Kirtsaeng and Price Discrimination

We all know John Wiley & Sons Inc.: textbooks. A bright Thai student studying at Cal saw what is taught in every good principles of economics class, that a price discriminator cannot succeed if the person who buys at a lower price can sell to someone who wants the good, but is only being offered, directly, a higher price. The Thai student is named Mr Kirtsaeng, and he sold Wiley textbooks first sold in Thailand in the United States for a substantial profit.

Different prices is the issue.


Wiley, like any good profit maximizer, claimed that Kirtsaeng’s importation and resale of the books was an infringement of the company’s exclusive right to distribute its copyrighted works under §106(3) of the Copyright Act. Wiley also asserted the Copyright Act’s import provision under §602.

The economic issue is simple: should copyright law give the copyright owner the right to price discrimination, which means, of course, more profits. The legal issue is a little more complex. 

The First Sale Doctrine was the obvious response, but the district court prohibited the student from raising the defense, rejecting its applicability to goods manufactured abroad.  The jury found Kirtsaeng liable for willful copyright infringement and awarded Wiley statutory damages of more than half a million dollars.

Luckily, Mr Kirtsaeng appealed. The Supreme Court noted that §602(a)(1) of the Copyright Act makes it clear that importing a copy of a work without permission violates the copyright owner’s exclusive distribution right under §106(3) of the Copyright Act.  But, there is that testy First Sale Doctrine also.

The First Sale Doctrine (17 U.S.C. § 109) provides that an individual who knowingly purchases a copy of a copyrighted work from the copyright holder receives the right to sell, display, or otherwise dispose of that particular copy. So, can one reconcile the First Sale Doctrine with the Import Restriction?

The big problem for the Supreme Court was Quality King Distributors v. L’anza Research International. There, the Supreme Court held that the first sale doctrine limited the scope of §602(a). A foreign distributor who re-imported copyrighted works, made in the US, could assert the first sale doctrine as a defense. The Quality King Court did not rule on whether the first sale doctrine would apply to works manufactured outside of the United States.

Wait. Quality King is about hair products, or, more specifically, their labels. The book case is  the first Supreme Court case about the first sale doctrine. That case involved a claim by a publisher that the resale of its books at discounted prices infringed its copyright on the books. Bobbs-Merrill Co. v. Straus, 210 U. S. 339 (1908). Bobbs-Merrill had inserted a notice in its books that any retail sale at a price under $1 would constitute an infringement of its copyright. The defendants, who owned Macy's department store, disregarded the notice and sold the books at a lower price without Bobbs-Merrill's consent. The Supreme Court said that the exclusive statutory right to "vend" applied only to the first sale of the copyrighted work:

"What does the statute mean in granting 'the sole right of vending the same'? Was it intended to create a right which would permit the holder of the copyright to fasten, by notice in a book or upon one of the articles mentioned within the statute, a restriction upon the subsequent alienation of the subject-matter of copyright after the owner had parted with the title to one who had acquired full dominion over it and had given a satisfactory price for it? It is not denied that one who has sold a copyrighted article, without restriction, has parted with all right to control the sale of it. The purchaser of a book, once sold by authority of the owner of the copyright, may sell it again, although he could not publish a new edition of it.

 Sell a book, and the owner of the copyright has lost control of its resale. Hair products? Well, they can have a copyright label. And their is that pesky import restriction.

The  Quality King went to the statute itself. It noted that the most relevant portion of § 602(a) provides:

"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 under section 106, actionable under section 501. ... "

It refers to section 106. The Court explaints: "After the first sale of a copyrighted item "lawfully made under this title," any subsequent purchaser, whether from a domestic or from a foreign reseller, is obviously an "owner" of that item. Read literally, § 109(a) unambiguously states that such an owner "is entitled, without the authority of the copyright owner, to sell" that item. Moreover, since § 602(a) merely provides that unauthorized importation is an infringement of an exclusive right "under 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.'

