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Does ‘first sale’ mean fewer sales?

copyrightSoon after the Supreme Court’s decision this past spring in Kirtsaeng v. John Wiley & Sons, a story in The New York Times gave voice to a widespread concern that a doctrine called “first sale” would soon swallow up a U.S. copyright owner’s right to control and limit importation and redistribution of not only textbooks intended for foreign markets but also of e-books not intended for lending (library or personal).

The Kirtsaeng case turned on a contest for priority between apparently conflicting provisions in the Copyright Act – one setting out the “first sale” doctrine and the other dealing with a copyright owner’s right to control importation of copies of their work. The Supreme Court tipped the scales in favor of first sale and interpreted the right to control importation as essentially non-existent for all practical purposes.1

In the print world, the Kirtsaeng decision affects college textbook publishers and authors most significantly. Until Kirtsaeng, they were able to sell copies of their U.S. textbooks at deep discounts to customers in developing nations that could not otherwise afford to purchase them. This allowed the textbook publishers to increase their print runs, drive down their per-unit cost of goods sold, spread development costs across more units, and exploit marginal or sub-marginal markets. After Kirtsaeng, that strategy and those markets were lost.

U.S. textbook publishers’ initial reaction to Kirtsaeng has varied. Cengage has announced publicly that it is adopting a new global pricing strategy based on U.S. pricing. Pearson appears to be doing likewise plus moving toward localized editions. According to comments on an earnings call, Wiley seems to be relying on a trusted distributor model coupled with a shift toward digital, increased international prices, and localized or differentiated editions. And although publishers may adopt a variety of strategies in response to Kirtsaeng, there’s no indication that the expansion of first sale has ended. E-books might have been the next casualty, but for an even more recent digital music case, decided after Kirtsaeng.

Publishers’ ability to control what becomes of an e-book after it leaves the digital store shelf is obviously a concern because of the ease, speed, and low cost of copying digital works. Ebooks, after all, are not subject to the practical limitations of reproducing and distributing paper copies. There is no cost of paper and ink. Press and bindery time are not required. The cost of holding an inventory is minimal because you need only one master copy and it requires no physical space. There is no counterpart to the packing and shipping cost of a product with some heft. The time it takes to move a copy from point A to point B, no matter the distance, is measured in microseconds. And each copy is indistinguishable from the original, with none of the wear and tear that the original physical copy experiences over time and none of the degradation that each new generation of product suffers.

So, it has become the norm for e-books to be licensed rather than sold. This has meant that first sale did not come into play. How could it, when there was never a “sale” transferring ownership of a copy but merely a lease or license? Moreover, the end user license served as a binding 2 contract with enforceable contractual restrictions on what the end user could do with a licensed copy.

But, a case decided just a few weeks after Kirtsaeng holds hope for ebook publishers – a New York district court held that the secondhand market for music downloads operated by a company called ReDigi could not use the first sale doctrine as a shield against Capitol Records’ copyright infringement claims.

ReDigi had launched a web-based business that invited users to re-sell their legally acquired digital music files and buy used digital music from other ReDigi users at a fraction of the price then available from iTunes. When a user “sold” a digital music file in this secondhand market, ReDigi deleted the original file from the seller’s computer and uploaded a copy to its server in Arizona, where a buyer could access or download it.

In reaching its decision that the service provided by ReDigi infringed the copyrights of Capitol Records, the Court explained that, as a technical matter, the laws of physics render it simply impossible for a “material object” to be transferred over the Internet; a digital file can come to be on a buyer’s computer only by being “saved” or reproduced there. To the Court, the fact that the original copy had been deleted didn’t matter. What mattered was that a new copy had been created. Therefore, ReDigi was not exercising the distribution right — which is insulated from an infringement claim by the first sale doctrine. Instead, it was exercising the reproduction right, which the first-sale doctrine does not insulate from claims of infringement.

This reasoning would apply with equal force to any attempt to establish a secondhand market for e-books. Like a digital music file, an e-book is technically not “distributed” to the buyer; instead it is reproduced on the buyer’s device. In the case of a second hand sale, presumably the original copy would then be deleted from the seller’s device. This process implicates the reproduction right rather than the distribution right, according to the ruling in ReDigi, and so first sale would not serve to insulate the transfer from a copyright infringement claim.

1 TAA filed an amicus brief in support of the publisher’s position in the Kirtsaeng case and, although its arguments did not ultimately carry the day, its brief was sufficiently persuasive to be cited by Justice Ginsberg in her dissenting opinion.

Steve Gillen is a lawyer and partner in the intellectual property firm of Wood Herron & Evans and has focused his practice on publishing and media matters for nearly 35 years. He is a TAA Council Member and a regular speaker at TAA conferences. sgillen@whe-law.com