to include all of the value the new owners might attach to their freedom to dispose of their copies by sale, lending, rental or gift to others. The motion picture studios that desired to segregate global markets did so by turning to technology rather than law, applying “regional codes” intended to match DVDs to the same region as the DVD players, so that discs purchased in one region would not play in the players sold in another region. But “regional coding” had more to do with protecting the theatrical window than preventing DVD price competition, since the theatrical release date varied from one region to another.

The next assault on the first sale doctrine did not come from the copyright industries, however, but from the trademark side. As global free trade policies made it easier for goods to be shipped from one region to another, manufacturers tried to optimize their prices for each local market, yet the price disparities were so great that such a practice itself created a market for arbitrage, where entrepreneurs would find the lower priced articles in one country and import them into the higher priced market, where the lower prices would put downward price pressure on that optimal price preferred by the manufacturer. When the courts uniformly held that trademark law could not be used to prevent arbitrage where the product was the very same genuine good to which the trademark owner had affixed its trademark, creative lawyers turned to the Copyright Act.

The first salvo sought to apply Section 602 of the Copyright Act, which granted the U.S. copyright owner an exclusive right to import “copies” and “phonorecords”. The theory was that even if the trademark was not infringed, the products packaging or label could be copyrighted, such that the bottle of shampoo or perfume bearing the copyrighted label would meet the definition in Section 101 of “copy” – a tangible medium in which the work is embodied. The Supreme Court put an end to that theory in 1998, not by challenging the notion that protection of shampoo price discrimination was within the scope of copyright law, but by simply holding that the importation right in Section 602 was a mere extension of the distribution right in Section 106(3). As such, the importation right, too, was “subject to” the limitations in Sections 107 through 122, including, of course, Section 109. Therefore, the owner of a copy, “lawfully made under this title,” is entitled to import the copy without the consent of the copyright holder. Quality King Distributors, Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998). But Justices Stevens and Ginsburg failed to anticipate the creativity of lawyers, and together paved the way for a new creative argument. In his unanimous opinion, Justice Stevens gave an example, in dicta, of a work having both a U.S. copyright holder and an English copyright holder, noting that copies made by the English copyright holder would not have been “lawfully made under this title” because the English copyright holder had no right, under the U.S. Copyright Act, to make them. Id. at 148. That aspect of the example is unremarkable, but the hypothetical facts are pretty far-fetched, in that it is virtually always the case that the English copyright holder and the U.S. copyright holder are one and the same, or derived their rights from the same author. Territorial rights are typically granted by a single copyright owner licensing the copyright – not conveying it. Thus, if the U.S. copyright holder licensed someone in England the right to make copies there, the license would be an exercise of the U.S. copyright holder’s exclusive U.S. right to authorize the reproductions. Unfortunately, Justice Ginsburg had added a brief concurrence, noting that the facts in Quality King involved copies made in the United States and exported before being imported. Citing two authorities of the opinion that “lawfully made under this title” could not have a global reach, since “this title” (the U.S. Copyright Act) does not apply abroad, she suggested, without opining, that the Court’s Quality King holding might not necessarily apply in the case of copies made abroad. Id. at 154, Ginsburg, J., concurring.

That none of the major opponents of the first sale doctrine immediately began making copies abroad is an indication that most copyright lawyers understood that the unanimous Quality King decision in no way limited its holding to “made in the U.S.A.” facts. Justice Ginsburg’s comment, not joined by any other justice, was apparently not viewed by the majority as being worthy of inclusion in Stevens’ opinion. In fact, to say that “lawfully made under this title” means the copy had to be “made in the United States” carries two obvious flaws: First, it would convert the phrase “under this title” into useless surplus, because it is a mere truism that the U.S. Copyright Act does not apply in foreign countries. Congress does not routinely limit all of its laws to the geographical limits of U.S. sovereignty, for that is a given. It makes much more sense that Congress was intending for the lawfulness to be judged solely by the U.S. Copyright Act, and not by other titles of the U.S. Code, or by state or municipal law. In other words, if the copy was made by the U.S. copyright owner, the owner of the copy enjoyed the entitlement in Section 109 without regard to whether the copy was made by a company not licensed to do business in the sate where it was made, or was made using substances banned by the Consumer Products Safety Commission, or was manufactured in violation of minimum wage or occupational safety laws.

