Kirtsaeng – Part III

In Part I and Part II of my Kirtsaeng saga, I detailed an American Supreme Court decision that addressed control of copyrighted works, after works have been transacted in sale according to the law. Two clauses of the American Copyright Act were in opposition; a right of control, to ban importation of copyrighted works acquired outside the United States collided with the limitation of control imposed by the doctrine of first sale. The majority opinion, written by Justice Breyer, decreed that first sale applies if the copies were legitimately produced and sold, irrespective of geographical consideration. In this case, the textbooks entering the United States were made and purchased in accordance with the publisher’s subsidiary organization for production and sales in Asia.

The importation ban allows publishers to more easily segment their markets. Similar books may be sold in different regions at different prices, without fear that cheaper copies would be resold in the United States undermining the American market. Publishers price their works according to the constraints of their target markets; higher-priced American books simply will not sell in lower-income countries. Thus those books are produced with lesser quality (i.e. cheaper paper, no colour images, etc. ) and priced with an eye to cost recovery. Which means the revenue from foreign market productions does not serve to reduce the costs incurred at home.

According to the brief submitted by Wiley (and similar language is found in the brief submitted by the Association of American Publishers) the development costs of a textbook are significant and are paid for by domestic market sales. If domestic wholesalers (i.e. campus bookstores or Costco) could import cheaper books and resell them, publishers’ revenues will severely decline, leaving little to fund the production of new books. “The likely result of Kirtsaeng’s proposal would be reduced access to educational materials around the world, with little corresponding benefit for American students (Wiley, p.49).”

Which raises the question of why bother to sell to foreign markets at all? If the sales only cover printing and distribution there seems little incentive to supply to those markets. A possible answer is that publishers are concerned with providing access to “educational materials around the world.” But altruism gives way to pragmatism; if consumers cannot afford the high-priced American textbook, piracy is likely to occur. And Wiley notes that “‘governments have been more responsive in dealing with piracy cases when textbooks are priced at a level that local students can afford.’ (Wiley, p.47).”

In making their argument, Wiley makes constant reference to a study by the Governmental Accountability Office (College Textbooks — Enhanced Offerings Appear to Drive Recent Price Increases, 2005). Wiley does not endorse all the findings and points to concerns expressed by the Association of American Publishers but: “nonetheless believes that the report’s summary of the many factors that bear on pricing in different countries provides useful context for the Court (Wiley, p.7).” In fact, the Association disagreed with the study almost in its entirety, objecting to the data used, the methodology, and the tone of the report (GAO 2005, p.38-43). Their concerns were addressed by the authors of the report, who emphasized the objective of the study was not to assign blame to publishers but to better understand how publishing practices (and the factors influencing those practices) affect the cost of college textbooks (GAO 2005, p.26-28).

The data used within the report spanned 1986-2004 and thus does not serve to reflect pricing today. That said, the principle reason cited for the heightened expense of books is the need to provide more than just a textbook (this might still play a part in pricing today and invites further study):

While many factors affect textbook pricing, the increasing costs associated with developing products designed to accompany textbooks, such as CDROMs and other instructional supplements, best explain price increases in recent years. Publishers say they have increased investments in developing supplements in response to demand from instructors (GAO 2005, p.i).

Returning to the Kirtsaeng dilemma, the challenges for the publishers to produce quality textbooks at home and abroad, while acknowledged by Justice Breyer, did not shift the focus of the case. He writes:

Wiley and the dissent claim that a nongeographical interpretation will make it difficult, perhaps impossible, for publishers (and other copyright holders) to divide foreign and domestic markets. We concede that is so. A publisher may find it more difficult to charge different prices for the same book in different geographic markets. But we do not see how these facts help Wiley, for we can find no basic principle of copyright law that suggests that publishers are especially entitled to such rights (p.31).

Breyer even goes so far as to indicate that giving the publishing sector the legislative power to divide markets would bring in an undercurrent of antitrust behavior:

We have found no precedent suggesting a legal preference for interpretations of copyright statutes that would provide for market divisions. … To the contrary, Congress enacted a copyright law that (through the “first sale” doctrine) limits copyright holders’ability to divide domestic markets. And that limitation is consistent with antitrust laws that ordinarily forbid market divisions…. Whether copyright owners should, or should not, have more than ordinary commercial power to divide international markets is a matter for Congress to decide (p.32)

And that is where American copyright debate is heading. The last significant changes to the American regime of copyright took place in 1998; with the Digital Millennium Copyright Act and the Copyright Term Extension Act. The last revision of the entire Act was in 1976. Maria Pallante (U.S. Registrar of Copyright) is calling for a complete overhaul of the law; Mike Masnick, writing for TechDirt on 18 March 2013, gave a comprehensive review and analysis of her early proposals. No doubt lobbyists of all stripes are gearing up for debate; the publishing community is sure to seek modification of first sale.

