Rebalancing Copyright Exhaustion

• Citation: Vol. 64 No. 3
• Publication year: 2015

Rebalancing Copyright Exhaustion

Guy A. Rub

REBALANCING COPYRIGHT EXHAUSTION

Guy A. Rub^*

ABSTRACT

In 2013, in Kirtsaeng v. John Wiley & Sons, Inc., the Supreme Court wrote another chapter in the ongoing story of copyright exhaustion. This ruling is part of a vibrant discourse and a series of recent decisions in high-profile cases, domestically and internationally, regarding the scope of copyright exhaustion and, more broadly, the ability of copyright owners to control the distribution of their work along the chain of commerce. Unfortunately, this discussion rarely explores the modern justifications for copyright exhaustion, which makes it notoriously incoherent and confusing.

This Article suggests that copyright exhaustion serves an important social function of reducing information costs. Without it, buyers will need to inefficiently waste resources inquiring whether they will be able to resell copyrighted work. Because resale rights are typically socially desirable, the law should usually provide those rights to buyers. Copyright exhaustion also has costs. The main costs are the reduction in the incentives to create and a regressive distributive effect that are the result of the limitations that copyright exhaustion places on certain price-discrimination practices. The balance between these benefits and costs should dictate the scope of copyright exhaustion.

This Article applies this balanced approach and explores the desired scope of copyright exhaustion. It concludes, inter alia, that it should not prevent copyright owners from exercising control over commercial importation of copyrighted goods or over distribution of digital work. However, contracting around copyright exhaustion should be restricted, and copyright owners

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should not be allowed to circumvent it just by including "magic words" in their standard-form agreements.

Introduction..............................................................................................743

I. On Copyright Exhaustion.............................................................749

A. Copyright Exhaustion in Context .............................................. 749
B. A Comparative Look on the Scope of Copyright Exhaustion .... 750

II. Historic Justifications for Copyright Exhaustion..................753

A. Regulating Vertical Restraint: From Strict Per Se Prohibition to a Narrow and Flexible Rule of Reason Test .......................... 754
B. Restraints on Alienation of Property and Servitudes on Chattel: From a Broad Prohibition to a Limited Reasonableness Test .................................................................. 759

III. The Cost of Copyright Exhaustion: The Effects on the Incentives-Access Tradeoff........................................................762

A. On the Incentives-Access Tradeoff............................................ 763
B. Price Discrimination in the Market for Copyrighted Goods..... 766
C. Price Discrimination, Arbitrage, and Copyright Exhaustion.....767
D. The Welfare Effect of Restricting Price Discrimination............ 770

IV. Other Possible Justifications for Copyright Exhaustion.....773

A. Channeling Distribution Schemes ............................................. 774
B. Spillovers and Distributive Effect.............................................. 778
C. Developing Resale Markets ....................................................... 780
D. Preserving Old Works ............................................................... 783
E. Protecting Buyers' Privacy ....................................................... 785

V. The Benefits of Copyright Exhaustion: Reducing Transaction Costs.........................................................................788

A. Copyright Exhaustion and Information Costs ........................... 789
B. Identifying High-Information-Cost Scenarios ........................... 792

VI. Normative Implications: Rebalancing Copyright Exhaustion......................................................................................795

A. Importation and Domestic Resale ............................................. 796
B. Digital Exhaustion ..................................................................... 801
C. Commercial Renting .................................................................. 806
D. Contracting Around Copyright Exhaustion ............................... 809
E. Nonownership Interests: Licensees Versus Owners .................. 812

Conclusion..................................................................................................816

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Introduction

When can copyright owners control the distribution of their works along the chain of commerce? Can John import a CD of copyright-protected music he purchased in Thailand to the United States, or does he need to secure permission from the copyright owner to do so? Once the CD is in the country, can John sell it on eBay? Can Clarence, who purchased the CD from John, resell it to Ruth? Can Ruth rent it to Elena? How do the answers to these questions differ if instead of buying a physical CD, John would have purchased a digital album on iTunes?

