Soon after the Supreme Court’s 6–3 decision this spring in Kirtsaeng v. John Wiley & Sons, a story in the New York Times gave voice to a widespread concern that personal and library lending of e-books might be legal even though many publishers oppose that. The case turned on a contest for priority between apparently conflicting provisions in the Copyright Act—one setting out the “first sale” doctrine and the other dealing with a copyright owner’s right to control importation of copies of their work.

In its 6–3 decision, the Supreme Court tipped the scales in favor of first sale and interpreted the right to control importation as essentially nonexistent for all practical purposes. The Times story characterized this decision as yet another step in a 30-year history of expanding the rights of consumers while eroding the dominion of copyright holders. Written by Eduardo Porter, it went on to observe that both Amazon and Apple had recently signaled interest in establishing marketplaces for the resale of digital works, presumably anticipating further expansion of the first sale doctrine to encompass transactions in digital works.

The decision in Kirtsaeng has some worried about this sort of first-sale expansion, but a look at the history and scope of the decision and at a related case may provide some comfort.

“Entitled to Sell”

The first-sale doctrine was established a century ago in a case that pitted Macy’s Department Store against the publisher Bobbs-Merrill Company. Macy’s had purchased a quantity of a popular Bobbs-Merrill book and was offering it to Macy’s customers at a deep discount as a loss leader to get people into its stores. Bobbs-Merrill objected to this practice, believing that it cheapened the book. When Macy’s persisted, Bobbs-Merrill brought suit, claiming that the resale of its books at unacceptably low prices amounted to distribution that was unauthorized and infringing of its copyrights.

The court rejected this argument and held that, having sold the books to Macy’s, Bobbs-Merrill had exhausted its copyright rights with that first sale and did not have the right to control subsequent sales of the same copies.

This principle was then written in to the Copyright Act of 1976 as Section 109, which says, in part: “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 . . . that copy.” In other words, the copyright holder can sell each copy one time, but in doing so the copyright holder exhausts control over that copy.

However, Section 602(a) of the same act creates a conflict, as it provides that “Importation . . . , without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies.” So the question before the Supreme Court in Kirtsaeng was whether there was a way to read the first-sale provision in 109 together with the importation right in 602 so that each could be given meaningful effect when copies were lawfully made and acquired outside of the United States by a buyer who wanted to bring them back to the United States for resale against the wishes of the copyright owner.

As noted, the court tipped the scales heavily in favor of the buyer who wants to bring copies back to the United States and resell them.

In the print world, the court’s decision affects publishers of college textbooks most strongly. Until the Kirtsaeng decision, they were able to sell copies of their U.S. textbooks at deep discounts to customers in developing nations that could not otherwise afford to purchase them. This allowed the textbook publishers to increase their print runs, drive down their per-unit cost of goods sold, spread development costs across more units, and exploit marginal or submarginal markets.

However, those benefits were available only if the publishers could legally stop the cheap books from reappearing in the United States to displace full-price domestic sales. The Kirtsaeng decision crushed this strategy.,

Assessing Implications for E-books

Although it remains to be seen how U.S. textbook publishers and other publishers will react, the first-sale decision train didn’t start with college textbooks, and there’s no indication that it has yet reached its final destination. E-books may be the next stop.

Publishers’ ability to control what becomes of an e-book after it leaves the digital store shelf is obviously a concern because of the ease, speed, and low cost of copying digital works. E-books, after all, are not subject to the practical limitations of reproducing and distributing paper copies. There is no cost of paper and ink. Press and bindery time are not required. The cost of holding an inventory is minimal, because you need only one master copy, and it requires no physical space. There is no counterpart to the packing and shipping costs of a product with some heft. The time it takes to move a copy from point A to point B, no matter the distance, is measured in microseconds. And each copy is indistinguishable from the original, with none of the wear and tear that the original physical copy experiences over time and none of the degradation that each new generation of product suffers.

In part because of this concern and in part because of market acceptance of the licensing business model used to distribute software, it has become the norm for e-books to be licensed rather than sold. This has meant, or so we have believed, that first sale did not come into play. How could it, when there was never a “sale” transferring ownership of a copy but merely a lease or license? Moreover, the end-user license served as a binding contract with enforceable contractual restrictions on what the end user could do with a licensed copy.

While some publishers worry that the e-book license may be the next casualty of first-sale expansion, a separate case decided just a few weeks later may point toward a different outcome.

In that case, a New York district court held that the secondhand market for music downloads operated by a company called ReDigi could not use the first-sale doctrine as a shield against Capitol Records’ copyright infringement claims.

