In the Matter of QUALITY KING DISTRIBUTORS, INC, Appellant, v. L’ANZA

RESEARCH INT’L, INC, Respondent

U.S. SUPREME COURT

March 10, 2006, Filed

PRIOR HISTORY: On writ of certiorari to the United States Court of Appeals for the Ninth Circuit

DISPOSITION: Affirmed.

COUNSEL: For Appellant: Sam Booch, Walla Walla, WA.

For Respondent: Nathaniel Jacob, Walla Walla, WA

JUDGE: Authored by Jason Wofsey in which Jim Hanson joins. Nathan Swain filed a dissenting opinion.

I. FACTS OF THE CASE:

L’anza Research International, Inc. is a California corporation which manufactures and sells hair care products and holds the copyright to the labels that are affixed to those products. L’anza limits it distribution of its products domestically to specialized distributors so as to be able to sell them at a higher price. L’anza also sells its products in foreign markets at prices lower than the prices charged to domestic distributors. In 1992 and 1993, Quality King purchased L’anza products overseas at prices intended for foreign markets and imported them to the United States, selling them at a price far lower than that charged by U.S. contributors. L’anza brought suit against Quality King, alleging that the importation and distribution of the copies in question violated L’anza’s exclusive rights under 17 U.S.C §106 and §602 to reproduce and distribute the copyrighted material in the United States and limit importation.

II. FUNCTION OF §602

Section 602 of 17 U.S.C., plainly states, “Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106.” This unambiguously gives copyright owners the right to prevent unwanted importation of copies. Quality King attempts to muddle these facts by pointing to limitations of the exclusive right to distribution given by section 106 of the Copyright act of 1976 (USC 17). 106 states that, “Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following…

(3) To distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending”

It is pretty clear that the reference to 106 in section 602 was intended to highlight the exclusive right of distribution. As an unintended consequence of referencing 106, it may seem that the same sections which limit 106, must also limit 602. One of these sections, 109 of USC 17, gives the owner of a particular copy the right to sell the copy without the consent of the copyright owner. There is no reason however, that this restriction should be able to overrule the prohibition of importation without the consent of the owner. Section 602 covers all copies that are acquired outside of the United States, without exception for legally purchased copies. One who purchases a copy overseas may indeed sell it or dispose of it as one pleases, but one may not import the copy into the United States without violating 602. The appellant claims that the right of “first sale” must necessarily restrict 602, and therefore render Quality King’s actions perfectly acceptable. This cannot be the case, however, because restricting 602 from including purchased material would prevent it from doing anything to supplement the rights of copyright holders further than the rights already granted by 106. The law, therefore, becomes superfluous and irrelevant.

III. Lack of significance of 602 if limited by 109

The appellant attempts to ascertain several useful purposes for 602 that can still exist with the limits of section 109, but these are hardly convincing. The appellant claims, “Because section 602 broadly refers to “copies” rather than merely legally-made copies, which have been “acquired” rather than legally acquired, 602 still prohibits the importation of pirated copies as well as those illegally purchased, situations that section 109 would provide no defense for. This does not prove any useful function for 602 because illegally-made and illegally acquired copies are already prohibited by law, hence the designation of illegal. The appellant argues that the importation of illegal copies is a separate offense from the illegal manufacturing and the illegal acquisition of copyrighted material. By this reasoning, section 602 would only serve the function of providing an additional charge to an already illegal action.

The appellant further argues that, “section 109 only provides a defense for importers who are the legal owners of the copies in question. If a possessor of copies does not hold ownership of them yet has not illegally acquired them (some sort of ward or caretaker, for example), and were to try to import them into the U.S. then section 602 would still prohibit that action.” Although it does appear that 602 could prevent the importation of copies that are not owned since section 109 does not apply to leased, rented, or loaned copies, there does not seem to be any desirable reason to specify such a prohibition. If that were the reasoning behind 602, the law would be stated to specifically include copy that is not owned. A copyright holder would have no sensible reason to prohibit the importation of such material, because if the importer is not the owner, than he is not granted the right of “first sale” and therefore can not resell the copy back in the United States.

