Ninth Circuit court neuters first-sale laws

[General Zod]

http://arstechnica.com/tech-policy/news ... own-it.ars

Let's say a relative gave you an imported Omega watch over the holidays. It's a nice piece, but it's not exactly your style, so after agonizing over the issue for the appropriate number of months, you decide to sell it over eBay.

Not so fast. Thanks to a decision by the Ninth Circuit Court of Appeals, that might not be so easy. In fact, the store that sold it, Costco, shouldn't have sold it in the first place, the court recently ruled, because the doctrine of "First Sale" has limits. Section 109 of the Copyright Act says that a copyright owner of a product has the sole initial right to distribute it. Then the subsequent buyers have the right to "to sell or otherwise dispose of the possession of that copy"—in other words, sell it again.

But now the Ninth Circuit says this doesn't necessarily apply to items in which a company's copyrighted logo was inscribed on a product made abroad, as in this case. The Public Knowledge advocacy group calls this decision "a terrible idea," and has filed an amicus brief with the Supreme Court, which is reviewing the case.

"What happens to Netflix, Amazon and eBay," PK's Anjali Bhat worries, "if they have to find out where each item was made, whether it has a copyrighted logo made outside the US (if the item itself isn't a copyrighted work), and then buy licensing rights from the copyright owner if the item was made abroad? That's an enormous economic burden to put on businesses who follow that model."

Quality King

Costco didn't directly buy these logoed watches from Omega. Instead, it purchased them at a bargain price via the so-called "gray market"—from distribution companies authorized to sell the items overseas. A company called ENE Limited bought them up and sold them to Costco, which put them up for sale at its stores in California. When Omega found out about this activity, it sued Costco for infringement.

Standing in the way of the company's complaint was the Supreme Court's 1998 Quality King Distributors decision, which put limits on this sort of litigation. In that case, California hair care product maker L'anza sued Quality King for illegal distribution of L'anza products. These US-made items came to Quality King via a similarly circuitous route. The company bought them extra cheap from a distributor in Malta, which had purchased them with affixed copyrighted labels from L'anza's United Kingdom wholesale outlet.

L'anza charged that because King bought its products outside the US, Section 109 protections didn't apply. Those protections were said to be overruled by Section 602, which prohibits unauthorized importation of copyrighted works acquired outside of the country. But the High Court saw it otherwise, contending that the First Sale principle "is applicable to imported copies."

602's "literal text is simply inapplicable to both domestic and foreign owners of L'anza's products who decide to import and resell them here," the Supremes declared at the time.
Lawfully made

So Omega ran a new line of argument past the Ninth Circuit in this latest dispute. Even though the Omega Globe Design logo is a US copyright, "the watches bearing the design were manufactured and first sold overseas." That makes this case different, the company's lawyers contended.

The Ninth concurred. "We hold that Quality King did not invalidate our general rule that § 109(a) can provide a defense against" unlawful importation claims "only insofar as the claims involve domestically made copies of US-copyrighted works." Thus, the First Sale doctrine doesn't apply in this instance.

What's the precise logic here? Let's go back to the exact language of Section 109. We've added italics to the key phrase:

"The owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord."

The Ninth interprets the "lawfully made under this title" phrase to mean, "legally made and sold in the United States."
An interconnected world

The Electronic Freedom Foundation (EFF), which joined the amicus brief, calls this logic "outrageous" and a "bogus copyright theory," as does Public Knowledge. "There is no textual support for this interpretation of 'lawfully made under this title'," writes PK's Bhat. "'Under this title' usually isn't synonymous with 'in this country'."

As the brief argues, if Congress had actually wanted the statute to apply to works made "within the United States," why didn't it explicitly say so, as it has in thousands of other instances within United States code?

And does this mean that now all a company has to do is manufacture its products abroad, stamp them with a copyrighted image logo that costs less than $50 to register, and the company can suddenly dictate the terms of redistribution long after the products are first sold?