ReDigi had launched a Web-based business that invited users to resell their legally acquired digital music files and buy used digital music from other ReDigi users at a fraction of the price then available from iTunes. When a user “sold” a digital music file in this secondhand market, ReDigi deleted the original file from the seller’s computer and uploaded a copy to its server in Arizona, where a buyer could access or download it.

In reaching its decision that the service provided by ReDigi infringed the copyrights of Capitol Records, the court explained that, as a technical matter, the laws of physics render it simply impossible for a “material object” to be transferred over the Internet; a digital file can come to be on a buyer’s computer only by being “saved” or reproduced there.

To the court, the fact that the original copy had been deleted didn’t matter. What mattered was that a new copy had been created. Therefore, ReDigi was not exercising the distribution right—which is insulated from an infringement claim by the first-sale doctrine. Instead, it was exercising the reproduction right, which the first-sale doctrine does not insulate from claims of infringement.

This reasoning would apply with equal force to any attempt to establish a secondhand market for e-books. Like a digital music file, an e-book is technically not “distributed” to the buyer; instead it is reproduced on the buyer’s device. In the case of a secondhand sale, presumably the original copy would then be deleted from the seller’s device. This process implicates the reproduction right rather than the distribution right, according to the ruling in ReDigi, and so first sale would not serve to insulate the transfer from a copyright infringement claim.

But the district court’s holding is at once both broader and narrower than publishers might like.

It is broader because the process of transfer was all that mattered to the court. Its decision focused on the fact that the transfer process involved reproduction rather than distribution without regard to whether the digital music file had been licensed or sold. As a result, it will be helpful to publishers whether or not they have effectively employed enforceable end-user licenses with each e-book transaction.

But it is also narrower because it precludes only the transfer of a digital file from one device to another. A transfer that is effected by selling the device itself—whether it is a CD, a thumb drive, an iPod, a Kindle, a Nook, a computer, or any other equipment—will be a “distribution” rather than a reproduction. And as a distribution, according to the decision in Kirtsaeng, it will be insulated from infringement claims by the doctrine of first sale unless the copyright owner has been careful to ensure that the first transaction is a license rather than a sale.

So, to be on the safe side, don’t rely just on the decision in ReDigi to preserve your right to control resale or further distribution of your e-books. Instead, make sure that your retail customers are advised at the time of purchase that they are getting a license to the digital book rather than ownership of the digital copy (see the example below). Require them to click through an enforceable license in order to complete the purchase. Make sure that the license clearly spells out what they can and what they can’t do with their digital copy. And if you are working through an e-book distributor, require the distributor to do this as well.

A EULA Example: Operative Language from a Typical End-User License Agreement

PLEASE READ THIS E-BOOK USER AGREEMENT (“AGREEMENT”) CAREFULLY BEFORE PURCHASING OR DOWNLOADING THIS E-BOOK.

COMPLETING YOUR PURCHASE SIGNIFIES YOUR ACCEPTANCE OF THESE TERMS.

IF YOU DO NOT AGREE TO THESE TERMS, YOU CANNOT PURCHASE OR DOWNLOAD THIS E-BOOK.

1. YOUR USE OF THIS DIGITAL COPY:

Publisher grants you a limited, nonexclusive, nontransferable, revocable and personal license to access and use one digital copy for your personal reference and informational purposes, subject to the following:

You must download this digital copy within 14 days of the file being made available to you, either from the link accessible in the Order History section of this Site or from the original email sent to you to confirm your e-book order. NOTE THAT THIS E-BOOK IS NON-RETURNABLE AND NON-REFUNDABLE.

You may download an individual digital copy up to three times.

You may annotate the text contained in your digital copy for your personal use and reference, but not for redistribution or republication.

Except as expressly permitted above, you shall not create derivative works from or of any Digital Content.

You shall not bypass, modify, tamper, defeat, or circumvent any of the security components, special rules, or other applications that protect this digital copy from unauthorized reproduction or distribution.

You shall not move, copy, reproduce, network, or otherwise transfer this digital copy to any computer or other device of any other person; provided, however, that you may transfer this digital copy to your own computers or other devices to the extent permissible by the applicable file-reading program.

You shall not share, lend, lease, rent, sell, license, sublicense, transfer, network, reproduce, display, distribute, or otherwise make this digital copy available to any other person.

Steve Gillen is a lawyer and partner in the intellectual property firm of Wood Herron & Evans and has focused his practice on publishing and media matters for 30 years. He is a member of IBPA and a frequent contributor to the Independent. To reach him: sgillen@whe-law.com; 513/241-2324, ext. 470.