First Sale Doctrine Alive and Well

Infotech and the Law Jonathan T. Cain

First Sale Doctrine Alive and Well

In a decision that may have surprised some software companies, the Supreme Court reminded the copyright licensing community last month that a doctrine of copyright law known as the "first sale doctrine" is alive and well.

This decision affirms one of the bargains between the rights of copyright owners and copyright users found in the Copyright Act - the right of the copyright owner to control the first sale of a copy of his work, but the unrestricted right of the owner of the copy to resell it to another without the owner's consent.

The decision handed down by the Supreme Court - Quality King Distributors v. L'anza Research International - involved the resale of hair-care products manufactured by L'anza and distributed throughout the world. L'anza brought its case under the copyright law based on the fact that each container of product bore a label that was subject to copyright protection.

With very slight changes in facts, L'anza's case easily could have been fought over software, videotapes, electronic game cartridges or any other gray market item containing copyrighted material.

L'anza, a California manufacturer of hair-care products, sold them to U.S. distributors under exclusive licensing and distribution agreements. It charged higher prices to its domestic distributors than it did in foreign markets.

One foreign distributor arranged for several tons of L'anza products, with their copyrighted labels attached, to be imported back into the United States without L'anza's permission and resold them at discounted prices to unauthorized retailers.

L'anza sued, claiming the scheme violated its exclusive rights under the Copyright Act to reproduce and distribute the copyrighted material in the United States and to control the importation of gray market copies.

Among the exclusive rights of a copyright owner is the right "to distribute copies ... by sale or other transfer of ownership." However, the Copyright Act also provides that "the owner of a particular copy ... lawfully made under this title ... is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy."

Read literally, the Copyright Act unambiguously says the owner of a legitimate copy "is entitled, without the authority of the copyright owner, to sell" that item.

Next, L'anza tried to rely on another section of the Copyright Act that is designed to control the unauthorized importation of copies in violation of the exclusive rights granted by the act. The Supreme Court explained, however, that the Copyright Act does not categorically prohibit the unauthorized importation of copyrighted materials. The copyright owner's exclusive rights are limited rights. They are subservient to other provisions of the act, including those protecting fair use, first sale and other limitations on the owner's exclusive rights.

Nor was the court particularly sympathetic to arguments that it should try to restrain the gray market in copyrighted materials. It expressed some disgust that it was being asked to uphold price discrimination so great that it was economically attractive for a foreign distributor to re-import the items back into the United States for sale at prices less than those available through authorized domestic sales.

"We are not at all sure that [gray market] appropriately describes the consequences of an American manufacturer's decision to limit its promotional efforts to the domestic market, and to sell its products abroad at discounted prices that are so low that its foreign distributors can compete in the domestic market," the court's decision reads.

The Supreme Court, at least, has not forgotten that copyright is a bargain - that the copyright owner takes away some exclusive rights, but those rights are limited by and subservient to other rights held by the owners of copies of protected works and by the public at large.

Recent proposals in Congress have suggested that a change is needed in this long-standing bargain for "digital works." The obvious question is: needed by whom? There is no legal distinction between digital works and those in any other format.

Granting greater rights to copyright owners to control the distribution and use of copies of their works necessarily will impose a new cost on the owners and users of copies of those works.

The L'anza case also highlights the important distinction between the ownership of the intangible intellectual property rights in a work and ownership of the tangible copy. In the software arena, this distinction is often overlooked.

Publishers frequently sell copies of software and then attempt to impose restrictions on the transfer of those copies to third parties. The lesson of L'anza is that such practices face real hurdles.

Jonathan T. Cain chairs the Technology Practice Group of Mays & Valentine LLP, McLean, Va. His e-mail address is jcain@maysval.com.


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