The IP blogosphere is abuzz today over an U.S. Supreme Court hearing, Kirtsaeng v. John Wiley & Sons, Inc., a case that has the potential to change the landscape of copyright law, and in particular, the first sale doctrine (otherwise known as the exhaustion doctrine). Ronald Mann from SCOTUSBlog has a good overview of the positions of the various parties. Meanwhile, Professor Ariel Katz posted a legal analysis of the issue on his blog, and Ars Technica ran an excellent article yesterday with the circumstances leading to the case. This post will briefly discuss the legal issues from a Canadian perspective, and examine whether the U.S. case may affect Canadian copyright law.
I won’t go through the case here, as the links above will do the job much better, but essentially the legal issue is whether a U.S. copyright owner can use copyright law to prevent parallel import of copyrighted works purchased from another country. In the particular case at hand, the U.S. Supreme Court is being asked to decide whether a person can buy textbooks from Thailand and resell them in the United States. Naturally, due to differential pricing, the textbooks cost far less in Asia than they do in the U.S., creating the potential for market arbitrage. The question is whether copyright law can be used to prevent parallel import of goods.
Canadian copyright observers will note that the facts are very similar to a Supreme Court of Canada case, Euro-Excellence Inc. v. Kraft Canada Inc., 2007 SCC 37, that involved the import of Toblerone and Côte d’Or chocolate bars from Europe into Canada. In that case, Kraft claimed that Euro-Excellence infringed their copyright on the logos attached to each wrapper of the chocolate bars, and attempted to prevent Euro-Excellence from importing the chocolate bars for resale in Canada (presumably at a lower price).
The SCC decision spawned some confusion. Kraft’s two main legal arguments carried the day, each winning over a majority of the court’s justices, but because of the peculiar way the votes split, and also because they needed to win both issues together to succeed, they actually lost in the outcome by a 7-2 majority. In essence, a majority of the court (Rothstein, Binnie, Deschamps, Abella, and McLachlin) agreed that the logo as part of the chocolate bar was subject to copyright law, and a different majority of the court (Bastarache, LeBel, Charron, Abella, and McLachlin) agreed that Kraft Canada was within their rights to sue for hypothetical infringement based on their exclusive license.
The bittersweet decision for Kraft had two consequences: first, the court appears to have decided that copyright law can be used to block parallel imports if the two contested conditions were met (the plaintiff was an assignee of the copyright, and there was an actual sale of a copyrighted work). Indeed, Kraft Canada obtained the copyrights in question by assignment following the case, and began a second lawsuit against Euro-Excellence, which was settled in 2009 with a promise by Euro-Excellence not to distribute the chocolate bars in Canada without authorization (and a separate agreement for exclusive distribution in Quebec).
Second, the lack of clarity caused by the four judgments may have left open the broader question of whether copyright law can and should be used to regulate grey market goods. Academic commentators have noted that Canadian courts have largely ignored or avoided the issue of parallel importation in copyright law (see, for example, Rose Ann MacGillivray, “Parallel Importation: A framework for a Canadian position on exhaustion of intellectual property”).
More worryingly, a majority of the Supreme Court of Canada seems to have assumed, in Euro-Excellence, that copyright law could be used to regulate parallel imports. Rothstein’s judgment disposes of Kraft Canada’s claim based on a licensing issue, but states that assignees of the copyright would have a right to sue the assignor for hypothetical infringement (which was the basis of this parallel importation claim). Bastarache, meanwhile, narrows his judgment to an interpretation of the Copyright Act which precludes “merely incidental” works from being protected by copyright, but seems to suggest, if the good being sold had its “legitimate economic interests” based in copyright (such as, say, a textbook), then it would indeed be protected. Abella’s judgment also failed to discuss the pertinent issue of parallel importation, finding that a logo on the wrapper was enough to invoke copyright law against imports of chocolate bars. Only Fish appeared to address the issue directly, expressing “grave doubt whether the law governing the protection of intellectual property rights in Canada can be transformed in this way into an instrument of trade control not contemplated by the Copyright Act” (Euro-Excellence at para 56).
This brings us to Kirtsaeng v. John Wiley & Sons. The Supreme Court of the United States is revisiting the issue because of an unusual 4-4 tie in a very similar case, Omega S.A. v. Omega Corp., 541 F.3d 982 (9th Cir. 2008).
The textbooks in question were not counterfeit per se, as they were genuine copies sold in Thailand by a subsidiary of Wiley. However, due to differential pricing, the same books in Thailand were sold at a significant discount compared to those in the U.S. The question is whether, given that under American copyright law works imported without the consent of the copyright owner is a violation of their “distribution right”, the claim can be defended based on the first sale doctrine.
While it is unclear which party the court will side with (arguments were made today), what is certain is that the copyright world is closely watching the case, as it may determine the the boundaries of the first sale doctrine and has implications for the jurisdictional reach of American copyright law.
In Canada, the case may become influential just as Bill C-11 is about to come into force. As mentioned above, the first sale / exhaustion doctrine has not been well developed in Canadian jurisprudence. Unlike the U.S., the doctrine has not been codified in the Copyright Act – that was, until Bill C-11. Particular provisions of the new copyright bill, in particular amendments to s. 3(1)(j) and s. 1.1(b), appear to recognize the doctrine of exhaustion:
3.(1) For the purposes of this Act, “copyright”, in relation to a work, means the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever, to perform the work or any substantial part thereof in public or, if the work is unpublished, to publish the work or any substantial part thereof, and includes the sole right…
(j) in the case of a work that is in the form of a tangible object, to sell or otherwise transfer ownership of the tangible object, as long as that ownership has never previously been transferred in or outside Canada with the authorization of the copyright owner (emphasis added)
With a dearth of previous decisions squarely addressing the doctrine of exhaustion, Canadian courts may be tempted to draw inspiration from their American counterparts.
If the U.S. Supreme Court decides the case in favour of Wiley, meaning that the first sale doctrine would not apply to goods made in a foreign jurisdiction, then it could be possible that Canadian courts will follow suit. This scenario is made more plausible by the court’s decision in Euro-Excellence, which did not address the parallel import issue directly, and at least by a slim majority, leaves open the possibility of copyright law being used to regulate the grey market. With trade between US and Canada so prevalent, the explicit acknowledgement that American copyright laws can stop free market arbitrage could have a very noticeable impact across the border. Of course, at least with respect to books, Canadians are used to seeing higher prices than their American cousins.
