[A2k] John Mitchell: TPPA Proposes Copyright Suppression of Price Competition

Manon Ress manon.ress at keionline.org
Tue Feb 21 10:51:09 PST 2012

Trans-Pacific Partnership Proposes Copyright Suppression of Price Competition
February 21, 2012 By John Mitchell

Dissatisfied with the exclusive right to set the price at which copies
of their works are first sold, copyright holders have been trying, for
over 150 years, to bolster the resale prices at which copies of their
works are re-sold, in order to protect them from the normal pressures
of free market price competition. Since they no longer own the copies,
they have tried extending the reach of their exclusive right to
“distribute” copies to encompass copies they no longer own. For just
as long, the courts and Congress have rebuffed those efforts. Today,
however, the United States Trade Representative is negotiating with
foreign countries to obligate Congress and the courts to give them
that power, even as their latest in a series of efforts to extend the
existing distribution right is pending before the Supreme Court.

When Mark Twain tried to prevent dealers in his books from offering
discounts to retailers, he lost. Clemens v. Estes, 22 Fed. 899 (C.C.D.
Mass. 1885). When the publisher of The Castaway tried to use its
copyright to prevent Macy’s from reselling the books for less than a
dollar, it lost. Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908). The
following year, Congress said “it would be most unwise to permit the
copyright proprietor to exercise any control whatever over the article
which is the subject of copyright after said proprietor has made the
first sale.” H.R. Rep. No. 2222, 60th Cong., 2d Sess., at 28-29
(1909), and wrote that principle into law. Going beyond the judicially
created “first sale” doctrine, Congress decreed that anyone in lawful
possession of a copy was free to distribute it without the copyright
owner’s permission, and established the copy/copyright dichotomy that
ownership of “copyrights” is distinct from ownership of “copies,” such
that ownership of one has no bearing on ownership of the other.
(Section 41, Copyright Act of 1909.)  After courts wrestled with that
a bit, and determined that Congress probably did not mean for it to
apply, literally, to someone in lawful possession of a pirated copy,
or to someone holding a copy in trust for someone else (see, e.g.,
Platt & Munk Co. v. Republic Graphics, Inc., 315 F.2d 847 (2d Cir.
1963)), the Copyright Act of 1976 clarified the statute, placing the
copy/copyright dichotomy into the new Section 202, and explaining, in
Section 109, that the “owner” of a copy, “lawfully made under this
title,” is entitled to redistribute it without the consent of the
copyright holder.

For the next several years, the law seemed clear enough that even the
Motion Picture Association of America conceded that it could not
prevent entrepreneurs from buying their expensive new videocassettes
and renting them to the public. In the 1980s, it turned to Congress to
neuter the doctrine, but failed in its efforts to control rental of
videocassettes (resulting in a financial bonanza for the studios from
sales to video rental stores). Just as the price of a new car factors
in the “resale value” and whatever value is derived from freedom to
rent it or lend it to others, so, too, the copyright industries
settled into accepting that whatever price they charged would be
calculated to include all of the value the new owners might attach to
their freedom to dispose of their copies by sale, lending, rental or
gift to others. The motion picture studios that desired to segregate
global markets did so by turning to technology rather than law,
applying “regional codes” intended to match DVDs to the same region as
the DVD players, so that discs purchased in one region would not play
in the players sold in another region. But “regional coding” had more
to do with protecting the theatrical window than preventing DVD price
competition, since the theatrical release date varied from one region
to another.

The next assault on the first sale doctrine did not come from the
copyright industries, however, but from the trademark side. As global
free trade policies made it easier for goods to be shipped from one
region to another, manufacturers tried to optimize their prices for
each local market, yet the price disparities were so great that such a
practice itself created a market for arbitrage, where entrepreneurs
would find the lower priced articles in one country and import them
into the higher priced market, where the lower prices would put
downward price pressure on that optimal price preferred by the
manufacturer. When the courts uniformly held that trademark law could
not be used to prevent arbitrage where the product was the very same
genuine good to which the trademark owner had affixed its trademark,
creative lawyers turned to the Copyright Act.

