Managing Digital Resale in the Era of International Exhaustion

Managing Digital Resale in the Era of International Exhaustion Seth Niemi Introduction The Copyright Act of 1970 and Directive 2001/29/EC of the European Parliament both guarantee copyright holders' exclusive rights of reproduction and distribution of their copyrighted material. Starting from a similar statutory basis, United States and European Union courts have diverged in their interpretation of these protections with respect to the first sale rule for digital goods. This paper analyzes the treatment of such "digital exhaustion" arguments under copyright law between the two legal systems from both the statutory interpretations employed and the policy rationales considered. The paper concludes by discussing the implications of adoption of digital exhaustion, within international law, for both copyright holders and consumers alike. I. Exhaustion Doctrine and the "First Sale" Rule The exhaustion doctrine is a long-standing tenet of American intellectual property law. The exhaustion doctrine historically acted as a common law limitation to the protection given to both copyright and patent holders whereby upon legal, unrestricted sale by the rights holder those rights were then "exhausted," and the rights holder could not further restrict resale of the good.1 The Supreme Court articulated the common law principle in the 1852 Bloomer v. McQuewan case, wherein they held that when the product in question "passes from the hands of the purchaser" the product no longer falls within the "limits of the monopoly" given by the patent.2 This doctrine, known as the "first sale" rule, arises from the understanding that an unrestricted sale [End Page 375] entitles the purchaser to "full enjoyment of that product."3 That enjoyment encompasses the use, lease, or resale of the good.4 While most individuals are unlikely to know this doctrine by name, it fits our inherent understanding of purchase and ownership.5 When we buy a product, we expect to be able to use that product as we wish and sell it again in the future without interference from the original seller.6 Patent exhaustion has been found to apply to method patents as well as the more typical exhaustion application to a utility patent. In Quanta Comput., Inc. v. LG Elecs., the Supreme Court considered the sale of computer parts produced through a process governed by a method patent.7 The Court held that patent exhaustion applies to method patents where the legally sold products "substantially embody" the patent in question.8 This reasoning concluded that, while patented methods were not "sold" in the traditional manner that goods protected by a utility patent may be sold, the underlying mechanism for patent exhaustion still exists as utility methods are not categorically exempt from the exhaustion doctrine. The sale products embodying the method patent they are produced under may exhaust that patent.9 The exhaustion doctrine and the first sale rule apply to copyright protections as well as those provided by patents. The Supreme Court in Bobbs-Merrill Co. v. Straus struck down an attempt by a book publisher to restrict the resale of their books below the initial sale price.10 The publisher had printed on the first page of the book a small passage reading "[t]he price of this book at retail is $1 net. No dealer is licensed to sell it at a less price, and a sale at a less price will be treated as an infringement of the copyright."11 The Court concluded that copyright protection did not include the right "to impose … a limitation [on the price] at which the book shall be sold by future purchasers with whom no contract exists."12 This principle of copyright exhaustion mirrors that which the Bloomer court found within patent exhaustion, namely that [End Page 376] legal sale without restriction or contract terminates the right of the copyright holder to prevent future resale. Copyright exhaustion and the first sale rule are codified in 17 U.S.C. § 109(a). 17 U.S.C. § 109(a) entitles "the owner of a particular copy or phonorecord lawfully made under [the statute]" to "sell or otherwise dispose" of the record "without the authority of the copyright owner."13 This statute reflects the common law development of the doctrine...