In the meantime, questions of importation are part and parcel of looming international trade agreements. Canada is eager to join the TransPacific Partnership Agreement (TPP), despite having no recourse to negotiating any of its terms. In November 2011, members of the Program on Information Justice and Intellectual Property provided a sobering analysis of the agreement from the perspective of the public interest. On the matter of market segmentation, the TPP would remove the flexibility of nations to import copyrighted works from the supplier (and country) of their choice, a flexibility that benefits consumers and is consistent with existing World Trade Organization regulations.

Kirtsaeng – Part II

The potential consequences of a geographical interpretation of first sale were what engaged me in my last post. In the Kirtsaeng decision, Justice Stephen Breyer gives due consideration to those risks and writes: “Neither Wiley nor any of its many amici deny that a geographical interpretation could bring about these ‘horribles’—at least in principle. Rather, Wiley essentially says that the list is artificially invented.”

Breyer limits his reference to that single word, but commentators (listed in the last post) all made reference to a “parade of horribles,” each being careful to make the reference in quotation marks. A casual Canadian reader, while aware that the phrase must have some distinctive meaning, is lost as to what it actually is. Indeed to anyone from Vancouver, “parade of horribles” conjures up images of the Parade of Lost Souls, of Commercial Drive fame, where Halloween revellers in ghoulish costumes happily followed the parade’s motto: “Honour the Dead and Wake the Living” (which may not be entirely inappropriate). But clearly something else was to be inferred here.

In an article dated to 1 July 2012 Ben Zimmer, writing for the Boston Globe, explains that the expression is rooted in nineteenth century satires of seventeenth century military parades in New England. Later adopted as a “legal-world insult,” the expression is used to “dismiss opponents’ concerns about a ruling’s negative effects.” Zimmer identifies an early proponent of the phrase as Thomas Reed Powell. Born in 1880, Powell attended Harvard Law School and went on to become a prominent legal observer. “One of his favorite expressions was ‘parade of imaginary horribles,’ which appeared in his writing as early as 1921.”  Zimmer also observes:

The expression, and the scorn for the opposition that it carries, are holding strong in the legal world, much to the chagrin of Justice Antonin Scalia, the Supreme Court’s foremost language kvetcher. In a 1990 law review article, Scalia listed “the familiar parade of horribles” as one of the “canards of contemporary legal analysis.” More often than not, Scalia feels, countering the doubts of dissenters as a “parade of horribles” is lazy reasoning: It’s still up to the writer of an opinion to explain “why all of the untoward results asserted to follow from the principle the court is adopting indeed do not follow.”

Returning to the case at hand, the phrase appears in the brief representing the position of Wiley. Their last argument calling for a geographically-based reading of first sale is titled: “Kirtsaeng’s Parade of Horribles is Speculative and Unpersuasive.” According to the publisher, “Kirtsaeng’s arguments depend on his assumption that the copyright owner could impose restrictions on downstream purchasers even after having authorized the sale of a particular copy in the United States.” Kirtsaeng’s argument (the brief is here) is that a geographical reading of first sale renders copyright owners with the capability of imposing “restrictions on downstream purchasers” – that is the crux of the dispute.

In any case, parade of horribles next appears in the dissent included with the majority opinion. Penned* by Justice Ruth Ginsburg, she writes: “The Court’s parade of horribles, however, is largely imaginary. Congress’ objective in enacting [the] importation prohibition can be honored without generating the absurd consequences hypothesized in the Court’s opinion.” In Part V-B-1 of the dissent, Ginsburg argues that “Copyright law and precedent … erect barriers to the anticipated horribles.” As illustration of how the horribles will not come to pass, seeking permission, implied license and fair use are all offered. But the principle argument by the publisher and echoed by Ginsberg, was that no such suits were likely to happen. From the dissent:

Most telling in this regard, no court, it appears, has been called upon to answer any of the Court’s “horribles” in an actual case. Three decades have passed since a federal court first published an opinion reading [first sale] as applicable exclusively to copies made in the United States. … Yet Kirtsaeng and his supporting amici cite not a single case in which the owner of a consumer good authorized for sale in the United States has been sued for copyright infringement after reselling the item or giving it away as a gift or to charity. The absence of such lawsuits is unsurprising. Routinely suing one’s customers is hardly a best business practice.

