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First Sale Hearing Raises Questions on Kirtsaeng and Digital Goods
Posted On June 24, 2014
A recent congressional hearing on the future of the first sale doctrine produced great discussion but little consensus as witnesses disagreed on whether Congress should modify the doctrine in response to the Supreme Court’s Kirtsaeng v. John Wiley & Sons, Inc. decision and on the doctrine’s application to digital goods. First sale allows the purchaser of a “particular copy” of a copyrighted work to resell, lend, trade, or otherwise dispose of that copy. The hearing debated whether that principal should apply to digital works that are often licensed rather than purchased, and how it should apply to copyrighted works created or intended for sale overseas.

Elements of First Sale

Found in Title 17, Section 109 of the U.S. Code, the first sale doctrine is considered an exemption to a copyright. It says that after the copyright owner has enjoyed the “first sale” of a particular copy of a copyrighted work—such as a book, music CD, or movie DVD—the copyright owner cannot control what the purchaser can do with the particular copy. The theory is that in realizing the sale of the particular copy, the copyright owner has obtained the income benefit that copyright was intended to protect, and the owner of that particular copy should not be restricted in what he can do with it.

Two elements of this principle become critical when considering whether it should apply to digital goods. The first provides that in order for first sale to apply there must be the sale of a copyrighted work in the legal sense, requiring the transfer of all legal title in the property to a new owner. While digital goods are often characterized as being “sold,” the license agreements that accompany them often describe the transaction closer to a “right to use” the good under certain circumstances. For example, when you “buy” a song from iTunes, you can use that song only on certain devices and under certain conditions. The second element is that the work must be a “particular copy.” Digital works are often transferred by streaming or downloading copies of copies, so a “particular copy” may not exist in a traditional sense. Due to these considerations, the first sale doctrine has generally been held not to apply to many forms of digital works such as software, streaming media, and ebooks.

As an additional complication, in 2013 the U.S. Supreme Court heard a case involving an entrepreneurial young man named Supap Kirtsaeng who discovered that his college textbooks were being sold in his home country of Thailand for far less money than they were being sold in the U.S. Consequently, he began arranging for family and friends to purchase these cheap copies and ship them to him in the U.S., where he resold them for a profit to himself, but for still less than the U.S. price. The publisher, Wiley, sued him, alleging that its copyright in the textbooks controlled distribution of the works and limited that distribution to Thailand. The court, however, determined that first sale did apply and that the works could be resold by the purchaser even after being sold in Thailand.

Opposing Views

The June 2 hearing before the Committee on the Judiciary’s Subcommittee on Courts, Intellectual Property, and the Internet was attended by a number of stakeholders representing publishers, content creators, user groups, and the technology industry. Leading off the hearing was Stephen M. Smith, Wiley’s president and CEO, who testified that the Supreme Court’s decision hurt both publishers and consumers of his company’s textbooks. By losing the ability to match pricing with markets, Wiley had to offer more restricted access or higher prices in overseas markets, limiting availability to students there. Smith also testified that these restrictions have increased counterfeiting and piracy with no concurrent benefit to U.S. consumers.

Taking the opposite view was John Ossenmacher, founder and CEO of ReDigi, a company that offers a “Pre-Owned Digital Marketplace” for the reselling of digital content. In support of the court’s decision, Ossenmacher said that “secondary markets have always existed … [and] supported the primary market”; the court’s decision did nothing to change that. Also testifying in support of the court’s decision were representatives of library organizations and users’ rights groups. The library groups said the decision was necessary to ensure that libraries could continue their existing practices without worrying about where works were printed. The users’ rights groups testified that the court’s decision was consistent with consumers’ expectations.

“Consumers’ expectations” emerged as a central theme in the broader discussion about first sale and digital goods. What are consumers expecting when they hit the Buy Now button to purchase a Kindle ebook from Amazon? If consumers are expecting ownership but are getting only a license (subject to an often long, complicated, and generally one-sided click-through licensing agreement), are they being deceived? If that’s the case, then is first sale and copyright the answer, or is contract and consumer protection law the answer?

Not surprisingly, responses broke down along similar lines. Representatives from the publishing and content provider industries supported the current situation in which the first sale doctrine does not apply to digital content, arguing that because of the ease of distribution of perfect copies of digital content, licensing works helps to prevent piracy and counterfeiting. Others argued that licensing can be pro-consumer in that the prices are often lower due to not needing to account for resale markets. (For example, a textbook seller prices a print book at $100, knowing that the book will likely be used by at least two people: the initial purchaser and a second user who purchased it as a used book. Under this theory, the textbook seller could license the electronic version of the book for $50 to each buyer, reducing the cost for the first buyer and possibly even the second buyer.) A representative from BSA | The Software Alliance noted that licensing software can create a pro-consumer relationship that allows for bug fixes, upgrades, and other services, which a direct purchase—which ends the relationship—would not provide.

The Committee’s Response

The questions from the members of the committee also suggested that much of the problem lies in the area of consumer expectations. Committee Chairman Bob Goodlatte (R-Va.) commented that different pricing between digital and nondigital versions of a work conveys to the consumer that she is obtaining a more limited set of rights to the work. Conversely, similar pricing might at least imply that the same set of rights are being conveyed as with a clear purchase. As a neutral party, a UCLA faculty expert spoke against a digital first sale right, but criticized the “mind-numbingly complex” license agreements that often accompany digital transactions and suggested the answer lies with greater consumer protections.

The hearing was neither the first nor will it be the last word on this subject. Less than 2 weeks later, these first sale issues came up again at a panel discussion sponsored by the Congressional Internet Caucus, a bipartisan group working to “promote the promise and potential of the Internet.” New to this meeting was a discussion about the possibility and implications of expanding licensing to tangible goods, particularly those that are only used on occasion. (License a pizza maker, anyone?) But again, the bulk of the discussion focused on whether consumer expectations were being adequately protected in licensing transactions.

Most observers do not expect immediate legislative action to address either the issues raised by the Supreme Court’s Kirtsaeng decision or the question of whether there should be a digital first sale principle. Between broader issues of copyright reform still being debated and election-year politics, it may be that the digital and nondigital marketplaces will have as much impact on the first sale doctrine as any legal changes.

George H. Pike is the director of the Pritzker Legal Research Center and a senior lecturer at the Northwestern University School of Law. He teaches legal research, intellectual property, and privacy courses at the School of Law in both the J.D. and Northwestern’s innovative Master of Science in Law program. Prof. Pike is a frequent lecturer on issues of First Amendment, copyright, and Internet law for library and information professionals. He is also a regular columnist and writer for Information Today, publishing a monthly column on legal issues confronting information producers and consumers. Previously, Prof. Pike was director of the Law Library at the University of Pittsburgh School of Law, and held professional positions at the Lewis and Clark Law School and at the University of Idaho School of Law, and was a practicing attorney in Idaho Falls, Idaho. Prof. Pike received his B.A. degree from the College of Idaho, his law degree from the University of Idaho, and his Masters in Library Science from the University of Washington. He is a member of the American and Idaho State Bar Associations, the American Association of Law Libraries, and the American Intellectual Property Lawyers Association.

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