The first salvo sought to apply Section 602 of the Copyright Act,
which granted the U.S. copyright owner an exclusive right to import
“copies” and “phonorecords”. The theory was that even if the trademark
was not infringed, the products packaging or label could be
copyrighted, such that the bottle of shampoo or perfume bearing the
copyrighted label would meet the definition in Section 101 of “copy” –
a tangible medium in which the work is embodied. The Supreme Court put
an end to that theory in 1998, not by challenging the notion that
protection of shampoo price discrimination was within the scope of
copyright law, but by simply holding that the importation right in
Section 602 was a mere extension of the distribution right in Section
106(3). As such, the importation right, too, was “subject to” the
limitations in Sections 107 through 122, including, of course, Section
109. Therefore, the owner of a copy, “lawfully made under this title,”
is entitled to import the copy without the consent of the copyright
holder. Quality King Distributors, Inc. v. L’Anza Research Int’l,
Inc., 523 U.S. 135 (1998). But Justices Stevens and Ginsburg failed to
anticipate the creativity of lawyers, and together paved the way for a
new creative argument. In his unanimous opinion, Justice Stevens gave
an example, in dicta, of a work having both a U.S. copyright holder
and an English copyright holder, noting that copies made by the
English copyright holder would not have been “lawfully made under this
title” because the English copyright holder had no right, under the
U.S. Copyright Act, to make them. Id. at 148. That aspect of the
example is unremarkable, but the hypothetical facts are pretty
far-fetched, in that it is virtually always the case that the English
copyright holder and the U.S. copyright holder are one and the same,
or derived their rights from the same author. Territorial rights are
typically granted by a single copyright owner licensing the copyright
– not conveying it. Thus, if the U.S. copyright holder licensed
someone in England the right to make copies there, the license would
be an exercise of the U.S. copyright holder’s exclusive U.S. right to
authorize the reproductions. Unfortunately, Justice Ginsburg had added
a brief concurrence, noting that the facts in Quality King involved
copies made in the United States and exported before being imported.
Citing two authorities of the opinion that “lawfully made under this
title” could not have a global reach, since “this title” (the U.S.
Copyright Act) does not apply abroad, she suggested, without opining,
that the Court’s Quality King holding might not necessarily apply in
the case of copies made abroad. Id. at 154, Ginsburg, J., concurring.

That none of the major opponents of the first sale doctrine
immediately began making copies abroad is an indication that most
copyright lawyers understood that the unanimous Quality King decision
in no way limited its holding to “made in the U.S.A.” facts. Justice
Ginsburg’s comment, not joined by any other justice, was apparently
not viewed by the majority as being worthy of inclusion in Stevens’
opinion. In fact, to say that “lawfully made under this title” means
the copy had to be “made in the United States” carries two obvious
flaws: First, it would convert the phrase “under this title” into
useless surplus, because it is a mere truism that the U.S. Copyright
Act does not apply in foreign countries. Congress does not routinely
limit all of its laws to the geographical limits of U.S. sovereignty,
for that is a given. It makes much more sense that Congress was
intending for the lawfulness to be judged solely by the U.S. Copyright
Act, and not by other titles of the U.S. Code, or by state or
municipal law. In other words, if the copy was made by the U.S.
copyright owner, the owner of the copy enjoyed the entitlement in
Section 109 without regard to whether the copy was made by a company
not licensed to do business in the sate where it was made, or was made
using substances banned by the Consumer Products Safety Commission, or
was manufactured in violation of minimum wage or occupational safety

The second obvious flaw in that reasoning is the unintended a fortiori
consequence no copyright owner would want: If a copy is not “lawfully
made” under the U.S. Copyright Act solely because the Copyright Act
does not apply abroad, then the other part of the exclusive right in
Section 106(1) – to “authorize” the reproduction of the work into
copies or phonorecords – would be limited to the exclusive right to
authorize reproductions in the United States alone. In other words,
anyone in the United States would be free to authorize reproductions
abroad without infringing upon the U.S. copyright owner’s exclusive
right to authorize reproductions.

Even so, for some U.S. copyright owners, the lure of maximizing
profits by preventing their global price discrimination from being
undermined by arbitrage has been sufficient to overcome that risk. The
Swiss watchmaker, Omega, had a problem on its hands. It set the
wholesale price to U.S. retailers at a level calculated to support a
retail price of $2,000, yet sold the same watch in other countries for
pennies on the dollar. So great was the disparity that the same watch
could profitably change hands more than once before reaching Costco’s
retail shelves, and still allow Costco to sell them profitably for
$1,400, and with a better warranty. Rather than reduce the wholesale
price to the U.S. retailers upset by the price differential, Omega
turned to the Copyright Act. It created a copyrighted work of
authorship, registered it with the U.S. Copyright Office, and embossed
it onto the backs of the watches in a size and placement not likely to
even be noticed. It then argued that the watches were the tangible
medium of expression embodying a work of authorship: the watches were
now “copies”, as defined in Section 101 of the U.S. Copyright Act. Not
only that, these were copies which the U.S. copyright holder, Omega,
had made outside of the United States, so although they were not
infringing in the least, they were, argued Omega, not lawfully made
under the U.S. Copyright Act. Although the District Court rightly
rejected that position, the Ninth Circuit, in a self-deprecating
Opinion (in which it heavily criticized its own precedent for leading
to “untenable” results), held that “lawfully made under this title”
means “lawfully made in the United States.” Omega, S.A. v. Costco
Wholesale Corp., 541 F.3d 982 (9th Cir. 2008). The Ninth Circuit was
so concerned about the effects of its holding that it developed a
judicial patch of sorts, in effect holding that even though Section
109 could not apply because the copies were made abroad, the first
sale doctrine would apply, after all, if the U.S. copyright holder
imported the copies into, or sold them in, the United States.