"Under the Ninth Circuit's ruling, a manufacturer would obtain the right to control its product even after the first sale," the groups warn, "and would maintain this right until it authorizes the product's sale within the United States. Buyers, in contrast, are left without the first sale doctrine to protect their subsequent disposition of the good."

The implications of this decision are huge, creating potential liabilities for anyone who distributes anything en masse: libraries, booksellers, or your local DVD or video game rental store.

"In an increasingly interconnected world," the amicus brief concludes, "where the manufacturing of tangible products and knowledge goods can be distributed easily and widely, consumers should be confident that they retain the same rights to their belongings regardless of where those goods or their labeling were produced."

Hopefully this gets overturned or a lot of people are going to be seriously fucked.

[Sarevok]

Maybe its time we update dictionaries and replace the word "sale" with "lease". You are not owner of anything no matter how much you pay for it. You just rent it. This seems to be the direction the insanity of Intellectual Property seems to be headed anyway so why not be honest about it ?

[General Zod]

Maybe its time we update dictionaries and replace the word "sale" with "lease". You are not owner of anything no matter how much you pay for it. You just rent it. This seems to be the direction the insanity of Intellectual Property seems to be headed anyway so why not be honest about it ?

Except we're not talking about intellectual property. If you'd read the article they're talking about actual physical merchandise.

[Simon_Jester]

Yes, but what makes it really insane is that the intellectual property (Omega's logo on the watch) is being treated as giving them some kind of right to control use of the physical property (the watch).

Which is why Sarevok's complaint, has a point, even though I think (I hope?) it's kind of melodramatic. This ruling effectively abolishes the distinction between physical and intellectual property, because anyone can stamp their logo on anything, and in this day and age you can (and will) get anything you want made overseas. If sale of physical property with a logo stamped on it counts as sale of the intellectual property of the logo (which it shouldn't), and if foreign-made intellectual property cannot lawfully be resold... then as far as I can tell, in effect all property created overseas is leased and the leases aren't transferrable without the original maker's permission.

[Sarevok]

Yeah I was being dramatic on purpose here.

A manufacturer retaining control over a physical object you have purchased is just wrong. The government can regulate the use of certain things like cars, firearms, industrial machinery, chemicals etc. But giving private companies control of over how an already sold product ends up being used or traded is too much.

[Coyote]

This could open up a big can of worms.

Say you buy a Toyota and you crash it. Toyota can then sue you for damaging their copyrighted merchandise?

And of course, then, if a manufacturer retains control over something that has been sold to an end-user, does that not also imply that they have responsibility for how it is used?

So if you get drunk and crash your Toyota into a family, can their survivors sue both you and Toyota for the misuse? And would it be determined whether you or Toyota had the "primary responsibility"? I bet that due to the "deep pockets" principle, Toyota will be held liable. I think once businesses think this through to it's logical conclusions, they will oppose this.

[Coyote]

Americans, passing up yet one more opportunity to sue someone if they think they can get rich by exploiting some poorly-understood lophole? No way!

[Terralthra]

Oh no, worst case scenario is those companies will have to add a few paragraphs of standard legalese to their sales contracts and licenses... they can't possibly cope with that!

Better start saying your prayers; this is clearly the end of the world.

By all means, clearly it's to the benefit of all citizens of the United States that we have to read through a contract full of legalese when we buy any item with a copyrighted logo on it. But only if it was made outside the US.

[CmdrWilkens]

The article said nothing about citizens of the United States. It focused big company resellers - these people deal with the law all the time. Do you really think Netflix, Costco and Ebay don't have armies of lawyers working on buyer terms already?

And if the exporter doesn't want to add the necessary license? Sucks to be them, they just lost access to a huge market.