The second obvious flaw in that reasoning is the unintended a fortiori consequence no copyright owner would want: If a copy is not “lawfully made” under the U.S. Copyright Act solely because the Copyright Act does not apply abroad, then the other part of the exclusive right in Section 106(1) – to “authorize” the reproduction of the work into copies or phonorecords – would be limited to the exclusive right to authorize reproductions in the United States alone. In other words, anyone in the United States would be free to authorize reproductions abroad without infringing upon the U.S. copyright owner’s exclusive right to authorize reproductions.

Even so, for some U.S. copyright owners, the lure of maximizing profits by preventing their global price discrimination from being undermined by arbitrage has been sufficient to overcome that risk. The Swiss watchmaker, Omega, had a problem on its hands. It set the wholesale price to U.S. retailers at a level calculated to support a retail price of $2,000, yet sold the same watch in other countries for pennies on the dollar. So great was the disparity that the same watch could profitably change hands more than once before reaching Costco’s retail shelves, and still allow Costco to sell them profitably for $1,400, and with a better warranty. Rather than reduce the wholesale price to the U.S. retailers upset by the price differential, Omega turned to the Copyright Act. It created a copyrighted work of authorship, registered it with the U.S. Copyright Office, and embossed it onto the backs of the watches in a size and placement not likely to even be noticed. It then argued that the watches were the tangible medium of expression embodying a work of authorship: the watches were now “copies”, as defined in Section 101 of the U.S. Copyright Act. Not only that, these were copies which the U.S. copyright holder, Omega, had made outside of the United States, so although they were not infringing in the least, they were, argued Omega, not lawfully made under the U.S. Copyright Act. Although the District Court rightly rejected that position, the Ninth Circuit, in a self-deprecating Opinion (in which it heavily criticized its own precedent for leading to “untenable” results), held that “lawfully made under this title” means “lawfully made in the United States.” Omega, S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008). The Ninth Circuit was so concerned about the effects of its holding that it developed a judicial patch of sorts, in effect holding that even though Section 109 could not apply because the copies were made abroad, the first sale doctrine would apply, after all, if the U.S. copyright holder imported the copies into, or sold them in, the United States.

Surprisingly, the Supreme Court reached an impasse. The Supreme Court’s 4-4 tie in Costco v. Omega, No. 08-1423, effectively affirmed the 9th Circuit’s holding. Meanwhile, the Second Circuit had apparently been waiting in vain for the Supreme Court to settle the matter, and following the impasse it went ahead and decided John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210 (2d Cir. 2011), holding (2-1) that “under this title” means “in the United States.” Finding no legal basis for the Ninth Circuit’s effort to lessen the fallout, it rejected the re-application of the limitation on the distribution right in the event the U.S. copyright owner imported the copies made abroad. Copies made abroad, reasoned the Second Circuit, can never be redistributed by their lawful owners without getting permission from the copyright owner – no matter how many times they have changed hands, and no matter that the U.S. copyright owner made them, imported them and sold them. Following Kirtsaeng, it has rejected appeals in three similar cases, all involving efforts by four major college textbook publishers to prevent price competition, within the United States, from secondary sales of textbooks they have already sold.

The Kirtsaeng holding is now the subject of petitions for certiorari in Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697, and Liu v. Pearson Education, Inc., No. 11-708. (The issue is also before the Second Circuit on petition for rehearing en banc in Pearson Education, Inc. v. Arora, No. 10-2829, even though the 2nd Circuit has twice denied en banc review of the issue.)

Against this backdrop, in which the Supreme Court is poised to re-examine the current vitality of a 150-year-old doctrine, the U.S.T.R. is advocating an end run, threatening to force Congress and the courts to adopt the outcome sought by those who engage in price discrimination against U.S. consumers.

Fundamentally, the issue has nothing to do with copyright protection. That is, in all factual scenarios in issue, the U.S. copyright holder made the copies and sold them at satisfactory prices. The fundamental issue is global price discrimination. Like any other global manufacturer of consumer goods, the publishers want to extract the maximum price each local market will bear. Where the price the market will bear varies enough to create a demand for arbitrage, these publishers are not content to respond to the arbitrage by reducing the disparity in global prices, but rather, they seek to use copyright infringement as the method of policing and enforcing the disparity, thereby preventing price competition from the copies they, themselves, already chose to sell more cheaply elsewhere. As a bonus, they can also prohibit U.S. college students from lending or selling used textbooks, so long as the textbooks were manufactured abroad.