In recent years, these and similar highly controversial questions have been the subject of several high-profile cases, including three that reached the United States Supreme Court.¹ Answering these questions requires courts and litigants,² as well as federal agencies,³ international negotiators,⁴ and scholars⁵ to address the exact scope of the doctrine of copyright exhaustion.⁶

The core principles of copyright exhaustion—also known as "the first sale doctrine"—are easy to grasp. Copyright exhaustion, whose principles are presented in Part I, is the doctrine that balances the interests of owners of copyright and the interests of the owners of copies in which the copyrighted

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work is embodied.⁷ Specifically, this doctrine provides that once copyright owners transfer ownership in copies of their works, their rights to control future distribution of those copies is exhausted.⁸ The buyers are therefore free to transfer the copies as they please.

unfortunately, applying this doctrine in our global village and the digital world, in which copies can easily move between countries and work can be copied and distributed exceedingly fast, both physically and digitally, is challenging. This challenge is exacerbated because copyright exhaustion is under theorized. Indeed, many judges and commentators take the principles of copyright exhaustion and their ancient justifications as a given without questioning them.⁹ As one scholar noted, copyright exhaustion is "one whose justification is still underdeveloped despite a century of mechanical recitation."¹⁰

This Article tackles this difficulty by reexamining the justifications for the norms of exhaustion in light of modern developments in technology, in other areas of the law, and in economics. it concludes that copyright exhaustion is justified as a tool to reduce information costs in markets for copyrighted goods. However, this socially desirable goal should be weighed against the reduction in incentives to create, and a possible regressive distributive effect that copyright exhaustion causes. This balance should dictate the scope of copyright exhaustion. This Article also rejects other possible justifications for the doctrine as either unconvincing or insignificant.

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Copyright exhaustion emerged in the early twentieth century.¹¹ As explained in Part II, at the time of its emergence, copyright exhaustion was rationalized, to a large degree, by several related principles: the common law refusal to recognize servitudes on chattels, its bar on almost all restraints on alienation of property, and, above all, the antitrust policy that prohibited practically all vertical restraints.¹² However, our views of those principles have changed during the last century, mainly because modern sophisticated economic models questioned their justifications and broad application.¹³ Development in the law followed, and these doctrines are no longer strictly applied but instead are subject to a rule of reason test.¹⁴ Therefore, those principles, which are now narrower and more flexible, can no longer justify the broad and strict doctrine of copyright exhaustion. Unfortunately, some courts and commentators, including recently the Supreme Court, continue to rely on those ancient principles.¹⁵ This continued reliance on historic principles that are too weak to justify copyright exhaustion nowadays makes the doctrine incoherent and confusing, and, more troubling, can prevent it from promoting desirable social goals.

Part III explores the effects of copyright exhaustion on the famous incentives-access tradeoff. It suggests that from that perspective copyright exhaustion might be socially costly. The facts of the recent Supreme Court decision in Kirtsaeng v. John Wiley & Sons, Inc. can illustrate this effect. The defendant in this case earned significant amounts of money by purchasing textbooks in Thailand and selling them in the United States.¹⁶ In doing so, he took advantage of the copyright owner's decision to engage in price

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discrimination and sell books in Thailand for a fraction of their price in the United States.¹⁷ Therefore, when the Supreme Court held that copyright exhaustion applies to Kirtsaeng's actions and thus they did not constitute copyright infringement, it also held that the publisher's ability to engage in international price discrimination is limited.

While the Supreme Court did not seem to be troubled by this de facto limitation on price discrimination,¹⁸ this Article suggests that from a policy perspective, restricting this type of a pricing scheme is likely undesirable. This restriction is expected to reduce the incentives to create, in many cases, maybe most, without improving access to the work.

Part IV considers other possible modern justifications for copyright exhaustion and...