A Brave New World for Copyright and the First Sale Doctrine

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Arbitrage is defined as taking advantage of price differences between two markets. A few years ago Supap Kirtsaeng, a math major at Cornell, found that his textbooks could be purchased more cheaply in his native Thailand than in Ithaca, so he asked friends to buy the books there and ship them to him. He started selling them on eBay and soon cleared almost $40,000. Eventually a major textbook publisher, John Wiley & Sons, got wind of Kirtsaeng’s business and filed a copyright lawsuit.

That the suit involved copyright may seem odd, since Kirtsaeng wasn’t copying anything. He was just re-selling items that he’d already paid for — a time-honored way to make money in almost any economy.

But because the items were books, some special rules applied. The textbooks were foreign editions (i.e., printed abroad), and Wiley had inserted the following language into the title pages: “This book is authorized for sale in Europe, Asia, Africa, and the Middle East only and may be not exported out of these territories. Ex­portation from or importation of this book to another region without the Publisher’s authorization is illegal and is a violation of the Publisher’s rights.” Wiley argued that by importing the books Kirtsaeng was violating the copyright owner’s exclusive right under the U.S. Copyright Act to authorize distribution. 

Kirtsaeng argued that Wiley’s right to control the sale of its books ended when the books were first sold. This idea is not unique to copyrighted goods. A carpenter sells you a table; you can resell it to your neighbor. The law doesn’t want the carpenter telling you who to resell it to. The same has traditionally been true for items protected by intellectual property; lawyers call this the “first sale doctrine.”

The central question here was whether the American first sale doctrine applied to copyrighted works manufactured abroad. And the answer to that question depended upon the meaning of one piece of statutory text – whether Wiley’s foreign textbooks were “lawfully made” under the provisions of the U.S. copyright law. Wiley contended that this only meant works actually made in the U.S. Kirtsaeng countered that a book that was printed abroad but pursuant to authorization by the U.S. copyright holder (the situation with Wiley’s texts) was also “lawfully made” under U.S. copyright law. The Supreme Court agreed with Kirtsaeng. The first sale doctrine, the Court held, allowed Kirtsaeng to import and re-sell the books he’d lawfully purchased abroad.

At one level this was a narrow case of statutory interpretation. Yet it also has big implications for ordinary people, as well as the future of media distribution in an increasingly globalized and wired world.

Under Wiley’s reading, if you went on vacation and bought some books in a London bookshop, you may be violating copyright if you try to bring them home. Or imagine you buy a Mercedes. Can you resell it? Your Mercedes (like all modern cars) contains a lot of software. Software is copyrighted. If the software was written abroad, then under Wiley’s interpretation you need Mercedes’ authorization to sell your car. Heck, you might need their permission to lend your car.  From the perspective of every teenage kid in America, this is not good.

While the decision in Kirtsaeng makes a lot of sense, market changes are already undermining the power of the first sale doctrine. Netflix started as a business that sends DVDs through the mail. A nifty business model, not least because the first sale doctrine meant that once Netflix bought a DVD, it was free to rent it to you without any further payment to the movies studios that hold the relevant copyrights. But that all changed once Netflix began migrating its business from DVDs through the mail to streaming video. Now Netflix is no longer distributing “copies” of films that it has purchased. Rather, it must license from the rights to offer streams of copyrighted films. And every time a customer streams a film, Netflix must pay. First sale plays no role.

What can book publishers like Wiley learn from this? Stop selling copies. Start licensing digital files. This is already happening, and the more it does, the more control content distributors will have—and the less consumers will have. When you purchase an ebook from Amazon, you’re not actually buying a “copy” of the book. You’re just licensing use of 1s and 0s that your Kindle renders as a “book.” This is just one reason you have never seen a used ebook store.