The profits to be derived from this scheme are sufficiently high that the publishers of college textbooks continue to battle it out in court, having retained Theodore Olson to represent them before the Supreme Court. And, they have continued to lobby heavily against federal and state government initiatives that attempt to bring down the price of college textbooks – prices that have been increasing much faster than the rate of inflation or college tuition. But would their efforts be for naught if the Supreme Court were to put a stop to using the Copyright Act as just a means for insulating their global price discrimination from the normal pressures of a free market? After all, the victorious Omega eventually suffered a defeat on remand to the District Court, which held that such use of its copyright constituted “copyright misuse.” Omega S.A. v. Costco Wholesale Corp. (E.D.Ca., Nov. 9, 2011). Here is where the aid of the U.S.T.R. in negotiating the Trans-Pacific Partnership Agreement (TPP) would come in, nullifying any potential adverse ruling by the Supreme Court while concurrently protecting against liability for copyright misuse. After all, if our own treaties require us to allow copyrights to be used to suppress price competition, it can hardly be a misuse of the copyright to do just that. The current draft would require the parties to codify the outcome from the 9th Circuit’s self-maligned interpretation. And, if the U.S.T.R. is successful, even if the Supreme Court were to reverse the Kirtsaeng holding, Congress would have an international obligation to amend Section 109(a) to apply only to copies either made in the U.S. or authorized by the U.S. copyright holder for sale here – authorized, no doubt, only at a minimum resale price rather than the true market price.

The current draft of the TPP has a provision that the major college textbook publishers could not have drafted any better themselves, as it mirrors the outcome advocated in their briefs. It would require treaty parties to codify the Ninth Circuit’s damaging ruling, thereby creating a huge loophole for U.S. copyright holders to take control all secondary markets for their works, as well as to control primary markets, by requiring all retailers to obtain a copyright owner’s “license to sell” in addition to outright ownership of noninfringing copies – if those copies are made abroad.

In an apparent effort to prevent the possible backlash if such new powers would allow the control over sale, gift, rental and bequest of shampoo (at issue in Quality King), watches (at issue in Costco v. Omega) or any other ordinary chattel, the TPP provision would require granting the power over all transfers of title or possession only in the case of copies and phonorecords in which the work of authorship represents substantially all of the value of the product. Whether to go beyond that would be optional, allowing parties to leave out automobiles and kitchen appliances containing copyrighted computer programs, for example. Less certain is the case of copies of technically separate works bundled together, such as whether the law could obligate retailers to look only to where the video game disc itself is made, and not worry about where the copyrighted package label or instructions included inside the packaging were printed. But it may not be so clear, either, in the case of some electronic devices, wherein the value of the software rivals the value of the hardware, or where the expensive hardware without the cheap software is unappealing. The iPhone, for example, comes pre-loaded with copyrighted computer programs, making it a noninfringing “copy” of many works, lawfully made in China (albeit by the U.S. copyright owner). Under the Ninth Circuit ruling, you may lend you iPhone to a friend without the copyright owner’s consent, because Apple sold it here (assuming Apple is the owner of all of the copyrights) in pre-installed works. Under the Second Circuit ruling, you cannot, simply because the copies were all made in China. Under the proposed TPP provision, the outcome might differ depending on whether there is a market for iPhones without the operating system (iOS) and related application software.

As per the TRANS-PACIFIC PARTNERSHIP INTELLECTUAL PROPERTY RIGHTS CHAPTER DRAFT – FEBRUARY 10, 2011, Section 4.2 provides:

“Each Party shall provide to authors, performers, and producers of phonograms the right to authorize or prohibit the importation into that Party’s territory of copies of the work, performance, or phonogram made without authorization, or made outside that Party’s territory with the authorization of the author, performer, or producer of the phonogram. [FN 11]”

“FN 11: With respect to copies of works and phonograms that have been placed on the market by the relevant right holder, the obligations described in Article [4.2] apply only to books, journals, sheet music, sound recordings, computer programs, and audio and visual works (i.e., categories of products in which the value of the copyrighted material represents substantially all of the value of the product). Notwithstanding the foregoing, each Party may provide the protection described in Article [4.2] to a broader range of goods.”