As still another potentially productive function, the appellant claims that, “602 still limits the importation of copies legally produced in other countries under their copyright laws, as 109 specifies that only copies legally made under “this title,” or USC 17, are applicable for first sale. In this way 602 may still restrict a foreign production branch of a copyrighted item from competing with a copyright holder’s domestic US production branch.” It is unclear why a foreign production branch of a copyrighted item would compete with a domestic branch as the owner of the copyright would likely have a stake in both branches. Perhaps if the foreign production branch was an independent contractor licensed by the copyright holder, they could have such motives, but it would seem more likely that there would be mutual interdependence between the copyright holder and the foreign producer, because the copyright holder could simply withdraw the license of the foreign produce to make the copyrighted item.

IV. Economic implications of 602

The United States has a vested interest in promoting the competitiveness of domestically held copyrighted material in the international market. The purpose of granting copyrights in the first place is to award producers for their innovations by giving exclusive rights over distribution of the copyrighted material so that they may control the price of their work so as to attain superior profit. Without copyright protection, there would be no financial incentive to create great works of art, to publish scientific research, or in this case to create an attractively labeled product. Once created, these works become open to the public to utilize without compensating the original producer. There would therefore be a shortage of innovation without the existence of copyright law.

The differences in the marketplace between the United States and many countries overseas warrant a variance in the prices charged in the different markets. A profit-maximizing producer will surely benefit from being able to sell at an appropriate price domestically, while still being able to charge less in a country where the elasticity of demand is greater due to the lesser wealth and lower incomes of the people. For the government to make it profitable for copyright holders to sell their material abroad, it must grant protection for pricing differences. In a perfectly competitive marketplace, these pricing practices would not be possible, as arbitragers would simply buy where the goods are cheap and sell where they are expensive until the market equilibrates at a uniform price. In keeping with the encouragement of innovation and the supporting of domestic exports, it is necessary to provide copyright holders with the right to halt the importation of their copyrighted material. Section 602 gives this right to the copyright holder, and applying the limitations of section 109 that Quality King argues should apply would completely undermine the utility of 602.

If we are to say that because of 109, any purchaser of a copy may import that copy into the United States, than 602 would fail to protect copyright owners from unwanted importation into the United States. Quality King claims that an exclusive contract with foreign distributors would be a sufficient means for L’anza to protect itself from unwanted importation, but that may not be plausible when one considers the transaction cost of exclusive contracts. If there is only one purchaser, such a contract would be simple enough, but there could be numerous purchasers, all of whom may require individual contracts. The legal fees associated with drafting and signing of the contracts could very well outweigh any of the benefits of selling copies abroad. Furthermore, L’anza has already been harmed by unwarranted importation, and therefore the company is entitled to retribution.

It makes much more sense to interpret section 602 to be a limit on the section 109 right of first sale than it does to make 109 limit the section 602 right to prohibit unwanted importation of copyrighted material. Section 602 specifically states that importation without copyright holder consent is an infringement of 106. 109 merely defines and clarifies 106; it most emphatically does not state that importation without copyright holder consent is not an infringement of 106. If Section 109 were to be seen as limiting 602, 602 would lose all integrity as law. It doesn’t make sense to limit 602 from including purchased copies when the law is stated to include all copies acquired outside of the United States. Quality King’s actions impede on L’anza’s right to exclusive distribution and are therefore illegal. I affirm the appellate courts decision.

Justice Nathan Swain Dissenting

I. ARGUMENT:

A. The doctrine of “first sale” set forth in the section 109 of Title 17, Chapter 1, provides sufficient authority to allow Quality King Distributors to import into the United States the L’Anza hair products that they legally obtained outside of the geographic boundaries of the United States, and then sell the L’Anza hair products in a manner that they see fit, regardless of the wishes of L’Anza Research Corporation. Section 109 of Title 17, Chapter 1, states, “the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord”. The language in this section clearly defines the rights of Quality King Distributors regarding their importation and sale of L’Anza’s hair products. The legitimate owner (Quality King Distributors) of the copyrighted copies (L’Anza hair care products) is not subject to limitations or restrictions imposed by the owner of the copyright (L’Anza Research Corporation). The “first sale” doctrine clearly limits the control a copyright owner has over copies of the copyrighted work once ownership of the copy has been legitimately transferred to some entity other than the copyright owner.