However, Breyer reminds all that “the law has not been long settled on this matter.” A geographical interpretation of first sale achieved favour at a Court of Appeal only through the Kirtsaeng/Wiley dispute. Meaning support from a higher court is less than two years old. Breyer writes:

The fact that harm has proved limited so far may simply reflect the reluctance of copyright holders so far to assert geographically based resale rights. They may decide differently if the law is clarified in their favor. … Thus, we believe that the practical problems that petitioner and his amici have described are too serious, too extensive, and too likely to come about for us to dismiss them as insignificant.

Between Wiley and Kirtsaeng, this case was fought on two fronts. For Kirtsaeng and its amici (friends of the court), the issue was the dilution of the limit of first sale. In response to that risk, libraries, museums, advocacy groups and many more parties offered articulate and well-reasoned arguments. Arguments not easily rejected by a “canard of legal analysis.” But from the perspective of Wiley and its supporters, the issue was not the role of first sale, but another section of Title 17, one which prohibits unauthorized imports. §106(a)(1) states “Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords … .”

For copyright owners, such a prohibition provides a mechanism by which markets can be divided into domestic and international segments, with varying products and pricing as desired by the copyright holder. Wiley argued that allowing first sale to apply to copies made outside the United States deprives the prohibition of meaningful effect. And that this will have negative consequences for publishers:

… there is a reason why Congress chose in 1976 to permit segmentation of international markets: It is both common practice and economically efficient for companies to sell their products in different countries at different prices, and in different forms, based on differing conditions in the relevant marketplaces. The market for college textbooks provides an excellent example.

With the disparity of income levels between the United States and developing nations, Wiley states:

If publishers were to price these textbooks at the same level as the U.S. editions, then the result would either be less widespread access to quality educational materials, or at least fewer legitimate copies of the textbooks as consumers unable to afford them turn instead to piracy.

To address market segmentation, my Kirtsaeng saga must run to a third post.

* For those curious as to how the Justices aligned on this case, the syllabus (headnote) gives the answer: “Breyer,  J., delivered the opinion of the Court, in which Roberts, C. J., and Thomas, Alito, Sotomayor, and Kagan, JJ., joined. Kagan, J., filed a concurring opinion, in which Alito, J., joined. Ginsburg, J., filed a dissenting opinion, in which Kennedy, J., joined, and in which Scalia, J., joined except as to Parts III and V–B–1.”

Update – April 2, 2013:  CBC describes the defeat of first sale in a New York District Court. ReDigi, an online market place for used iTunes songs, was deemed in violation of copyright. The court denied ReDigi’s reliance on first sale in part because of first sale’s seeming ineligibility in the digital sphere. (Fortunately, the Canadian Supreme Court insists that copyright be read in a technologically neutral fashion.) While the circumstances of this case differ from Kirtsaeng, a common theme is: should copyright owners have the means to control downstream uses of their works after receiving compensation for a sale conducted in accordance with copyright law?

Kirtsaeng – Part I

Last week the United States Supreme Court handed down its decision on Kirtsaeng v. Wiley, a decision favourable to libraries, consumers, and, notably, capitalists. At issue was a foundational element of market operations: the right to resell property free of constraint by the original owner of the property. In this case, a foreign graduate student attending an American university arranged for the lawful purchase of textbooks in his home country, which he then resold in the United States. The publisher claimed infringement.

The case makes for good reading, not only as it illustrates (and rebuts) a disturbing effort on the part of an academic press to claim larger rights than copyright actually affords, but also because of the elegance of the language of rebuttal. The majority opinion, written by Justice Stephen Breyer, leaves no doubt that the argument of the publisher is ill-conceived. Breyer’s erudite prose also raises the story to something far more enjoyable than merely bewildering references to sections and subsections.

The grant of copyright under Title 17 (the United States’ Copyright Act) includes an extensive list of exclusive rights reserved for copyright owners, rights that allow for significant control of copyrighted work and subsequent copies. However, those rights are subject to a few limitations; one such limitation being that of First Sale: “the owner of a particular copy or phonorecord lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or oth­erwise dispose of the possession of that copy or phonorecord.”