 

Copyright holders should be required to face market competition from goods they sell, just like anyone else. It may be the case that some countries with lower per capita income would welcome price discrimination that favors their own people. Even so, it is hard to imagine any harm to them if it also creates a market for distributors in countries with higher per capita incomes to purchase more copies in those countries, for export to the developed nations. Conversely, high-priced copies in the U.S. might be more appealing if they can be sold as “secondhand” copies in lower-income markets. More importantly, policymakers of all nations should pause to consider the long-term effects of allowing transnational companies to use copyrights as a means of permanently balkanizing the world by artificially separating low income and cheap labor nations from more developed and higher income nations. But whatever the policy considerations may be behind whether to require TPP parties to prohibit market forces from undermining global price discrimination in copyrighted copies, it is the height of lunacy to allow the United States Trade Representative to tamper with a longstanding fundamental doctrine of United States copyright law that Congress has never shown the slightest desire to change. Up until the Copyright Act of 1976, Congress’ position was to completely deny copyright protection to copies of English language works made abroad, and the sole purpose of that policy was to protect U.S. jobs. Although that jobs-protection aspect of the U.S. Copyright Act was abandoned in 1976, the U.S.T.R. is intent on taking the country to the opposite extreme, by rewarding U.S. copyright owners who send U.S. reproduction jobs abroad. The U.S.T.R. is advocating a copyright position that, if adopted, would mean, quite simply, that if U.S. copyright holders are foolish enough to make their copies with U.S. labor, and foolish enough to import them themselves, they will lose the power to protect supra-competitive retail prices in the United States, leaving money in the pockets of U.S. consumers. Such an outcome has never been a part of U.S. copyright policy, which Constitutionally seeks to increase the dissemination of works of authorship in the U.S., and there is no sound reason why it should become part of the Copyright Act now – particularly not when the feat is being accomplished by sidelining Congress and the courts.

 

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  10 Responses to “Trans-Pacific Partnership Proposes Copyright Suppression of Price Competition”

  1. I think this is a bit confused. The TPP agreement merely establishes the right to prevent infringing imports. It does not affect the first sale doctrine. That doctrine has nothing to do with where goods are made. It is about whether the right granted by section 106(3) has been exercised. Now, you may think that the first sale doctrine should be changed to provide that where an act equivalent to the US distribution right has been exercised in a foreign territory, section 109 should apply as if the first sale had taken place in the US, but it is wrong to suggest that the TPP is engineering anything new.

    However, we have anti-trust law to address anti-competitive practices. Perhaps again it would be a good thing if consumers in poor countries subsidised those in rich ones by having to pay a global mean price for medicines or consumer goods. A subject for another post, perhaps.

    • Thomas, the TPP US proposal according to the leaked text, grants a right to the rightholder to prohibit the importation of a legaly made work. This right is not contemplated in Berne, Trips or WCT, so is clear engineering something new.

  2. TPP is crazy! How is it Fair Trade when one of the countries is state controlled. For a company that is wronged, how would they every be able to get compensation… especially a small manufacturer. Madison Avenue is selling Main Street! Contact your Representative in Washington now and tell them to strongly oppose. With Vietnam and China next door this will make NAFTA look like a great deal! We don’t have the lobbying money but we do have a voice, but only if we use it.

  3. […] Trans-Pacific Partnership Proposes Copyright Suppression of Cost Competition Below the Second Circuit ruling, you can’t, basically simply because the copies had been all created in China. Under the proposed TPP provision, the outcome may possibly differ depending on regardless of whether there is a market place for iPhones with out the operating system (iOS) and related … Study a lot more on International IP and the Public Interest […]

  4. I did not do justice to our global audience with my U.S.-centric examination of the TPP, so Thomas’ confusion is understandable. To be clear, by its very own language (quoted in the blog, above), the TPP does not merely provide a right to “prevent infringing imports,” if what Thomas means is the importation of infringing copies. That is already part of U.S. law. What it grants is the right to prevent the importation of non-infringing copies.

    It affects the U.S. first sale doctrine in large part because, ever since 1909, the “first sale doctrine” established by the courts was supplemented by a codification that has never required a sale. Section 109(a) of the current U.S. Copyright Act is often referred to as “the first sale doctrine.” It is more. By its own terms, it entitles the owner of a copy, lawfully made under the U.S. Copyright Act, to dispose of that copy without the consent of the copyright holder even if it was never sold. That has been the case for over a century. In fact, since 1909, no sale or original distribution has ever been required.