Surprisingly, the Supreme Court reached an impasse. The Supreme
Court’s 4-4 tie in Costco v. Omega, No. 08-1423, effectively affirmed
the 9th Circuit’s holding. Meanwhile, the Second Circuit had
apparently been waiting in vain for the Supreme Court to settle the
matter, and following the impasse it went ahead and decided John Wiley
& Sons, Inc. v. Kirtsaeng, 654 F.3d 210 (2d Cir. 2011), holding (2-1)
that “under this title” means “in the United States.” Finding no legal
basis for the Ninth Circuit’s effort to lessen the fallout, it
rejected the re-application of the limitation on the distribution
right in the event the U.S. copyright owner imported the copies made
abroad. Copies made abroad, reasoned the Second Circuit, can never be
redistributed by their lawful owners without getting permission from
the copyright owner – no matter how many times they have changed
hands, and no matter that the U.S. copyright owner made them, imported
them and sold them. Following Kirtsaeng, it has rejected appeals in
three similar cases, all involving efforts by four major college
textbook publishers to prevent price competition, within the United
States, from secondary sales of textbooks they have already sold.

The Kirtsaeng holding is now the subject of petitions for certiorari
in Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697, and Liu v.
Pearson Education, Inc., No. 11-708. (The issue is also before the
Second Circuit on petition for rehearing en banc in Pearson Education,
Inc. v. Arora, No. 10-2829, even though the 2nd Circuit has twice
denied en banc review of the issue.)

Against this backdrop, in which the Supreme Court is poised to
re-examine the current vitality of a 150-year-old doctrine, the
U.S.T.R. is advocating an end run, threatening to force Congress and
the courts to adopt the outcome sought by those who engage in price
discrimination against U.S. consumers.

Fundamentally, the issue has nothing to do with copyright protection.
That is, in all factual scenarios in issue, the U.S. copyright holder
made the copies and sold them at satisfactory prices. The fundamental
issue is global price discrimination. Like any other global
manufacturer of consumer goods, the publishers want to extract the
maximum price each local market will bear. Where the price the market
will bear varies enough to create a demand for arbitrage, these
publishers are not content to respond to the arbitrage by reducing the
disparity in global prices, but rather, they seek to use copyright
infringement as the method of policing and enforcing the disparity,
thereby preventing price competition from the copies they, themselves,
already chose to sell more cheaply elsewhere. As a bonus, they can
also prohibit U.S. college students from lending or selling used
textbooks, so long as the textbooks were manufactured abroad.

The profits to be derived from this scheme are sufficiently high that
the publishers of college textbooks continue to battle it out in
court, having retained Theodore Olson to represent them before the
Supreme Court. And, they have continued to lobby heavily against
federal and state government initiatives that attempt to bring down
the price of college textbooks – prices that have been increasing much
faster than the rate of inflation or college tuition. But would their
efforts be for naught if the Supreme Court were to put a stop to using
the Copyright Act as just a means for insulating their global price
discrimination from the normal pressures of a free market? After all,
the victorious Omega eventually suffered a defeat on remand to the
District Court, which held that such use of its copyright constituted
“copyright misuse.” Omega S.A. v. Costco Wholesale Corp. (E.D.Ca.,
Nov. 9, 2011). Here is where the aid of the U.S.T.R. in negotiating
the Trans-Pacific Partnership Agreement (TPP) would come in,
nullifying any potential adverse ruling by the Supreme Court while
concurrently protecting against liability for copyright misuse. After
all, if our own treaties require us to allow copyrights to be used to
suppress price competition, it can hardly be a misuse of the copyright
to do just that. The current draft would require the parties to codify
the outcome from the 9th Circuit’s self-maligned interpretation. And,
if the U.S.T.R. is successful, even if the Supreme Court were to
reverse the Kirtsaeng holding, Congress would have an international
obligation to amend Section 109(a) to apply only to copies either made
in the U.S. or authorized by the U.S. copyright holder for sale here –
authorized, no doubt, only at a minimum resale price rather than the
true market price.

