If you lend me your car they can sue you for copyright infringement!
This sounds crazy, and it is. Crazy but true. Copyright law is being distorted in the craziest ways, and today, the U.S. Supreme Court is scheduled to decide whether to hear an appeal from one of the crazy rulings.
Back in 1998, shampoo makers used copyright to go after people who sold their shampoo cheaper than the price at which they wanted to gouge the U.S. consumer. They claimed that the longstanding first sale doctrine, now codified in 17 U.S.C. § 109, did not apply at all to imported shampoo.
Well, to be clear, it wasn’t the imported shampoo that gave them the right to prohibit people from lending their shampoo to someone else – or from reselling bottles the makers had sold cheaply overseas, and well below the price they hoped to extract from us. Rather, it was the copyrighted label on the shampoo bottle that did it. Because the copyrighted work appeared on a bottle of shampoo, the shampoo bottle was a “copy” of a “work” protected by U.S. copyright law. But in that case, the Supreme Court said “no way”. The Court concluded that the right to prohibit imports of copies was just a part of the exclusive right to distribute copies, and that right is expressly limited by the first sale doctrine: Once someone else owns the shampoo (I mean, copy), the copyright owner cannot generally control any further transfer of possession.
The Supreme Court’s reading served us well, and upheld a policy recognized by the courts for 150 years, and codified by Congress in 1909. Now, in the centennial year of that codification, price gougers are trying to rip off U.S. consumers with two major attacks on the first sale doctrine. The first price-gouger is Omega – the watch company – upset that Costco was able to sell perfectly legal Omega watches in the U.S. at much less than what they thought they could extract from U.S. consumers’ pockets, even as Omega sold the same watches at much lower prices in countries with lower per capita incomes.
The other price-gougers are major publishers of college textbooks. Ever wonder why college textbooks cost so much? Several reasons are available, but one stands out today, and was brought to the Supreme Court’s attention: Some of the largest textbook publishers appear to be engaged in a concerted campaign to limit access to cheaper copies of their textbooks, be they used textbooks or copies they made and sold overseas in, you guessed it, markets where there are millions of students who either do not enjoy the U.S. per capita level of income or do not enjoy access to U.S.-style financial aid or low-interest loans with which to pay $333 per semester for textbooks.
How do these attacks come? By attacking copyright law itself. The first sale doctrine, as codified in Section 109(a) of the Copyright Act, states in relevant part:
“Notwithstanding the provisions of [the distribution right in] section 106 (3), the owner of a particular copy … 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”.
This specific language has been in place since 1976, but only recently has it occurred to anyone that they should go about policing their discriminatory pricing (price gouging) by using the Copyright Act as a bludgeon. To get around the Supreme Court’s ruling in the shampoo case, the underscored language above is being used to argue that (1) “this title” means “the U.S. Copyright Act,” (2) the U.S. Copyright Act does not apply in Switzerland or China, and (3) therefore, copies made in Switzerland or China, even if lawfully made by or with the permission of the company claiming U.S. Copyright Act protection, were not lawfully made “in the U.S.A.” and, therefore, Section 109 does not apply because if not made in the U.S.A. it could not have been “under this title”.
The publishers just won an important ruling. They were going after a number of small online retailers, generally shutting them down either with a settlement agreement or a default judgment, because it’s pretty hard for a small online retailer to go up against textbook publishing giants when a negative outcome most likely means bankruptcy. One of the sellers stood up to them. Linda Liu, who knew exactly how much cheaper these publishers were selling their copies of the same textbooks in China, had been helping U.S. students obtain the same benefits their Chinese counterparts were enjoying. She could sell new copies for a fraction of the cost that new copies of the same works were being sold for in the U.S., and still make a modest profit even after paying for shipping from China and fees to the websites hosting her service. For her, this supplemented household income. For the publishing giants who were spending a lot of time and money persuading the U.S. Congress and several state legislatures that the high price of textbooks was none of their concern, Ms. Liu is a threat. Price competition is a threat. She had read the law, and she interpreted it the way it had been interpreted for 150 years: The publishers made and sold the books wherever they chose at whatever price they chose, she bought some, and now she was free to sell the copies she owned wherever she chose at whatever price she chose. This is the same law that encourages used book stores, video rental stores, CD trade-in shops, library lending, and yard sales and bequests conveying works of art, books and any number of lawful copies of copyrighted works.