Would it make sense to expand the first sale doctrine to cover electronic media? The doctrine arose when books were just paper. And it’s the nature of a paper book that when you sell it to someone else, you lose access to it.  But selling a “used” ebook requires only that you make a new copy of the book’s digital code. In the world of paper books, the first sale doctrine was important, but also self-limiting – selling a book did not mean copying it. In the world of ebooks, that limit on first sale disappears.  Or does it?

Enter Amazon, which has filed for a patent on a system that would cut off the seller’s access to a piece of digital content once the buyer has paid for it. If Amazon can succeed in making ebooks behave more like old-fashioned books, the result might be first sale 2.0, and a vibrant marketplace in used digital goods.   

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COMMENTS: 23


  1. Seminymous Coward says:

    I can scarcely believe Wiley was stupid enough to get an explicit SCOTUS ruling on a case they were doomed to lose. They had a lot of customers scared with their official-sounding threat. My paperback copies of textbooks used to raise the occasional eyebrow; even that modest barrier has just been washed away.

    Of course, I’m sure this will be taken out on the (literally) poor international students, who will see their prices raised to relative heights that exceed the absurd.

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    • Mike B says:

      Perhaps they figured the case would be ruled on similar grounds to Patent law. Shame that all works created in the US are instantly created under US law where Patents are jurisdiction by jurisdiction.

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  2. K says:

    A second-hand market for a non-scarce product that can be copied at virtually no cost? It’s even more absurd than selling non-scarce copies in the first place. Markets for digital copies do not need to exist and wouldn’t unless there were laws restricting property rights for those items. It just doesn’t make sense. People will be able to earn money from their work anyway — if there is enough demand for something, people get paid to create it.

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    • James says:

      So explain how you create a demand for something before it exists, and before you have any idea what the output will be. As for example you’re a would-be author who devotes perhaps a year of evenings & weekends to writing your first novel. Will you do that if there’s no prospect of making some money from it? Will people randomly offer to pay you to write before they know whether they’ll like what you produce?

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      • K says:

        “So explain how you create a demand for something before it exists, and before you have any idea what the output will be.”

        There won’t be demand for anything before anybody has any idea about the end product, and I don’t think anybody would assert that. As a writer, I could provide samples of previous work and maybe also of the work in progress. If I haven’t started writing yet, it would be very hard to get funding unless I have some previous works I can show. This is not a bad thing though, this trust mechanism works the same in the rest of society (and in business, of course).

        “As for example you’re a would-be author who devotes perhaps a year of evenings & weekends to writing your first novel. Will you do that if there’s no prospect of making some money from it?”

        Probably not, unless I actually write because I just like writing or because I want to spread some particular idea. However, I do think there should be and will be prospects of making money for writers as well as anybody else who produces something for the benefit of others.

        “Will people randomly offer to pay you to write before they know whether they’ll like what you produce?”

        As of today, do people know for sure whether they’ll like a book or not before they have paid for it? (No.) If they have read other books by the same author they will be able to make a good guess, but that would go for my scenario too — if you’ve read a book by a particular author and really liked it, you may want to support the author to write more books. Crowdsourcing funding (like Kickstarter does) might be a first step towards this model of funding creative works.

        I understand your scepticism, there are some major hurdles in society that need to be overcome before things could work well without copyright, but I do believe it can and will work. Will keep an eye on this in case you want to discuss this more.

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      • James says:

        “As of today, do people know for sure whether they’ll like a book or not before they have paid for it? (No.)”

        As of today, perhaps not. Certainly not as often as I’d like. As of say a decade or so ago, when I could happily spend a few hours each month browsing through a physical bookstore, there were much better odds that I would like the books I bought, even when they were by new (or previously unknown to me) authors.

        This, I think, is a major way in which the on-line book market fails both customers and publishers. Yes, it’s easy to order reference books, and fiction by the handful of authors whose works I automatically buy, but it’s hard to find those new authors.

