Guest Post: Exhaustion and Copyright Law – A look at the Copyright Amendment Bill, 2010

One of our regular commentators – Ms. Sneha Jain – a student of ILS, Pune has sent us this excellent guest post on the implications of the Copyright Amendment Bill, 2010 for parallel imports of copyrighted works. She has further nuanced her post by linking the discussion to the proposed definition of ‘commercial rentals’ in the pending Bill. For those of you interested in the concept of parallel imports, this post is a must read.

Exhaustion and Copyright Law

by Sneha Jain

While the disability-related and the film industry-related amendments of the Copyright (Amendment) Bill, 2010 (the ‘Bill’) continue to be the hot topics of conversation amongst the IP circles see here, another amendment, which is by no means lesser in significance, has been overshadowed in the limelight.

Simply worded, yet powerful in its impact, the amendment to Sec. 2(m) which defines an “infringing copy” and corresponding amendments to Sec. 14(d)(ii) and 14(e)(ii) will bring a symmetry in the application of the principle of international exhaustion across the three genres of IP – Trademark, Patent and Copyright.

Exhaustion and Parallel Imports

Exhaustion acts as a limitation on the distribution right by excluding control over the copies which have already been put into circulation. The Principle of Exhaustion or the First Sale Doctrine means that once a copy of the copyrighted work is sold, the exclusive right of the owner to sell or distribute a copy of the work is exhausted by the first sale of such copy.

There are three forms of exhaustion –
1)Domestic – where the owner exhausts his right only if the copies are sold for the first time domestically;
2)Regional – where the rights are exhausted only if the first sale occurs within his own country or any country within a region; and
3)International – where rights are exhausted irrespective of the place where the copies are first put for sale.
In the first two situations, the owner retains the right to restrict import of copies made abroad into the domestic market or the region respectively. However, in case of international exhaustion, the owner loses this right on the first sale.

The practical effect of this principle is the practice of parallel imports whereby an unauthorised third party imports cheaper but legitimate copies from Country A into Country B to sell them in parallel with the same yet more expensive legitimate copies which are either domestically manufactured or imported with the consent of the copyright owner.

Exhaustion under Trade Mark and Patent Law

Sec. 30 (3) of the Trade Marks Act, 1999 recognises the principle of national as well as international exhaustion. Sec. 30(4) clarifies that 30(3) does not apply where the proprietor has “legitimate reasons” to “oppose further dealings in the goods in particular if the goods are changed or impaired after they have been put on the market.”

In the context of the Patents Act, 1970, even though Sec. 107A(b) has been ambiguously worded and has been the subject of numerous debates, it expressly recognises only the principle of international exhaustion. Nevertheless, strong arguments exist in favour of recognition of national exhaustion as well.1

Exhaustion under Copyright Law

Justice Bhat in Warner Bros. v. V.G. Santosh, CS(OS) 1682/2009 explicitly recognised that, in the context of copyright law, while the principle of international exhaustion may apply to literary, musical, dramatic or artistic works; it does not apply to cinematographic film [and to sound recordings as well]. This case involved the import from US into India of legally purchased DVDs of films produced by Warner Bros. which were not yet released for public viewing in India. He based his decision on the difference between the wordings of Sec. 14(1)(d) [and (e)] and 14(1)(a)/(b)/(c). While under the former, the copyright owner continues to exercise his right to sell or give on hire a particular copy “regardless of whether such copy has been sold or given on hire on earlier occasions”; under the latter, he ceases to exercise these rights over copies which are “already in circulation.”

This essentially means that the buyer of a cinematographic film or a sound recording cannot sell or give on hire, his copy of the film or recording without the previous permission of the copyright owner. However, the buyer of a literary, musical, dramatic or artistic work does not require any such permission. Justice Bhat also favoured this interpretation on the ground that since owners of copyright in films/recordings can exercise their right to distribute the work through licences which can be limited geographically, accepting international exhaustion would permit a licensee, who acquires a copy, to exploit the copies beyond his contractually imposed geographical limit and thus nullify the object of geographically limited licences.

Proposed Amendments

The Bill proposes to add a proviso to the definition of an “infringing copy” under Sec. 2(m) –
“Provided that a copy of a work published in any country outside India with the permission of the author of the work and imported from that country into India shall not be deemed to be an infringing copy.”

Correspondingly, the words “regardless of whether such copy has been sold or given on hire on earlier occasions” in Sec. 14(1)(d)(ii) and 14(1)(e)(ii) are proposed to be deleted. Also, the word “hire” in the above sections has been replaced by “commercial rental” which definition is proposed to be added by Sec. 2(fa) –
2(fa) “commercial rental” does not include the rental, lease or lending of a lawfully acquired copy of a computer programme, sound recording, visual recording or cinematographic film for non-profit purposes by a non-profit library or non-profit educational institution.

Impact of the Proposed Amendments

By the amendment to Sec. 14, the distinction in the wordings of Sec. 14(1)(d)/(e) and 14(1)(a)/(b)/(c) which formed the basis of Justice Bhat’s reasoning in Warner Bros., will become non-existent. Copyright law will henceforth recognise the principle of international exhaustion uniformly without making any distinctions between the various works. Further, the exclusion of ‘copies of works lawfully published abroad and imported into India’ from the definition of “infringing copy” also reinforces the applicability of the international exhaustion principle.

However, at the same time, an exception is provided to the applicability of international exhaustion by the definition of “commercial rentals”. This definition is rather exclusionary than explanatory. The exclusionary part appears to have been influenced by Sec. 109(b)(1)(A) of the US Copyright Code which was added by the Record Rental Amendment Act, 1984. Sec. 109(b)(1)(A) is an exception to the first sale doctrine whereby a buyer of a copy of a sound recording/computer programme is prohibited from renting it to the public for commercial advantages. This was added to counter the practice of consumers renting new albums, making copies and avoid buying the album. The Indian law does not explain what is included within “commercial rental” but explicitly excludes rentals for non-profit purposes by certain establishments from its purview.

Further, “commercial rental” under the Indian law applies not only to sound recordings and computer programmes but also to cinematographic films. This falls squarely within the condition to the exception under Art. 11 of the TRIPS whereby Members are obligated to enable owners of cinematographic films to prohibit or authorise sale or commercial rental of originals or copies only if such rental has led to widespread copying which materially impairs the reproduction right of the owner.

Concluding Remarks

The recognition of international copyright exhaustion is a welcome change. It brings uniformity in the intellectual property regime of the country. At the same time, carving an exception to this principle by defining commercial rentals ensures protection of the reproduction rights of the owner.

While the Indian law is on the path of consistency and stability, the legal regime which influenced our law – the US, also appears to be headed for some uniformity. The US Supreme Court has granted a certiorari see here and here against Omega v. Costco Wholesale Corp., 541 F. 3d 982 (9th Cir. 2008). It has agreed to review the issue of “whether the principle of international exhaustion applies to copyrighted works that are manufactured abroad.” The review is expected not only to discuss the copyright angle but also shed some light on the applicability of exhaustion to other areas of intellectual property. This will directly affect an ongoing litigation on the issue of international patent exhaustion before the Federal Circuit in FujiFilm Corp. v. Benum, Fed. Cir.App. No. 2009-1487 see here . The decision on the certiorari is expected in the October 2010 Term of the Court.