B. Section 602 of Title 17, Chapter 6, is limited by section 109 of Title 17, Chapter 1, thus preventing the universal application of section 602 which states, “Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords”. Section 602 is limited under “under section 106” which is in turn “Subject to section 107 through 122” under section 106 of Title 17, Chapter 1, which includes section109. Section 109 gives the owner of a copy numerous rights that are not limited by the authority of the copyright owner, such as, “to sell or otherwise dispose of the possession of that copy or phonorecord.”

C. The dissenting opinion also finds that in addition to section 602 of Title 17, Chapter 6, being limited by section 109 of Title 17, Chapter 1, section 602 of Title 17, Chapter 6 does provide that “Importation into the United States, without the authority of the owner of copyright under this title” is not an unqualified “infringement of the exclusive right to distribute copies or phonorecords,” and cannot be construed to demonstrate such unqualified infringement. Section 602 includes within its text three exceptions to the prohibition on the importation of copyrighted copies, and they are:

(1) importation of copies or phonorecords under the authority or for the use of the Government of the United States … (2) importation, for the private use of the importer and not for distribution … (3) importation by or for an organization operated for scholarly, educational, or religious purposes and not for private gain.

These exceptions, while few, speak to the nature of section 602 and the limitations of rights afforded to the owner of the copyright. While the section 106 may appear to have only these three limit, that is not the case. Section 602 is set up in a way that establishes a law – importation of copyrighted material is illegal without the authority of the owner – then provides the exceptions to the rule. Some of the exceptions, such as “first sale” were previously mentioned in Title 17 and were refereed to with the words, “under section 105, actionable under section 501.” The other exceptions to the law that were not mentioned in an earlier section of Title 17 were stated explicitly within section 602.

D. I reject the Respondent’s argument that the language of section 602 of Title 17. Chapter 6 is clear in its intention that copyright material is unqualifiedly prohibited from being imported into the U.S. by parties other than the owner of the copyright. The Respondent’s interpretation of section 602 is not correct in their argument that importation of copyrighted materials is always prohibited in section 602. The dissenting opinion has concluded in argument “A” that section 602 is limited, with one of those limitations being the “first sale” doctrine. The Respondent’s analysis and argument that “unauthorized importation of such materials is always an infringement” is clearly not correct, and is in fact misleading, because section 602 is limited by the rights afforded the legitimate owner of a copy in section 109 as well as well as three subsections contained within section 602.

E. I reject the Respondent’s argument that allowing section 602 of Title 17. Chapter 6 to be limited by section 109 of Title 17, Chapter 1 would detract substantially from the usefulness of the law. While the law is limited by the “first sale” doctrine, this doctrine, set forth in section 109,only applies to legally made copies, legally obtained and owned. Section 602 still applies to illegal copies, copies illegally obtained and thus not rightfully owned, and as the Appellant aptly points out, copies in which the “possessor of copies does not hold ownership of them [and] yet has not illegally acquired them (some sort of ward or caretaker, for example).” And also as the Appellant points out, “602 still limits the importation of copies legally produced in other countries under their copyright laws, as 109 specifies that only copies legally made under “this title,” or USC 17, are applicable for first sale.” The law may not be as broad reaching as the Respondent would like it to be, but it is still applicable to a number of situations.

F. The Respondent’s argument of a need to limit the importation of copyrighted material may be a legitimate and well serving need. But the theoretical need of a law is beyond the scope of the questions presented in this case and there are other avenues to which copyrighted material can be protected. The Appellant responded to the Respondent’s claim by bring up the idea of “exclusive contracts” to which American copyright holders would require their foreign distributors to adhere. This would protect the copyright holder’s price of their domestic product while simultaneously allowing for foreign distribution at a price fitting for foreign markets, which could be substantially less than the price of the domestic product.