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.