For a body of law that involves much arcane language, “first sale” is refreshingly transparent. With the proviso that the property transferred was lawfully made, “first sale” literally indicates where a copyright owner’s control stops: at the conclusion of the first transfer of the property. Clearly, pirated copies do not enjoy the shelter of first sale. But the property under question was not an outcome of piracy; these books were produced in accordance with the publisher’s wishes, by the publisher’s subsidiary organization for the Asian market.

The case hinged upon the meaning of five words: “lawfully made under this title”. The publisher asserted that the limitation of first sale did not apply to copies manufactured outside the United States. But as a significant amount of book printing is carried out overseas, such an interpretation has ramifications far beyond this case.

Imagine a not improbable scenario: a consumer purchases a new book in the United States (unaware that it was manufactured on foreign soil) and later gives away some books, including the foreign production, to a charitable organization collecting books, toys and other household items. A used bookstore then acquires the book from the charity and sells it to another consumer who eventually donates the book to a library. Not surprisingly, the library loans the book to its patrons. If the location of the book’s manufacture becomes the determinant of first sale, all actions after the first purchase become suspect.

To any ordinary individual, it is beyond belief that the United States Congress intended this outcome. Yet, the publisher’s interpretation was shared by lower Courts and the United States Solicitor General. Breyer acknowledges those views and then writes:

The geographical interpretation, however, bristles with linguistic difficulties. It gives the word “lawfully” little, if any, linguistic work to do. (How could a book be unlawfully “made under this title”?) It imports geography into a statutory provision that says nothing explicitly about it.

Breyer spends considerable time exploring the meaning of those five words, dryly observing: “…  neither ‘under’ nor any other word in the phrase means ‘where’”. He determines that “lawfully made under this title” means that to enjoy the limit of first sale, the manufacture must have met the requirements of American law. In other words, when a copyright holder authorizes the foreign production, location does not render first sale inapplicable. Alerting readers to the entirety of his analysis, Breyer writes: “We believe that geographical interpretations create more linguistic problems than they resolve. And considerations of simplicity and coherence tip the purely linguistic balance in Kirtsaeng’s, nongeographical, favor.”

Breyer then examines the past and present language of the exception of first sale, the common law history of first sale, and, the challenge a geographic reading of first sale would pose to other conditions within Title 17 that specifically reject geography (i.e.,“§104 of the Act itself says that works ‘subject to protection under this title’ include unpublished works ‘without regard to the nationality or domicile of the author,’…”). Following the linguistic and legal analyses, Breyer considers the social practices that have been built upon the exception of first sale. With reference to a myriad of briefs submitted to the Court, Breyer uncovers a range of activities taken for granted today that would have been cloaked in fear and uncertainty if the publisher’s arguments had prevailed.

Briefly, library collections in the United States contain some 200 million foreign produced works; “How are the libraries to obtain permission to distribute these millions of books? How can they find, say, the copyright owner of a foreign book, perhaps written decades ago?” Art museums would be at risk if they choose to display foreign-made art, i.e. the 20^th century works of René Magritte, Henry Matisse and Pablo Picasso. Even the works of American Cy Twombly would be affected, given that Twombly took up residence in Italy in 1957. And used-book dealers have  “operated … for centuries under the assumption that the ‘first sale’ doctrine applies.”

Libraries, museums and used-bookstores are at the forefront of the dissemination necessary for copyright to live up to its American constitutional mandate of furthering the progress of the arts and sciences. To impede such accepted practices of operation is troubling, to say the least. And yet, that is only one aspect of the problems created by a geographical reading of first sale. The very functioning of a consumer culture is at risk. A truly fearsome prospect was raised by technology companies and retailers; a loss of first sale means potential disruption to the resale of any consumer item that has copyrighted material within it and is manufactured abroad. At the top of the list were items which rely on software, including automobiles, mobile phones, tablets and computers. Yet, even this list is modest – the reality is that “over $2.3 trillion worth of foreign goods were imported in 2011.” Given that packaging materials contain copyrighted work, the potential reach of copyright holders into legitimate market operations is almost beyond comprehension.

My next post will continue this story. Included are the publisher’s efforts to paint these potential consequences as merely a “parade of horribles”, market segmentation, and how Canada might be affected should the site of production become a consideration in the handling of lawfully made products. In the meantime, the 6-3 opinion, delivered by Justice Stephen Breyer is here; Jennifer Howard covered the story for The Chronicle of Higher Education, and detailed analyses are available from Kenneth Crewes, Director of the Copyright Advisory Office for Columbia Law School, Howard Knopf of Excess Copyright, and Kevin Smith, Scholarly Communications Officer for Duke University.