Getting first sale wrong

Last week the Second Circuit Court of Appeals handed down a decision with potentially disastrous consequences for higher education.  I admit that I have been reluctant to write about it because I cannot think of a good remedy for the situation and I dislike the role of Chicken Little, always crying that the sky is falling.  But with this decision two judges on the 2d Circuit really did open some cracks in the firmament above higher ed., and there is no way to ignore them.

In the case of John Wiley & Sons, Inc. v. Supap Kirtsaeng, the court has held that the “First Sale” doctrine in copyright law – which allows libraries to lend books and consumers to resell the books they buy – applies only to works that were manufactured in the United States.  In an earlier case (Costco v. Omega, which was affirmed by an evenly divided Supreme Court) the Ninth Circuit had ruled that first sale did not apply if a work was manufactured and sold abroad, but the Second Circuit went much further.  In last week’s ruling they decided that first sale did not apply even when the work manufactured abroad was sold in the U.S. with the authorization of the copyright holder.  Thus they have created the anomalous situation where a rights holder enjoys the full protection of U.S. law, but consumers who buy the work do not have the advantage of a basic rule for their protection.

The Second Circuit panel seems to know this is a bad decision, and yet they make it anyway.  In a footnote they acknowledge that they are creating an incentive for content companies to move their operations, and the jobs that go with them, off-shore.  And the very well-reasoned dissent also makes it clear that the state of the law did not require this sweeping limitation on first sale.  After several readings I am still not sure why these two judges felt compelled to so dramatically change first sale after over a century of its successful application.

The irony of this decision is that in creating an incentive for publishers to publish their books overseas, the “manufacturing clause” in the Copyright Act (section 602) was used by the Second Circuit panel to accomplish the exact opposite of what it was originally intended to do, which was to defend U.S. businesses. (Note, as a sidebar, this article from Forbes on the “chain reaction of decline” in U.S. manufacturing and imagine it getting worse as both law and economic conditions create negative incentives for U.S. manufacturing).

One of the problems that the Wiley decision creates is uncertainty about library lending.  Libraries do not even know, I am afraid, how much of their collections are manufactured abroad.  In the Second Circuit, however, lending anything that was manufactured outside the U.S. is now in question, regardless of where it was purchased (even directly from the publisher).  The manufacturing clause that is at the root of this decision does contain an exception for the importation of books “for library lending purposes,” but it does not say is that libraries can actually lend these books.  There was no reason to say that, of course, since Congress clearly assumed that first sale would apply.  But Congress didn’t anticipate the short-sightedness of these two judges.  And the situation is even worse for video, since the exception for audio-visual works in the manufacturing clause only mentions “archival purposes,” not lending.  So potentially very large, and probably indeterminate, portions of a library’s collection in the Second Circuit (NY, VT and CT) may now be in a grey area – they can certainly be used in the library but may not be available for legal lending.

I hate to imagine it, but this decision raises some frightening possibilities and requires greater vigilance on the part of librarians.  At the very least, libraries must demand information from publishers about where every item has been manufactured. Obtaining such information is no longer an option, since our legal uses of the things we buy now depends on knowing this, and the place where the publisher is located or where the sale took place is simply not sufficient.  But what I really fear is that publishers will begin to manufacture more of their works overseas and then try to demand a higher price – one that includes “public lending rights” – from libraries.

If libraries are in a difficult position, students may be even worse off under the Second Circuit’s ruling.  Again, publishers now have an incentive to manufacture their textbooks abroad and sell them to U.S. students.  Such students would no longer have the right to re-sell their textbooks or to purchase used texts.  The defendant in the case, Supap Kirtsaeng, had made a lucrative business out of reselling textbooks purchased in Asia.  He was perhaps an unsympathetic party, but what he was doing was not different in kind from the resale of texts that is common on all college campuses.  This activity makes higher education a little more possible for many.  Now publishers have an easy way for to close down this secondary market for textbooks, about which they have complained for years.  In the process, the cost of education for college students would be pushed up even further.

So what can be done about this appalling decision?  There are very few real options, but here are some suggestions:

• In the short term, libraries can demand manufacturing information and, for works manufactured outside the U.S., insist on a “right to lend” being including in purchase agreements.  If publishers try to charge extra for this, libraries must walk away from the purchase.
• The Second Circuit could be petitioned to re-hear the case en banc.  The decision as it came out last Tuesday seems almost careless, and it certainly went beyond what was necessary to uphold the District Court ruling against Kirtsaeng.  The Ninth Circuit rule from Costco would have been sufficient grounds for an affirmation, so there was no cause in either the facts or the law for this strange holding.  Perhaps the whole Second Circuit could reexamine the situation and set it right.  But is the defendant willing to take this path?
• Congress could amend the law to make clear that first sale applies in the U.S. whenever a work is sold with the authority of the rights holder.  Much in the Copyright Act indicates that this was the intent of the law in the first place, and either section 109 or 602 (or both) could be easily amended to reverse the harmful effects of the Wiley court’s misunderstanding.  But is Congress really interested in technical amendments to the Copyright Act right now, however badly they are needed?  The two Judges in Wiley themselves suggested that Congress could correct them if they were getting it wrong (they were!), but as the ARL Policy blog noted last week, this seems more like a taunt, in the current political climate, than a real option.