This week, we wanted to cover an interesting copyright case that may gut the used CD, book, and video game markets. Do you buy used games or music? If this decision holds up, those secondary markets could be in danger. Read on to learn why….

John Wiley & Sons, Inc. v. Kirtsaeng, No. 09-4896-cv (2d Cir. Aug. 15, 2011) (Judges Cabranes, Katzmann, and District Judge J. Garvan Murtha of the District of Vermont, sitting by designation)

This copyright case from the Second Circuit addresses an important issue: if you legally buy a copy of a work (like a book, CD, or DVD) outside the U.S., can you resell it in the U.S. without permission from the copyright owner?

You might have thought the answer was pretty obvious, but this is actually a tough one. The Supreme Court considered this question last year in Costco Wholesale Corp. v. Omega S.A., 131 S.Ct. 565 (2010), but the Court actually deadlocked and couldn’t give us a decision that would bind lower courts. Justice Kagan had to recuse herself, and the Court tied at 4-4. That left the appealed Ninth Circuit decision (Omega S.A. v. Costco Wholesale Corp., 541 F. 3d 982 (9th Cir. 2008)) in place. The Ninth Circuit decided that an item manufactured abroad can’t be resold in the U.S. without permission from the copyright owner unless it’s been legally sold in the U.S. once already.

Enter student entrepreneur. Mr. Kirtsaeng was a student with a plan to pay for his education. He had his friends and relatives in Asia buy textbooks there, ship them to him in the U.S., and he re-sold them on eBay. He made a lot of profit from this business, which shows how overpriced textbooks are in the U.S.

The problem is that Wiley (the publisher) put a label in the Asian textbooks that stated they couldn’t be imported into the U.S. without its written permission. So Wiley sued Kirtsaeng for copyright infringement.

Normally, once you buy an item, you can resell it if you like. 17 U.S.C. § 109, which is part of U.S. copyright law, states that it’s not copyright infringement to resell an item “lawfully made under” the Copyright Act. This is known as the “first sale doctrine.” There was no question that Kirtsaeng’s family bought the textbooks legally, and that those textbooks were made legally by Wiley, albeit outside the U.S. So Kirtsaeng should be in the clear, right?

But wait. There’s another section of the Copyright Act, 17 U.S.C. § 602(a)(1), which calls unauthorized importing of copyright-protected works copyright infringement. And Wiley didn’t authorize bringing those textbooks into the U.S.

So which provision wins?

The Second Circuit said that it’s Section 602. Basically, the court found that there are works that are not “lawfully made” under U.S. copyright law, but aren’t pirated either (that is, they’re not illegal).

I’m reminded of the Weeping Angels from Doctor Who. For you non-Whovians, the Weeping Angels are an alien race that can only move when no one is observing them. If you look at one, it looks like a statue. If you look away, it’ll move. So here we have textbooks that look just like regular textbooks so long as you keep them to yourself. If you try and sell them, they act like pirated works.

If this sounds like convoluted reasoning, that’s because it is. What really seems to be going on is that the court is protecting Wiley’s ability to set different prices for different markets, using copyright law to prevent arbitrage.

There are a lot of potential consequences to this decision. Under the Second Circuit’s analysis, any manufacturer that is making copyrighted works abroad (like, say, CDs or DVDs) now gets to ignore the first sale doctrine. Are used music stores now copyright infringers? How about used bookstores? Sure sounds like it.

Plus, this ruling creates a very strong economic incentive to shift abroad the manufacturing of these types of copyrighted items. Video game manufacturers have been complaining about the used game market eating into their profits and driving down prices for years. If the games are manufactured abroad, the used game market goes “Poof!”

Judge Murtha, who usually sits in the trenches and tries cases, saw this issue too. So he wouldn’t go along with the rest of the panel.

Such a result would provide greater copyright protection to copies manufactured abroad than those manufactured domestically: Once a domestic copy has been sold, no matter where the sale occurred, the copyright holder’s right to control its distribution is exhausted. I do not believe Congress intended to provide an incentive for U.S. copyright holders to manufacture copies of their work abroad.

This is a good candidate for petitioning to the Supreme Court, so we’ll be watching the case.

You can read the opinion here.