The judge in her case, Pearson Education v. Liu, issued a ruling last Friday in which he basically agreed with Ms. Liu’s interpretation of the plain meaning of the law, legislative history and purpose of the Copyright Act, all pointing to the notion that she should be free to keep selling these legal copies, bringing downward price pressure on price-gouging textbook publishers. In a very thorough and thoughtful legal analysis, he laid waste to these silly arguments that the first sale doctrine only applies to manufacturers dumb enough (my words, not his) to keep their manufacturing jobs here at home. Showing the utmost respect for the U.S. Supreme Court, however, he was troubled by a short passage in the old 1989 shampoo case, wherein the court gave an illustration that suggested that foreign-made products were not covered. In an admittedly close call, Judge Holwell concluded that Liu’s motion to dismiss the claims should be denied, giving deference, instead, to this rather loose language (my words, not his) by the Supreme Court.
Personally, I would take issue with that interpretation because I think the Supreme Court did not mean for its illustration to stand for the proposition that offshore manufacturing is the copyright owner’s secret sauce to perpetual control. But this is not the time or place to make that argument. This is a blog for the general public focusing on the national public policy more so than parsing the illustration the Supreme Court’s used to bolster its interpretation of the statute.
Is a watch a “copy of a work protected by copyright”? Yes, if there is any copyrighted work embedded in it, is the implicit response, and that’s why Omega, unable to stop cheaper and perfectly legal parallel imports of “watches” created a “work of authorship” (a logo), registered it as a copyrighted work with the U.S. Copyright Office, and then began embedding it on the back of its watches. Presto! Common everyday “watches” are suddenly turned into “copies” of copyrighted works, enjoying the protection of U.S. copyright law with a twist – U.S. copyright law works best for would-be price-gougers and price-discriminators who want to eliminate price competition from secondary sales by simply moving the U.S. manufacturing jobs offshore.
The implications of this are mind-boggling. Is Ford upset that competition from used cars is placing downward price pressure on new car prices? You bet. They loved “cash for clunkers,” that took a lot of used cars out of circulation. If you are an automaker, just make sure that you install a copyrighted logo or copyrighted software (you know, those smart chips living in and around our engines and safety features) and make the car (or the part with the software) anywhere other than in the United States. Suddenly, “Fords” become “copies” of works of authorship protected by U.S. copyright law and, if lawfully made outside of the U.S., Ford gets to sue the pants off of anyone who dares sell them, lease them, trade them, drop them off at valet parking, or even lend them to a family member for a quick errand, unless they first obtain Ford’s permission.
Now, “that’s silly,” you might say. Why would Ford want to prevent your use of valet parking or letting a family member drive it? It wouldn’t. But you would still, legally, need Ford’s permission, which it might helpfully include in the owner’s manual. But as for Hertz car rental or used car sales, that’s a whole different matter. If Ford’s analysts ran the numbers, they might think they are leaving money on the table by letting people make money renting their cars or selling them used without giving Ford a cut. They could be nice, and make it simple: “You may sell it used, provided you give us 10% of the sales price.” Later, if used car prices and rentals were still deemed too competitive an option, they just jack up the fee. (Of course, there could be competition from GM, which might offer a lower “resale fee” with the purchase of a new vehicle.)
This whole issue has come to a head today, as the Supreme Court is scheduled to scheduled to consider Costco’s petition
to appeal the Ninth Circuit’s conclusion that it is fine and dandy for a Swiss watch maker to discriminate against U.S. consumers by using the Copyright Act – well, they didn’t really say “fine and dandy”. They actually moaned about how bad an idea it was, and how they did not like this weird interpretation of the law that seems to make no sense and leads to untenable results, and then concluded that their wringing hands were tied by their own precedent. That’s why Costco is seeking Supreme Court review. Adding a more “traditional” copyrighted work – books – to the mix, Ms. Liu’s motion to dismiss was decided just in time for Costco’s counsel to bring it to the attention of the Supreme Court as just one more example of why the time is so ripe for the Supreme Court to step in and restore order.
None of us want our heirs to have to pay the copyright holder for permission for our estate to transfer to them our artwork, photographs, postcards, sound recordings or foreign films made abroad. Nor do we want copyright owners to be in a position to skim off profits from our charitable donations of such things, under threat of suing us for statutory damages. Much less do we want permission to have to be obtained for such transfers once shampoo makers, watch makers, car makers, and makers of copyrighted labels to be affixed to all manner of consumer goods catch on to this windfall being handed to them by these legal loopholes. If the Supreme Court will not close the loophole by clarifying and correcting the proper and historic interpretation of the first sale doctrine, Congress must.