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	LEGAL UPDATE: Quality King Distrib. v. L'Anza Research Int. Intellectual Property  by Craig Aronson In Quality King Distributors Inc. v. L’Anza Research International, Inc., 118 S.Ct. 1125, the Supreme Court weighed in on the issue of whether the first sale doctrine affords a defense to liability for copyright infringement. The first sale doctrine is generally stated as the rule that the copyright holder’s right to control distribution of its product does not extend beyond the first sale to a resale of the product; so that a downstream reseller of a copyrighted good cannot be liable for copyright infringement if the product as copyrighted was first sold into the marketplace by the copyright owner. In L’Anza, a California-based company engaged in the business of manufacturing and selling hair care items. The labels affixed to the products were copyrighted. In the United States, L’Anza sold exclusively through a network of authorized distributors, consisting entirely of professional beauty and barber salons. As a condition to sell the L’Anza products, the distributors agreed to market the wares only within certain geographical zones, which were the authorized channels. The sales of L’Anza goods outside the United States involved the exportation of goods through authorized distributors abroad. The foreign sales involved the same merchandise sold at discounted prices through authorized local distributors. After initial export, the L’Anza merchandise passed through various intermediaries where it wound up in Malta. A portion of the shipment was acquired by a company in California, which recognizing the market potential, brought the merchandise in from Malta and resold it in the United States effectively splitting the difference between the price charged normally in the United States through authorized distribution and the price being charged in Malta. This fact pattern has become typical of many major global companies. They have in effect sought to divide the world into different price and distribution zones. The United States carries the “Nordstrom price tag;” Europe carries the “Macy’s price tag;” and some of the Asian countries sport the “Kmart price tags” on the same merchandise. The issues raised are neither simple nor straightforward. Should a copyright holder be allowed to use the copyright law to restrict competition and create these different commercial zones? How does one balance copyright owners’ rights with free trade and competition? These issues are at the heart of the dispute amongst intellectual property experts on the scope of copyright protection for imported goods, even though the L’Anza decision was anchored on more technical grounds of statutory construction. The procedural status of the L’Anza decision is that L’Anza had filed in Central District of California, Federal Court, for copyright infringement, specifically violation of its copyright ownership and exclusive right to distribution under 17 USC 106, 501 and 602(a) of the Copyright Act (602 being the prohibition on unauthorized importation). Quality King asserted a first sale defense, essentially to the effect that the merchandise had been sold by L’Anza and was in the chain of distribution prior to its purchase by defendant. L’Anza moved for summary judgment on the grounds that section 602 of the Copyright Act prohibited importation of copyrighted materials without the copyright holder’s consent and that this prohibition was not subject to first sale exception. The trial court granted summary judgment, which was affirmed on appeal with the statement of the Ninth Circuit that “section 602(a) would be rendered meaningless if section 109(a) were found to supersede the prohibition on importation.” Thus, the Court of Appeals found the unauthorized is grounds for liability regardless of any claim of first sale defense. The Supreme Court reversed, holding that the prohibition on unauthorized importation of copyrighted goods under section 602 did fall subject to the provisions of section 106, including the exception to liability under 106 pursuant to the “first sale” defense. (Indeed, if section 602 liability were not subject to an exception for first sale, that would create the anomaly that domestic sales of copyrighted goods would be subject to exceptions for liability as to educational and scholarly purposes and first sale, whereas imported copyrighted goods would not fall subject to that exception.) The Supreme Court decision in L’Anza could have been clearer concerning whether or not the decision was limited to the facts before the court, namely a manufacture and sale of the goods in question in the United States and then their export abroad, where they were purchased by defendant’s supplier and imported back into the United States. The uncertainty surrounding the legality under copyright law of goods manufactured abroad and sold there by the copyright holder and then imported into the United States without the copyright holder’s permission arises from Justice Ginsberg’s concurring opinion, in which she limits the court’s ruling to goods that were “triangulated” back into the United States—sold here, exported, and then imported into the United States. This is not a point emphasized in the majority opinion, but is a point that Judge Ginsberg latches onto as the reason for the decision in her concurring opinion. The L’Anza decision highlights the tension between the quasi-ownership rights of the copyright holder on the one hand balanced against allowing the efficiencies of the marketplace on the other. On the one hand the copyright owner is promised “an exclusive right to distribute copies to the world.” On the other hand, the courts recognize that taken to an extreme this would allow the use of intellectual property rights to carve up the world market through judicially imposing restrictive commerce. The L’Anza decision seems to make commercial sense at least where the goods are the same and similarly merchandised: Is there any reason why the entrepeneur who sees the same product in a foreign country at a 20% discount should not be able to import the product and split the costs savings with the consumer here? Price differences in the world marketplace are after all the driving force behind importation of this merchandise. To allow first sale defense prevents economic protectionism and provides the end user with an alternative, cheaper source of merchandise and thus, favors free competition. The response typical of the copyright holder’s position is that the unauthorized importation of copyrighted merchandise undermines the copyright holder’s interests. It ignores differences in costs of merchandising here and abroad and may be used to sidestep quality control or effective merchandising channels. It thereby calls into question and confuses within the marketplace the legitimate channels for distribution, which may operate at higher overhead or expense in marketing. Of course, the copyright holder has ways of limiting distribution other than through the attempt to use the copyright statute to bar import. The manufacturer can place restrictive clauses in the foreign distributor’s contracts, such as geographical restrictions on trade, and further insist that the distributors restrict purchasers to local use and distribution. The copyright holder can then seek to use contract and the foreign country’s court’s enforcement of those contracts as a restriction on unwanted distribution of goods. The trademark owner can also reduce the likelihood of arbitrage by limiting the price differences to smaller increments, thus taking away some of the incentive for this importation. On the surface of the L’Anza decision, the court largely chose to step around these policy issues, and stated: “The wisdom of protecting domestic copyright owners from the unauthorized importation of validly copyrighted copies of their works and the fact that the Executive Branch has recently entered into at least five international trade agreements apparently intended to do just that, are intended to do just that, are irrelevant to a proper interpretation of the Act.” L’Anza, 523 U.S. at 153-154. Accordingly, in the aftermath of L’Anza the general argument is that the first sale defense applies to unauthorized importation of goods first sold by the trademark holder abroad. The Ginsberg concurring opinion that seeks to fasten the opinion on the factual specifics, including domestic manufacture and sale, leaves some doubt as to the scope of the decision and leaves room for zealous advocates to debate the point. The importation limitation is most problematic to the gray marketer absent the broad interpretation often given L’Anza because the copyright restriction on unauthorized importation does not require a showing that the imported product is in some way inferior, as would often be the case in the trademark setting. ©2006 The Business Suit, Defense Research Institute. All Rights Reserved. Back
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