Solved. But, what about textbooks, produced abroad? In Kirtsaeng, the Court notes that the location of the manufacture of the copyrighted work is critical when interpreting §109(a) because the codification applies the first sale doctrine to a particular copy “lawfully made under this title.”  The Court concluds that the statute should be read to favor a non-geographical interpretation, and that “lawfully made under this title” means “in accordance with” or “in compliance with” the Copyright Act, and rejects the argument that the language applies to works made “in territories in which the Copyright Act is law.” First Sale rules, it seems.


And copyright owners cannot squeeze more profits.

Downloading 24 songs costs $220,000, which is quite a bit for music. The threat of a significant award under the copyright statute for illegal downloading is real. $9,250 per work was the award in the below Minnesota case, where the defendant replaced her hard drive and denied downloading, but was not believed. She also had written a college paper on the legality of Napster. That was in a first trial. In a second, the jury wanted to award $80,000 per tune. The Court said verdict two was too much, and instead remitted damages to $2,250 per work, for a total of $54,000, on the ground that the jury’s award was “shocking.” The recording companies declined the remitted award and exercised their right to a new trial on damages. Third time is a charm, and $62,500 per song was the new number. In every way, she undercut a plea to be an "innocent" in the matter. But, Ms Thomas-Rasset was left with an appellate case about the constitutionality of the copyright statutory award.

Here is the Thomas-Rasset case: Capitol v Thomas-Rasset.


There were three trials and an appeal. Most interestingly, upon the Court's insistence, the parties filed
supplemental briefs in which the recording companies defended the court’sinstruction and Thomas-Rasset argued that the court erred when it instructed the juryon the “making available” issue. After a hearing, the district court granted Thomas-Rasset’s motion for a new trial on this alternative ground, holding that making a work available to the public is not “distribution” under 17 U.S.C. § 106(3). The issue whether making copyrighted works available to the public is a right protected by § 106(3) has divided the district courts. Compare, e.g., Atl. Recording Corp. v. Howell, 554 F. Supp. 2d 976, 981-84 (D. Ariz. 2008), and London-Sire Records v. Doe 1, 542 F. Supp. 2d 153, 176 (D. Mass. 2008), with Motown Record Co. v.DePietro, No. 04-CV-2246, 2007 WL 576284, at *3 (E.D. Pa. Feb. 16, 2007), and Warner Bros. Records, Inc., v. Payne, No. W-06-CA-051, (W.D. Tex. July 17, 2006).

 The district court, relying in part on the now-vacated decision in Sony BMG Music Entm’t v.
Tenenbaum, 721 F. Supp. 2d 85 (D. Mass. 2010), vacated in relevant part by, 660 F.3d 487 (1st Cir. 2011), granted Thomas-Rasset’s motion and reduced the award to $2,250 per work, for a total of $54,000. The court ruled that this amount was the maximum award permitted by the Due Process Clause.

The Eighth Circuit relied on the old Supreme Court Case, saying that " The Supreme Court long ago declared that damages awarded pursuant to a statute violate due process only if they are “so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.” St. Louis, I.M. & S. Ry. Co. v. Williams, 251 U.S. 63, 67 (1919). Under this standard, Congress possesses a
“wide latitude of discretion” in setting statutory damages. Id. at 66. Williams is still good law, and the district court was correct to apply it." The record companies choose the first, and smallest verdict.

Tannenbaum Down for the Count?

In 2007, graduate student Joel Tenenbaum was sued for downloading and distributing 30 songs using file-sharing services like Napster, Morpheus, Kazaa and LimeWire. After his five days in court with a jury of his peers, he was found to have infringed the copyrights in the 30 songs. The result? Statutory damages of $22,500 for each song. Pow.