The current draft of the TPP has a provision that the major college
textbook publishers could not have drafted any better themselves, as
it mirrors the outcome advocated in their briefs. It would require
treaty parties to codify the Ninth Circuit’s damaging ruling, thereby
creating a huge loophole for U.S. copyright holders to take control
all secondary markets for their works, as well as to control primary
markets, by requiring all retailers to obtain a copyright owner’s
“license to sell” in addition to outright ownership of noninfringing
copies – if those copies are made abroad.

In an apparent effort to prevent the possible backlash if such new
powers would allow the control over sale, gift, rental and bequest of
shampoo (at issue in Quality King), watches (at issue in Costco v.
Omega) or any other ordinary chattel, the TPP provision would require
granting the power over all transfers of title or possession only in
the case of copies and phonorecords in which the work of authorship
represents substantially all of the value of the product. Whether to
go beyond that would be optional, allowing parties to leave out
automobiles and kitchen appliances containing copyrighted computer
programs, for example. Less certain is the case of copies of
technically separate works bundled together, such as whether the law
could obligate retailers to look only to where the video game disc
itself is made, and not worry about where the copyrighted package
label or instructions included inside the packaging were printed. But
it may not be so clear, either, in the case of some electronic
devices, wherein the value of the software rivals the value of the
hardware, or where the expensive hardware without the cheap software
is unappealing. The iPhone, for example, comes pre-loaded with
copyrighted computer programs, making it a noninfringing “copy” of
many works, lawfully made in China (albeit by the U.S. copyright
owner). Under the Ninth Circuit ruling, you may lend you iPhone to a
friend without the copyright owner’s consent, because Apple sold it
here (assuming Apple is the owner of all of the copyrights) in
pre-installed works. Under the Second Circuit ruling, you cannot,
simply because the copies were all made in China. Under the proposed
TPP provision, the outcome might differ depending on whether there is
a market for iPhones without the operating system (iOS) and related
application software.

CHAPTER DRAFT – FEBRUARY 10, 2011, Section 4.2 provides:

“Each Party shall provide to authors, performers, and producers of
phonograms the right to authorize or prohibit the importation into
that Party’s territory of copies of the work, performance, or
phonogram made without authorization, or made outside that Party’s
territory with the authorization of the author, performer, or producer
of the phonogram. [FN 11]“

“FN 11: With respect to copies of works and phonograms that have been
placed on the market by the relevant right holder, the obligations
described in Article [4.2] apply only to books, journals, sheet music,
sound recordings, computer programs, and audio and visual works (i.e.,
categories of products in which the value of the copyrighted material
represents substantially all of the value of the product).
Notwithstanding the foregoing, each Party may provide the protection
described in Article [4.2] to a broader range of goods.”

Copyright holders should be required to face market competition from
goods they sell, just like anyone else. It may be the case that some
countries with lower per capita income would welcome price
discrimination that favors their own people. Even so, it is hard to
imagine any harm to them if it also creates a market for distributors
in countries with higher per capita incomes to purchase more copies in
those countries, for export to the developed nations. Conversely,
high-priced copies in the U.S. might be more appealing if they can be
sold as “secondhand” copies in lower-income markets. More importantly,
policymakers of all nations should pause to consider the long-term
effects of allowing transnational companies to use copyrights as a
means of permanently balkanizing the world by artificially separating
low income and cheap labor nations from more developed and higher
income nations. But whatever the policy considerations may be behind
whether to require TPP parties to prohibit market forces from
undermining global price discrimination in copyrighted copies, it is
the height of lunacy to allow the United States Trade Representative
to tamper with a longstanding fundamental doctrine of United States
copyright law that Congress has never shown the slightest desire to
change. Up until the Copyright Act of 1976, Congress’ position was to
completely deny copyright protection to copies of English language
works made abroad, and the sole purpose of that policy was to protect
U.S. jobs. Although that jobs-protection aspect of the U.S. Copyright
Act was abandoned in 1976, the U.S.T.R. is intent on taking the
country to the opposite extreme, by rewarding U.S. copyright owners
who send U.S. reproduction jobs abroad. The U.S.T.R. is advocating a
copyright position that, if adopted, would mean, quite simply, that if
U.S. copyright holders are foolish enough to make their copies with
U.S. labor, and foolish enough to import them themselves, they will
lose the power to protect supra-competitive retail prices in the
United States, leaving money in the pockets of U.S. consumers. Such an
outcome has never been a part of U.S. copyright policy, which
Constitutionally seeks to increase the dissemination of works of
authorship in the U.S., and there is no sound reason why it should
become part of the Copyright Act now – particularly not when the feat
is being accomplished by sidelining Congress and the courts.

Manon Anne Ress
Knowledge Ecology International
1621 Connecticut Ave, NW, Suite 500
Washington, DC 20009 USA
manon.ress at keionline.org

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