Except that Ebay, in particular, is the one most likely to be targeted as they are the middleman for exchanges of goods which are sold using the first sale principal. If I, me individual person, were to purchase a product under circumstances akin to the ones which are at stake here (perhaps from a UK distributor while I was on vacation having then legally declared the items upon my return to the United States) then post said items for sale on Ebay then both the company and I COULD, emphasis on could, be liable for copyright infringement unless we are able to document the origin and manufacture of all copyrighted items present within the object.

So in the case of a watch, lets say that I am in the UK, see a watch that I know is selling for $200 back home but they have at this liquidation sale for the equivalent of $100. I snap up say two dozen of them, declare them on my customs form upon my return (and pay the relevant duty, about $12 in this case since I traveled with my wife and we used up our exemptions). I now lawfully own the items and have them in the United States. Now I post them on Ebay for $150 each (plus hipping and handling where I make the "real" money) and sell them off...

Under the above ruling both myself and Ebay (since they take a commission percentage of the sale) are liable for potentially infringing upon the producer's "First Sale" rights if any part of the item was stamped with a copyrighted logo (or similar device) produced abroad.

You are talking about potentially undermining everything Ebay does because they would have to check or otherwise positively identify the manufacturing origin of every item sold through their service. Its not the end of the world (and they might find a way to justify just requiring sellers to indicate that they have complied with these new requirements) but it is the sort of thing that gives excessive and undue control of the product to the manufacturer over the rightful pejoratives of the purchaser.

[General Zod]

You are talking about potentially undermining everything Ebay does because they would have to check or otherwise positively identify the manufacturing origin of every item sold through their service. Its not the end of the world (and they might find a way to justify just requiring sellers to indicate that they have complied with these new requirements) but it is the sort of thing that gives excessive and undue control of the product to the manufacturer over the rightful pejoratives of the purchaser.

Not to mention every single used car dealer in the US. I mean if you think the lawsuits from the media moguls are bad because they think they're failing . . .

[Patrick Degan]

Civilisation will not be brought crashing down from nuclear war, plague, overpopulation or global warming. It will be brought down by elevating intellectual property in law as a holy principle which thou shalt never violate —after which all commerce and social intercourse grinds to a halt.

[Coyote]

It'll be forgotten until something happens and someone sees a chance to go after some big company cash cow.

If I am not allowed to do certain things with an item I've purchased, because the manufacturer insists on retaining certain property rights, then it is only a matter of time before someone will make the connection that the manufacturer therefore retains certain responsibilities for how that item is used, as well.

Take the watch in the given example. Say a child chokes on an Omega pocket watch that he swallowed. Is it a stretch to imagine that someone riding the sympathy train of "angry parent" wouldn't go to Omega and file a wrongful death suit since --after all-- Omega insists on retaining rights to the item post-sale?

People already file suits against manufacturers (some legit, some frivolous). This will give them more ammo/rationale. More manufacturers will have to defend themselves legally and invest in legal protection. Expect to see more of those annoying warning labels that state the obvious like "do not use electric hair dryer while in shower" and stuff like that. End results? Costs will go up for the consumers to pay for all the manufacturer's legal protection fees so they can have their cake and eat it too, ie, retain property rights while eschewing responsibility for misuse of said property.

[Terralthra]

I have only one question, Destructionator:

How does this ruling serve to benefit the citizens of the United States?

[Kanastrous]

Civilisation will not be brought crashing down from nuclear war, plague, overpopulation or global warming. It will be brought down by elevating intellectual property in law as a holy principle which thou shalt never violate —after which all commerce and social intercourse grinds to a halt.

This is based upon overheard talk radio, so take it for whatever little it's worth...but it's been suggested that the emphasis upon protecting intellectual property resulted from the realization that having shipped actual manufacturing of physical-type moveable property overseas, the US needed something to keep making money on: and that something was going to be 'intellectual property.'

[CmdrWilkens]

I don't think it does. I don't think it hurts either; the effect will be nothing more than a slight change in sales contracts with importers, I say this with near certainty. Even if the scenario where a citizen buys some stuff in the UK and sells it here is technically infringement, I don't see an RIAA style random lawsuit campaign coming out of it. They'd go after the buy guys, and the big guys can take care of themselves.