Now, this case is famous because Charles Nesson, law professor, used this case to question the constitutionality of copyright damages. The judge, Nancy Gertner, bought the argument, and, finding the award unconstitutionally excessive, reducing the award to $67,500. When there is a principle to fight, that fight usually happens, and here it did. Tenenbaum moved for a new trial or remittitur, arguing that the court should remit the award to the statutory minimum because its excessiveness both offended due process and merited common law remittitur. Judge Gertner bypassed the issue of common law remittitur, and reduced the jury award by a factor of ten on the basis that the award was unconstitutionally excessive under the standard for evaluating punitive damage awards enumerated in BMV v. Gore, 517 U.S. 559 (1996).

On to appeals. The First Circuit appeals court found Professor Nesson's attempt to change copyright unpersuasive, and reinstated the jury award of $675,000 on procedural grounds. It rejected the argument that copyright damages statute "was unconstitutional under Feltner [v. Columbia Pictures Television, Inc., 523 U.S. 340(1998)], that the Act exempts so-called ‘consumer copying’ infringement from liability and damages, that statutory damages under the Act are unavailable without a showing of actual harm, that the jury’s instructions were in error, and his various trial error claims.” The First Circuit left the door open for Judge Gertner, saying that, although her ruling on constitutionality was incorrect, she should consider common law remittitur. Remitittur is the power of the judge in a civil case to reduce or eliminate of jury's damage award. Remittitur is appropriate only if the award exceeds “any rational appraisal or estimate of the damages that could be based on the evidence before the jury,” where such evidence is reviewed in the light most favorable to the prevailing party.

Now, litigation takes turns unplanned by the best litigators. Here, Professor Nesson lost Judge Gertner when the case was sent back to district court. She retired. The new judge assigned to the case, Judge Rya Zobel, was less sympathetic. The Gore standards, it seems, do not apply in a statutory setting. Another Supreme Course case does, the Williams case does, and that says to defer to Congress in setting damages.

Where now, Professor Nesson?

 Tenenbaum Decision re: Gore or Williams?

Protect Your Business Work Product: Copyright

USI MidAtlantic, Inc. suffered a $22.5 million judgment for copyright infringement from competitor. A former employee of the competitor joined MidAtlantic and supplied them with binders of information about insurance products created by his former employer. Most lawyers would look to confidentiality agreements and trade secrets, but Graham, the competitor, had done something even better: they copyrighted the material. When MidAtlantic copied language from the binders into over 800 client proposals, they were found to indirectly infringe the copyrights.Graham recovered profits attributable to USI MidAtlantic's infringement, plus prejudgment interest.

The lesson? Copyright can be used to protect business work product. The plaintiff proved lost profits: their task may have been easier if they had promptly registered their copyrights.

The big legal issue in the case how far back can copyright damages go? Three years is the statute of limitations. The issue is, though, whether the statute of limitation runs three years from discovery or from when the claim "accrued," e.g. "occurred." Under the injury rule, a claim accrues, and the statute of limitations begins to run, when the plaintiff suffers the injury. If the discovery rule applies, the claim arises when the plaintiff discovers, or with reasonable diligence should have discovered, the injury. The difference: in this case the shorter limit resulted in $2 million in damages, the longer $20 million.

The Third Circuit went with the Discovery Rule. "Although we have not previously addressed this issue, eight of our sister courts of appeals have applied the discovery rule to civil actions under the Copyright Act. See Warren Freedenfeld Assocs., Inc. v. McTigue, 531 F.3d 38, 44-46 (1st Cir.2008);  Comcast v. Multi-Vision Elecs., Inc., 491 F.3d 938, 944 (8th Cir.2007);  Roger Miller Music, Inc. v. Sony/ATV Publ'g, LLC, 477 F.3d 383, 390 (6th Cir.2007);  Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 705-07 (9th Cir.2004);  Gaiman v. McFarlane, 360 F.3d 644, 653 (7th Cir.2004);  Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 796 (4th Cir.2001);  Daboub v. Gibbons, 42 F.3d 285, 291 (5th Cir.1995);  Stone v. Williams, 970 F.2d 1043, 1048 (2d Cir.1992)."