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  3. m.m says:

    So, does this ruling essentially demolish the entire concept of foreign rights for published books? Or does it, as Seminymous C says, simply mean that publishers will now be obliged to raise prices of foreign editions to levels that make it unprofitable to export them to other countries?

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    • Mike B says:

      They can simply charge different prices for different languages and get probably 70-80% of the effect. If you speak Thai then you can get a discount Thai language textbook anywhere in the world. Few if any first worlders are going to learn Thai just to save $50 on a textbook.

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      • m.m says:

        Yes, but there are also differing foreign publication rights even when the book is the same language. For example, if I publish a book (written in English) in the US, publishing it in the UK or Australia (or in Thailand, but printed in English, not translated to Thai) often involves different rights.

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    • tung bo says:

      The publishers already combat this by varying the contents of the foreign editions by a small amount. It’s the same strategy they do in updating a popular text book every two years by adding 5% new materials and changing the questions. That way, most first world student don’t want the hassle to find the changes and locate the right set of questions to answer for homework. So they slavishly buy the new edition, often with the professor’s encouragement (since many of them are authors). It’s a scam and all parents of college students know it.

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  4. Raj says:

    EU is already ahead and allowing resale of digital goods such as software and games. See: http://www.wired.co.uk/news/archive/2012-07/04/eu-judgement-implications

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    • Mike B says:

      I can’t wait until the EU enshrines full ownership rights in the objects people get in MMO type games. Basically if you get a virtual item the game operator cannot prohibit you selling it for real money.

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      • Sbard says:

        That would open an interesting can of worms. If you have an ownership interest in your MMO assets, do they have to compensate you for them when they shut the game down? Could certain game mechanics start running afoul of gambling regulations? Could you sue someone for destroying your valuable starship or robbing your vessel at gunpoint in EVE Online?

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  5. Mike B says:

    I was brought into the first sale principle in the context of patents (where it is known as patent exhaustion) and in that case I believe it is fairly clear cut that the owner of a patent has the right to control import of items covered by his or her patent. Even if the same standard is applicable what I believe makes patents different is that unlike copyright where works such as textbooks are created pursuant to the US Code and upheld around the world thanks to all sorts of copyright treaties, patents must be filed separately in all jurisdictions. However I think that Patent law may explicitly give the patent holder blanket say on importation.

    http://en.wikipedia.org/wiki/Patent_exhaustion_doctrine

    Note that is not just a redirect to the Copyright first sale page.

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  6. Enter your name... says:

    Just wanted to say how much I loved this line:

    “Heck, you might need their permission to lend your car. From the perspective of every teenage kid in America, this is not good.”

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  7. Paul Dunmore says:

    Wiley already responded by raising the prices of foreign editions of English-language textbooks. A few weeks before my course began last year, the bookstore told me that Wiley had raised the price of my set text from $150 to $450 (NZ dollars, say $120 to $360 USD). The story was that this was to make it unprofitable to re-export books to the US. My story was that my students were not going to pay that price, and I wasn’t going to ask them to.
    I quickly found a reasonably priced text from another publisher, which was a pain for me and lost sales for Wiley.
    If that is typical, publishers will be forced to reduce the price of their US texts to levels that are comparable with what they can charge internationally. That probably means cutting the cost by being sensible about the fancy colour printing on archive-quality paper, and also reducing the expensive support materials, which benefit the professors and the schools more than the students.

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    • teh_drewski says:

      That’s especially insane because there’s only a moderate foreign exchange difference between New Zealand and the US, and New Zealand is a *higher* cost of business environment, not a lower one.

      Perhaps you could have asked a US based friend to buy copies of the text and ship them to you for resale in New Zealand to take advantage of cheaper, US printed English language copies. Or your students could take advantage of New Zealand’s “grey import” friendly laws.

      Although ultimately changing texts is probably the fairest way to “reward” Wiley’s behavious.