But in any case, that's irrelevant. The court is doing its job.

Yet by reinterpreting the first sale provisions in this light the court has opened the door to such lawsuits. Prior to this ruling no private citizen could realistically been taken to court over such measures nor would they be, however with RIAA and MPAA already establishing infringement awards far in excess of the real lost earnings this ruling has opened the door to manufacturers pursuing citizens doing something that should, by all means, be legal.

Having lawfully acquired an item there is no reason why I should not be able to legally re-sale that same item...the fact that it is unlikely a manufacturer will come after me is immaterial. The court has made illegal an action which should be legal. You are arguing from a standpoint of utility which may in fact be relevant but from a point of legal principal the court's decision is deeply unsettling in the deference it gives to originators over users.

[Havok]

This is a non issue. People will ignore it just like they ignore countless stupid laws that no one thinks makes sense or that are outdated. Companies aren't going to pursue it because it is ridiculous and will hurt business.

[CmdrWilkens]

This is a non issue. People will ignore it just like they ignore countless stupid laws that no one thinks makes sense or that are outdated. Companies aren't going to pursue it because it is ridiculous and will hurt business.

The RIAA has spent roughly $64 million in legal fees to recoup $1.4 million in violations...now that's just because their business model, to their thinking, demands that they aggressively attack any distribution channel other than their own. But to this model what point was it for the original suit to be made in the first place? Clearly somebody thinks that actions of re-importers and other distributors is harming their business model and was willing to pay the expense of the lawsuit. Now with a favorable ruling in their hand I think it would be foolish to suggest that companies will not pursue this...it might be illogical from a disinterested perspective but I think its optimistic to believe that new legal avenues to increase control over product distribution won't be utilized especially with a favorable ruling to this effect.

The court has made illegal an action which should be legal. You are arguing from a standpoint of utility which may in fact be relevant but from a point of legal principal the court's decision is deeply unsettling in the deference it gives to originators over users.

The thing that should be unsettling isn't the court's decision - they just apply the law* - but rather the wording of the law itself. The copyright act itself is what gives this power to them, not any single court decision.

* Of course, they might be mistaken about this interpretation, and that would be up to the Supreme Court at this point (I think) to decide.

It would probably be a good idea to get Congress to overhaul it again and address issues like this in the new wording. A more conservative fix would be to just change "under this Title" to something more specific to close the hole here. I'm mixed on if a big change on copyright would be good or bad, but there's a lot of little changes I'd certainly like to see to it, and plugging this hole is ok by me too.


The big thing I'm against in this thread is all the overreacting. If you judged the world from Internet forums, you'd swear the Copyright Act alone brings us to the brink of armageddon every other week.

Oh I don't think its armageddon and I agree that there is an awful lot of over-reaction (here and elsewhere) but I would contend that this is poor law in its interpretation of "lawfully made" because it would seem to conflict with 601(b)(7). Since the 602 provisions don't apply when 601 isn't operative (and 601(b)(7) basically re-codifies first sale) and since 602 must be subject to 106 (which in turn is excepted out by 109). Moreover, as Costco argued, the Quality King decision certainly suggests (and rather strongly) that lawfully made under this title should only exclude those items that were made under agreements whereby they were contractually excluded from the US. That is unless the production rights granted by the copyright holder gave US distribution rights to an exclusive outlet then all other outlets should still be considered "lawfully made under this title" without having necessarily having been made in the United States.

Anyway I think its a poor reading of the law on the 9th's part but, as you say, it will go to the Supreme Court and they can clarify the Quality King decision. Aside from that I think it grants an unneeded degree of control to a producer who had every option of only allowing foreign manufacturing operations to distribute outside of the US (that is it should have been Omega's duty to to contractually enforce exclusion of non-US products from the US market if that is what they wanted)