Defense, it seems, often relies on some shred of hope in some case somewhere. On this issue, it is a New York District Court case that gives copyright defendants hope to limit the limitations to accrual. Auscape Int'l v. Nat'l Geographic Soc'y, 409 F.Supp.2d 235, 247 (S.D.N.Y.2004). And defendants want to broaden a Supreme Court case on FCRA statute of limitations to copyright. TRW Inc. v. Andrews, 534 U.S. 19, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001). That dog, it seems, won't hunt.

Here is the Third Circuit case: WILLIAM GRAHAM COMPANY v. HAUGHEY USI

CD's? CD's still exist? The law tries to catch up . . .

The trouble with technology and the law is that technology moves fast; the law does not.

So, finally a ruling on whether promotional music compact discs can be resold without violating copyright. The answer? Yes, because of the first-sale doctrine. UMG Recordings, Inc. v. Augusto, Case No. 08-55998 (9th Cir., Jan. 4, 2011) (Canby, J.).

UMG Records distributed promotional CDs. They sent them to critics, radio personnel, and others for promotion. Of course, they claimed the cd was only for those to whom they sent them: acceptance of the cd is a license; not for resale; promotional use only; resale or transfer is not allowed and may be punishable under federal and state laws. Very imposing.

I had always wondered, since way back in the day, when a local general manager of a Fort Wayne tv/radio empire gave me a new Iggy Pop album sent to them for promotion, whether I had been the unwitting recipient of a copyright violation or some kind of crime. Cal wasn't worried; but, I never wanted to risk my neck for Iggy Pop.

The question is answered. Despite the warning of the Dire Wolf on the recordings sent, unsolicited and for free, we need not beg "don't murder me record company, please don't murder me," although Mr Augusto was dragged to the Ninth Circuit. His sin? Ebay.

The district court granted Augusto summary judgment finding his sale on Ebay of Big Bad Record Company's promotional cd's permissible under the first-sale doctrine. Lawfully acquiring title of a copyrighted work gives one the permission to transfer, sell, or dispose of that work without permission from the copyright owner. That's the first sale doctrine (which says the second sale is not a copyright violation).

The Supreme Court created the first sale doctrine, which is very simple. Once you buy a car, you can resell it at any price. Why should copyright differ? In Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), the Supreme Court said it should not. Describing its own case, the Supreme Court explained: "In that case, the publisher, Bobbs-Merrill, had inserted a notice in its books that any retail sale at a price under $1.00 would constitute an infringement of its copyright. The defendants, who owned Macy’s department store, disregarded the notice and sold the books at a lower price without Bobbs-Merrill’s consent. We held that the exclusive statutory right to vend applied only to the first sale of the copyrighted work..."

The Big Bad Record Company said its distribution of promotional CDs constituted a license and not a “sale,” pointing to its promotional statements on the CDs. But, the first-sale doctrine applies not only to a sale, but also to any transfer after the copyrighted work being placed in the stream of commerce. And, as any contract law 101 would teach, the free, unsolicited distribution did not create a license. And the commentators had explained that "first sale" really means "first transfer:" Although this statutory limitation is commonly referred to as the first sale doctrine, its protection does not require a "sale." The doctrine applies after the "first authorized disposition by which title passes." 2 Nimmer § 8.12[B][1][a]. This passing of title may occur through a transfer by gift. See 4 William F. Patry, Patry on Copyright § 13:15 ("Since the principle [of the first sale doctrine] applies when copies are given away or are otherwise permanently transferred without the accoutrements of a sale, 'exhaustion' is the better description."); 2 Paul Goldstein, Goldstein on Copyright § 7.6.1 n.4 (3d ed.) ("[A] gift of copies or phonorecords will qualify as a 'first sale' to the same extent as an actual sale for consideration.").

