1998 B.C. Intell. Prop. & Tech. F. 040801
Supreme Court Upholds the First Sale Doctrine in Gray Market Cases
On March 9, 1998, the Supreme Court unanimously ruled that the first sale doctrine applies to copyrighted goods produced in the United States and sold in foreign markets. In the case of Quality King Distributors, Inc. v. L'anza Research International, Inc., 1998 WL 96265 (U.S. Cal.), the court held that the first sale doctrine prevents copyright owners from controlling the importation of copyrighted goods sold outside the United States. The court found that section 602(a) of the Copyright Act, 17 U.S.C. §602(a), gives copyright owners the right to control the importation of copies into the United States, is an extension of the copyright owner's exclusive right to distribute copies under section 106 and not an additional right of the copyright owner.
Like the other exclusive rights of a copyright owner under section 106, the exclusive right to distribute copies is limited. The court found that the first sale doctrine, codified in section 109(a) of the Copyright Act of 1976, 17 U.S.C. §109(a), limited the right of American manufacturers to control the distribution of their copyrighted products once they are sold to foreign buyers. The first sale doctrine states that once a copyright owner sells a copy of his work to another, the copyright owner relinquishes all further rights to sell or otherwise dispose of that copy. The Supreme Court first adopted the first sale doctrine in the case of Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908). In that case, the Supreme Court held that the exclusive right to sell copyrighted works only applied to the first sale of a copyrighted work. 210 U.S. 339, 349-350. While the copyright owner retained the underlying copyright to the expression fixed in the work, the copyright owner gave up his ability to control the fate of the work once it had been sold.
This case prevents domestic manufacturers of copyrighted goods from using their copyright monopolies to block competition from Gray Market competitors. Because of fluctuations in currency exchanges and lower advertising costs, American manufacturers can sell their copyrighted products in foreign markets at lower prices. Once those prices drop low enough, foreign buyers can import the products back into the American market and make a profit. The importation of copyrighted goods creates problems for companies like L'anza who rely on exclusive distributorships and expensive advertising in order to sell their products in the United States. In 1992 and 1993, L'anza's United Kingdom distributor agreed to sell several tons of L'anza products with copyrighted labels to a distributor in Malta. The copyrighted products eventually made their way back into the United States without L'anza's permission and were sold by Quality King Distributors to several unauthorized retailers in California.
L'anza brought an infringement suit against the Malta distributors, Quality King Distributors, and the California retailers in federal district court. The Malta distributor never appeared in the suit and the California retailers settled out of court. L'anza charged Quality King Distributors with infringing their exclusive right under section 602 to reproduce and to distribute the copyrighted materials in the United States. The District Court rejected Quality King Distributor's affirmative defense based on the first sale doctrine and entered summary judgment in favor of L'anza. 1995 WL 908331 (C.D. Cal.) The Ninth Circuit Court of Appeals affirmed the lower court's decision, reasoning that section 602 would be meaningless if the first sale doctrine provided an affirmative defense to this type of case. 98 F.3d 1109, 1114 (9th Cir. 1996).
The Supreme Court reversed the Ninth Circuit's decision through a strict reading of section 602. Justice Stevens, who wrote the unanimous opinion stated that "since §602(a) merely provides that unauthorized importation is an infringement of an exclusive right Œunder section 106,' and since that limited right does not encompass resales by lawful owners, the literal text of §602(a) is simply inapplicable to both domestic and foreign owners of L'anza's products who decide to import them and resell them in the United States." Justice Stevens went on to explain that the first sale doctrine only provides a defense to lawful owners of copyrighted products, and would not apply to owners of piratical copies or non-owners, such as bailees and licensees. Finally, he noted that "section 602(a) applies to a category of copies that are neither piratical nor lawfully made under this title." This category applies to copyrighted products lawfully made under the copyright law of a country outside of the United States. Thus, section 602(a) allows American copyright owners to bring infringement actions against foreign distributors who produce materials under the copyright laws of a country outside of the United States. The first sale doctrine would apply for copyright materials made under the Copyright Act of the United States.
Justice Ginsburg submitted a brief concurring opinion stating that this case was limited to copyrighted materials which make a "roundtrip journey" from the United States to foreign countries and then back again.
The decision resolved conflicting interpretations of the scope of section 602(a) by the Third and Ninth Circuit Courts of Appeal. The Third Circuit Court of Appeals had ruled in the case of Sebastian International, Inc. v. Consumer Contacts, Ltd., 847 F.2d 1093 (3d Cir. 1988), that the first sale doctrine restricted Sebastian International's ability to prevent Consumer Contacts from importing Sebastian's copyrighted products into the United States. Justice Stevens' opinion for the Supreme Court upheld the reasoning of the Third Circuit's opinion.