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    • Matt says:

      Great point, This is going to be a true case of price elasticity of demand. Before, publishers had tried to create separate markets to better achieve an equilibrium price in each market, thus giving the customer higher profit margins, however in this new situation, we will be closer to a true free market. I imagine as with anything it will be a combination of price of textbooks going up in some markets and down in others. It is basically taking away a portion of the publishers monopolistic control.
      Also this is going have further effect on grey market goods, thus allowing people in the developed world to purchase goods at a lower price.

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    • nobody.really says:

      “Wiley already responded by raising the prices of foreign editions of English-language textbooks….
      I quickly found a reasonably priced text from another publisher, which was a pain for me and lost sales for Wiley.
      If that is typical, publishers will be forced to reduce the price of their US texts to levels that are comparable with what they can charge internationally.”

      Uh … no. Publishers had simply observed that different market segments have different elasticities of demand, and had sought to serve each segment. This is little different than the way publishers segment the book market for people will a low tolerance for waiting (charging a high price for hard cover books) vs. people with a higher degree of patience (charging a lower price for paperback books that, curiously, get published much later than the hardcover versions).

      North America is the bread-and-butter for any English language publisher. They build their business plans around that market. And English language publishers are not going to jeopardize their profit margins in N. American just on the off chance of picking up a few extra sales in the UK and the Southern Hemisphere. Resale management policies were designed to permit publishers to reap their N. American profits, but also offer books for sale in the rest of the world at a price that people would be able to afford. But if the courts deprive them of this opportunity, publishers will simply sacrifice their sales in the rest of the world.

      What result?

      Scenario 1 (a/k/a Paul Dunmor’s scenario or the “Dog in the Manger” scenario): The rest of the world loses access to high-quality, inexpensive books. Publishers lose the opportunity to serve this ancillary market. No one will gain. Sure, people in N. America may have felt aggrieved by the fact that other people got books for lower cost than we did. But the net result of the court’s ruling will not reduce prices in N. America; the ruling will simply increase prices abroad.

      Scenario 2: Perhaps publishers will find some way to publish abroad versions of their books that prove to be unpalatable to N. American audiences. Perhaps the books could be published on paper that is beneath the quality N. American consumers expect, but that people in other parts of the world don’t mind. Perhaps the books could be riddled with politically incorrect language choices (“Negros” and “girls”) that would go unremarked on by English readers in the rest of the world. In this manner, publishers might create a mechanism for re-segmenting the market for a book.

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  8. AaronS says:

    OK, so that’s what the publisher said and wanted. But does that make it legally binding? I mean, if I published a textbook and said, “You must wear a coat and tie while reading this,” does that make it legally binding?

    I hope not.

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  9. mfw13 says:

    I’d add that the fact the first sale doctrine currently does not apply to digital goods may be having a negative impact on markets for them.

    For example, although I am a voracious reader, I refuse to get an e-reader because I do not want to pay for goods that I can neither lend to friends (something I do with physical books quite frequently) or re-sell (something I also do with my used books).

    I’d be much more likely to spend $$$ on e-books if sellers either created a lending system (i.e. I could “borrow” the digital file of a book for a specified period of time at a minimal cost, Netflix style), or created a resale system, so that I could lend or re-sell an e-book once I was finished reading it if I so chose.

    Until then I’ll continue to check books out from library for free and/or buy used books…

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  10. Ben says:

    It’s actually possiable to arbitrage amazon with its self, partially easy in Europe with non import export taxes and same currency accross EU here is a site that supplies all the comparative data for products, http://www.huge-river.com

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  11. Fractal says:

    It is clear that these companies want everything their way. For me that it is fine that for digital media these guys want to license rather rather than sell their products. That is fine when all is working… so what happens when the digital file is corrupted. As I leased it, like if my hire car broke down, I would expect replacing free of charge immediately (in perpetuity). It cannot be correct that if it works they own it, if it is broken I own it, and have no redress to oblige these companies to provide the service I paid for.

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