Legal View: Tips for IP lawyers in wake of game-changing ruling

Kimberly B. Herman, The Daily Record Newswire

Protecting rights has always been a challenge for intellectual property owners because of the relative ease with which pirates can steal their work. Books, motion pictures, art, music and software go out into the public domain and, unless guarded in some technological way, are often there for the taking.

Historically, IP owners have required customers who use their creative content to enter into license agreements as a way to guard their rights and protect against downstream use by others. But a March 19 ruling by the U.S. Supreme Court could ultimately cause IP owners to lose control of their copyrighted works by eroding the force of license agreements.

In Kirtsaeng v. John Wiley & Sons, Inc., the Supreme Court held that a Cornell student was within his rights when he imported text books from Thailand for resale in the U.S.

Publisher John Wiley & Sons sells the books in Thailand at a lower cost than in the U.S. It sued to stop the resale, arguing that the student was infringing on its copyright by importing the books without permission and reselling them in the U.S. at a price greater than that paid by Thai customers.

In its ruling, the Supreme Court said the “first sale doctrine” could be used as a successful defense to allow the importation of copyrighted works into the U.S. that are lawfully made — not pirated — abroad. The first sale doctrine protects a purchaser’s right to resell, lend and give away copyrighted works in the U.S. when legally manufactured even if the purchaser does not have express permission to do so.

The ruling could have significant implications for anyone operating in the resale market for books, music, software, movies and other works protected by copyright. One fallout is that vendors of all products who segment their prices regionally are likely to raise their prices across the board.

But a more ominous concern for IP owners is the potential clash the Supreme Court is creating between IP owners’ rights to control downstream use through contractual restrictions in license agreements and the first sale doctrine. Have the justices opened the door for end users to declare that products they license from IP owners are in the stream of commerce once purchased and therefore available to resell despite a license’s contractual terms? If so, then license agreements may not have the teeth they once had.

Here’s the rub: When a consumer purchases a song from iTunes, the buyer is purchasing a license from Apple to use the music for personal enjoyment, not to resell it. That differs from purchasing a book from Amazon, which is a simple sale not involving a license. The Supreme Court’s ruling could allow consumers to contend that the first sale doctrine applies to the purchase of that iTunes song, giving them the right to resell the tune. They could claim that the song was injected into the stream of commerce the moment it was made available for purchase.

The dust still needs to settle from the court’s ruling. In the meantime, IP owners should include the following steps to leverage their licensing agreements to the fullest.

• Have a clear statement of license. Be clear that the transaction is a license not a sale. It won’t, by itself, guarantee that the terms governing the transaction will be considered a license if challenged, but it is a necessary feature of any enforceable agreement.

• Clamp down on property transfer. The license should explicitly limit the conditions under which the IP can be transferred to another user. The conditions should include a clear ban of resale and transfer; a requirement that all copies be returned upon expiration or termination of the agreement; and the requirement that the user obtain written consent to sell or transfer the property from the IP owner.

• Impose use limits. Additional restrictions can be added when appropriate, such as geographic limitations on where the product can be used, or prohibitions on modifying or altering the IP, such as software.
• Charge recurring fees. Charge ongoing license fees in a “subscription” model to lessen the chances that a court will find the license agreement akin to a first sale in which the purchaser is typically required to pay a one-time fee.

From an intellectual property perspective, Kirtsaeng may be one of the most significant copyright decisions in the last 10 years. The facts were limited to textbooks, but the implications likely will roll across a wide swath of industries and geographies. By imposing the first sale doctrine, the Supreme Court may have begun the process that leads to the last license.

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Kimberly B. Herman is a partner in the corporate department of Sullivan & Worcester in Boston and leader of the firm’s intellectual property group.