Parallel Imports and the Exhaustion Doctrine: A Thai Take Away in the USA

The recent judgment of the Supreme Court of the United States in the case of Kirtsaeng v John Wiley Inc is already attracting a lot of attention. This is understandable because of its effect in rightly being seen as confirming that, at least in relation to copyright specifically, the US law presently recognises the concept of ‘international exhaustion’. In the decision in Kirtsaeng the US Supreme Court confirmed (in a majority decision) that the ‘first sale doctrine’ (another expression for ‘exhaustion doctrine’) applies in respect of copyrighted works manufactured abroad with the permission of the copyright owner.

In summary, the exhaustion doctrine deals with the extent to which the owner/holder of certain intellectual property rights (‘IPR owner’) in respect of a particular product can control an individual item or copy of that product after the item or copy is sold by or with the authorisation of the IPR owner. Generally, a ‘national’ form/version of the exhaustion doctrine, which some countries operate, recognises that once an individual item or copy manufactured within the country is sold, by or with the consent of an IPR owner in respect of the item or copy, the purchaser can do whatever he likes with the individual item or copy as, in other words, the rights of the IPR holder are ‘exhausted’ by that authorised sale. The more controversial aspect of the exhaustion doctrine is whether an ‘international exhaustion doctrine’ applies or is to be recognised. Under an international exhaustion doctrine the rights of an IPR owner will also be ‘exhausted’ in respect of items or copies sold by the IPR owner or with its consent in any other country. An international exhaustion doctrine could obviously have a hampering effect on the strategy of an IPR holder to market a product at different prices in different countries or regions. At the same time an international exhaustion doctrine may provide arbitrage opportunities, through ‘parallel imports’, for some people with a particular ‘enterprising’ orientation —- like the defendant in Kirtsaeng v Wiley.

The defendant was a Thai national who had gone to the USA as a student. On realising that copies of certain books in his native Thailand were cheaper than the copies on sale in America, he arranged with acquaintances to have Thai copies bought and sent to him which he then resold at a profit in the USA. John Wiley Inc was the copyright holder in respect of the books who had granted permission for the manufacture and sale of the copies in Thailand on condition that those copies were not for sale in the USA. Accordingly, John Wiley sued in the US courts for the alleged infringement of its rights. Ultimately, the decision turned on technical issues of interpretations of specific provisions of the American Copyright Act 1976 (USC Title 17) primarily with the court finding in favour of the defendant in a majority decision.

The court held that while section 106 of the Copyright Act confers some rights on the copyright owner, including distribution rights, those rights are qualified by the provisions of sections 107-122 of the same Act. In particular section 109(a) sets forth the ‘first sale doctrine’ and provides that the owner of a copy ‘lawfully made under this title’ can sell or otherwise dispose of the possession of that copy without the authority of the copyright owner. The court (majority opinion delivered by Breyer J.) held that ‘lawfully made under this title’ means made ‘in accordance with’ or ‘in compliance with’ the Copyright Act and that this extends to copies manufactured outside the USA with the permission of the copyright owner. In other words, the ‘first sale doctrine’ operates to protect the owner of a copy of a work even though the work was manufactured outside the USA, and that owner may dispose of that copy without the permission of an owner of copyright in respect of the work concerned.

Another significant provision considered by the court was section 602(a)(1) of the Copyright Act which provides that importation into the US of copies of copyright work without the authority of the copyright owner is an infringement of the copyright owner’s exclusive distribution right under section 106. Ordinarily, this provision might have been expected to entitle the claimant Wiley to succeed in the action against Kirtsaeng. There was, however, the small technical matter that the US Supreme Court had ruled in a previous case that the reference in section 602 to a copyright owner’s exclusive distribution rights under s.106 also incorporates the limitations to those distribution rights contained in sections 107-122 and especially the first sale doctrine under section 109: Quality King Distributors, Inc. v. L’anza Research Int’l, Inc.  523 U. S. 135, 145 (1998).

The consequence, evidently, is that while importation of copies of works without the authority of the copyright owner may prima facie be an infringement of the copyright owner’s exclusive distribution right, the defence of the first sale doctrine applies to such importation as much as it applies to sale of domestically manufactured copies. This is because in each case the exclusive distribution right derives from section 106 which in itself is subject to the limitation on that right by, inter alia, the first sale doctrine as expressed in section 109(a). It was recognised, in the written opinions of the judges, that this decision would have a serious curtailing effect on the scope of application of section 602 with Kiagan J (joined by Alito J), while supporting the majority decision, suggesting that perhaps it was intended that section 602 should have an effective import prohibition but one that does not interfere with the first sale doctrine or that removes first sale protection from every copy manufactured abroad.

A number of matters are worth bearing in mind about this unquestionably important decision of the court in Kirtsaeng. In the first place, the judgment was made in the specific context of copyright and it will be premature to read the judgment as adopting ‘international exhaustion’ in the US in respect of different types of intellectual property (and the court even suggests that a lessee of a copy is not protected, unlike a purchaser/owner). Nevertheless, the majority opinion in particular has a clear colour and ringing tone of consumer protection. Breyer J observed that the first sale doctrine is ‘a common law doctrine with an impeccable historic pedigree’ and, after quoting approvingly from a 17th century dictum of Lord Coke, said: ‘A law that permits a copyright holder to control the resale or other disposition of a chattel once sold is similarly “against Trade and Traffi[c], and bargaining and contracting.”’ He also said: ‘American law too has generally thought that competition, including freedom to resell, can work to the advantage of the consumer.’ Very significant too is the dismissal of the argument that the interpretation of section 109(a) adopted by the court will make it difficult or impossible for publishers (or copyrights owners) to divide foreign and domestic markets with the retort that there is no basic copyright law principle that publishers are especially entitled to such rights. Finally, it is similarly significant that the court pointed to a range of instances (referred to dismissively in the dissent as a ‘parade of horribles’) when important institutions and organisations may be negatively and undesirably affected if the court were to adopt an interpretation denying first sale protection to copies manufactured abroad.

In a subsequent post, we plan to compare this decision with the attitude towards exhaustion of IP rights in the United Kingdom as another common law (yet ‘European’) example and also in Nigeria as an example from a developing country.

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