    Unlike the more common doctrine of the “exhaustion” of the distribution right, which was the idea behind the common law first sale doctrine developed in the 1800’s, the statute requires only that the copy have been “lawfully made” under the U.S. Copyright Act. My position is that any copy made by the owner of the U.S. copyright is, a fortiori, lawfully made under the U.S. Copyright Act. The textbook publishers argue that although they own the U.S. copyright, whenever they make a copy outside of the United States that copy is not lawfully made under the U.S. Copyright Act. They do not, of course, claim that the copies they make are infringing – just that anything they make outside of the United States is not “lawfully made” under the U.S. Copyright Act (even though that Act gives them the exclusive right to make the copies), and that, therefore, Section 109(a) does not apply to the owner of those copies.

    I agree with Thomas that the doctrine – both the common law first sale doctrine and its expansion to owners of lawfully made copies in Sections 109(a) and 202 of the U.S. Copyright Act – “has nothing to do with where goods are made.” A lower corut in the Eastern District of Virginia agrees. But that is not what the textbook publishers argue, or what the Ninth Circuit Court of Appeals, in Omega, and the Second Circuit Court of Appeals, in Kirstsaeng, have held. That’s my point: At issue now before the Supreme Court is whether, in 1976, the U.S. Congress intended to repeal make this age-old contingent on where the U.S. copyright holder made, or authorized to be made, the copy.

    But, I reiterate, “whether the right granted by section 106(3) has been exercised” is not the issue at all, insofar as Section 109(a) or the TPP draft language are concerned. Although that question applies to the European exhaustion doctrine as well as the common law first sale doctrine in the United States, Section 109(a) grants a specific entitlement to the owner of a copy that is “lawfully made” under the U.S. Copyright Act, even if the distribution right in Section 106(3) was never exercised. It applies to copies “lawfully made” by, for example, downloading a work onto a laptop or smartphone according to the reproduction right licensed by the copyright holder.

    To give an example of the importance of Section 109(a)’s expansion of the first sale doctrine, a mere “exhaustion” approach would not address all of the works I have lawfully reproduced onto my laptop computer and iPhone, both of which are “copies” and “phonorecords” of myriad works, all of which were lawfully made by or with consent of the owners of the U.S. copyrights.

    Some of those works were reproduced onto my laptop and iPhone while they were outside of the U.S., so my laptop computer and iPhone are both “copies” and “phonorecords” of myriad works, only some of which were made in the U.S.A. According to the plain language of the TPA, my laptop computer and iPhone are “copies” and “phonorecords” of works “made outside that Party’s territory with the authorization of the author, performer, or producer of the phonogram.” The parties to the TPP must prohibit their importation even though the U.S. copyright holder never owned them, and even though the U.S. copyright holder authorized the downloads.

    The notion that all of these authors, performers and producers would now get to sue me for copyright infringement if I return from my vacation abroad, bringing my laptop and iPhone with me, sounds ludicrous, but that is precisely the coverage of the TPP.

    According to footnote 11, the U.S. would get to decide whether to allow them to control the importation of my articles that embody works of authorship reproduced onto them while outside the United States if the product is one “in which the value of the copyrighted material represents substantially all of the value of the product,” but the U.S. would be obligated to prohibit me from importing my laptop if I happened to download the latest “patch” or “update” in the operating system or application software while I was abroad, unless I have permission from the copyright owner.

  5. […] Trans-Pacific Partnership Proposes Copyright Suppression of Price Competition […]

  6. […] a fantastically detailed post, John Mitchell walks through how the USTR is seeking to effectively neuter any used goods sales by more or less locking in these rulings that makes it effectively against the law to resell […]

  7. […] a fantastically detailed post, John Mitchell walks through how the USTR is seeking to effectively neuter any used goods sales by more or less locking in these rulings that makes it effectively against the law to resell […]

  8. […] you want a really in depth and excellent look into what the TPP is and its ramifications are then you should make reading John Mitchell’s post mandatory but this little tidbit from the post should give you an inkling of the disaster that will happen […]

  9. […] a fantastically minute post, John Mitchell walks by how a USTR is seeking to effectively fix any used products sales by some-more or reduction locking in these rulings that creates it effectively opposite a law to […]

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