The ‘First Sale Doctrine’ and Its Impact on the Music Business

On March 19, the Supreme Court issued its decision in Kirtsaeng v. John Wiley & Sons, a landmark copyright case examining the reach of the “first sale” doctrine. Under that doctrine, the owner of a copy of a work that was “lawfully made” in accordance with U.S. copyright law “is entitled, without the authority of the copyright owner, to sell or otherwise dispose” of it. For instance, if you purchase a lawfully produced music CD or movie DVD in the United States, you are free to later sell it at a garage sale, donate it to a library or loan it to a friend.

But what about goods made and sold overseas and then imported for resale? After all, there is another provision of copyright law that prohibits the importation into the United States, without the authority of the copyright owner, of copies of a work “acquired outside the United States.”

These two potentially contradictory features of copyright law were tested by Supap Kirtsaeng, who built a business around importing textbooks that had been lawfully made and sold overseas and then reselling them at a profit in the United States. After publisher John Wiley & Sons filed suit against Kirtsaeng in 2008, a federal district court found that his actions infringed Wiley’s copyrights, and the Second Circuit affirmed. However, the Supreme Court reversed these decisions on March 19, holding that the first sale doctrine “applies to copies of a copyrighted work lawfully made abroad.” The ruling will make it very difficult for sellers of physical goods like music CDs to price the same products differently in different markets.

So what will this mean for music sales? In an amicus brief filed in the case, the RIAA and Motion Picture Assn. of America warned against exactly the decision the Supreme Court has now made, stating it “would undermine the copyright protection on which artistic fields like the motion picture and music industries depend for their economic viability” and “have deleterious consequences for the U.S. economy as a whole.”

The Supreme Court’s Kirtsaeng decision undeniably weakens the power of copyright holders. But it’s a bit of a stretch to suggest that the entire U.S. economy might suffer significant harm as a result. In fact, the negative impact on music copyright holders will likely be far more modest than some people expect. Why? Because the first sale doctrine applies to sales. By contrast, music download and cloud-based access services can be delivered using licenses that allow copyright holders to retain a much higher level of control over use of the work.

Not all licenses, however, are equivalent. For example, ReDigi has built an online digital music marketplace based in part on its belief that the iTunes terms of sale, in contrast with the terms of use for Amazon’s online music store, provide for a transfer of title that allows iTunes customers to resell their songs. Whether that interpretation carries the day will depend on the outcome of an ongoing lawsuit filed against ReDigi by Capitol Records in a New York federal district court.

More generally, it is certainly possible — and very common — to design licenses in which customers do not become owners of a copy of a song. Under such licenses, music copyright holders can and routinely do impose restrictions on resale and geographic portability. Whether these sorts of restrictions are well matched to the ways in which people and information move in today’s world is a debate for another day. But as profoundly important as Kirtsaeng is for copyright in the broader sense, it may have little impact on a music ecosystem increasingly built around licensing-based approaches for distributing “purchased” content.