Best of all, there is a Unordered Merchandise Statute. Because the discs were unordered merchandise, the recipients were free to “retain, use, discard, or dispose” of them as they saw fit under the Unordered Merchandise Statute." That statute does, indeed, make unordered merchandise a gift. Kudos to the defense lawyers for this research.

The 9th Circuit dismissed the infringement claim. I am safe for receiving Iggy Pop. And future lawyers will try to understand what was a cd . . .

Fees . . fees. . . fees . .

Section 505 of the Copyright Act provides:

In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs.

Seems simple.

The court has two tasks in applying §505: first, deciding whether an award of attorney's fees is appropriate and, second, calculating the amount of the award.

Simple again.

When is an award appropriate? One must be a "prevailing party," meaning that ". . . one has to be awarded some relief by the court. Id. at 603, 121 S.Ct. 1835. The key inquiry is whether some court action has created a “material alteration of the legal relationship of the parties.” Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep't of Health & Human Res., 532 U.S. 598, 604, 121 S.Ct. 1835, 149 L.Ed.2d 855 (2001).

So, once one prevails, the analysis goes on because, even if a plaintiff or defendant "prevails," the Supreme Court in rejected a rule requiring attorneys' fees in copyright infringement cases as a matter of course, instead leaving the question of attorneys fees to the discretion of district courts. Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994). The Supremes ruled that “attorneys' fees are to be awarded to prevailing parties only as a matter of the court's discretion.”).

So, how does a Court determine its discretion? The Ninth Circuit tells the Court to look at factors. Five factors. They are:

(1) the degree of success obtained;
(2) frivolousness;
(3) motivation;
(4) objective unreasonableness (both in the factual and legal arguments in the case); and
(5) the need in particular circumstances to advance considerations of compensation and deterrence.

But, remember: the applicable standard depends on the statute, and Section 505 simply authorizes fee awards to the prevailing party.

Derivative Works Exception

Here is a corner of copyright law: the Derivative Works Exception. 17 U.S.C. §203(b)1), the Derivative Works Exception, presents a defense to a claim of infringement. It provides that a derivative work prepared under the terms of a license “may continue to be utilized under the terms of the [license] after its termination.”



The Supreme Court explained in Mills Music, Inc. v. Snyder, 469 U.S. 153 (1985), that “an entitlement to continue to distribute derivative works under the Derivative Works Exception depends on the terms of the license.” Who's Sorry Now? That is the song which is the subject of the Mills Music case. It's author sold the renewal rights in the song to Mills Music and received an advance and 50% of future revenues on reproductions and a fee on sheet music. The author died, and his estate cancelled the transfer, causing almost all the rights in the copyright to revert to the estate. The exception? Under §304(c)(6)(A), a "derivative work prepared under the authority of the grant before its termination may continue to be utilized under the terms of the grant after its termination." There were many sound recording of "Who's Sorry Now," so the dispute was about who received the continuing royalties from the recordings. The result? Since the recordings had been "prepared under authority of the grant" from the author to petitioner, the terms of the agreement that had been in effect prior to the termination governed the record companies' obligation to pay royalties, and that under those agreements petitioner and respondents were each entitled to a 50 percent share in the net royalty.

What about architectural drawings? In a new case, Architettura licensed its site plans for an apartment complex in Fort Worth to the developer. Ultimately, another architect was chosen. Architettura wanted to be paid for its work, but the developer refused. Architettura claimed infringement. It was undisputed that Architettura owned the work and could revoke any licenses, which it did; but, the Court found that if another firm had used their work while developing the site plan, the new work was a derivative work. And the Plaintiff has a "Who's Sorry Now" problem. They argued that the Derivative Works Exception did not apply to a revocable license of limited duration, as here, but should only be applied to a statutory termination, as in Mills. The Court disagreed.

The lesson? Beware of derivative works if you license a copyright.