Failed Defense: First Sale Doctrine

The U.S. Court of Appeals for the Eleventh Circuit recently decided a case involving a conviction under 18 U.S. Code § 2318: U.S. v. Harrison, 534 F.3d 1371 (11th Cir. 2008).

The relevant portion of § 2318 provides as follows:

Whoever, in any of the circumstances described in subsection (c), knowingly traffics in . . . a counterfeit label or illicit label affixed to, enclosing, or accompanying, or designed to be affixed to, enclose, or accompany . . . a copy of a computer program . . . shall be fined . . . or imprisoned for not more than 5 years or both.

18 U.S. Code § 2318. The “circumstances described in” § 2318(c) are factors that give the federal government jurisdiction to prosecute the case. The factors that applied in this case are that the counterfeit/illicit labels in question were “affixed to . . . or designed to be affixed to . . . a copy of a copyrighted computer program.” 18 U.S. Code § 2318(c). (The other primary factors conferring jurisdiction are that the crime was committed in U.S. territory and/or involved the use of the mails or a facility of interstate commerce . . . like the Internet.) If you’re interested in the elements of a case under this statute, you can read about them in the Department of Justice manual you can find here.

Here are the facts in the case, as given in the defendant’s brief to the Eleventh Circuit:

In . . . 2005, Harrison owned and ran a Georgia corporation by the name of Sales International, LLC (`SI’). . . . SI was run by Harrison out of the basement of his residence in Oxford Georgia. His employees included . . . [names omitted].

The businesses sold, among other things, Microsoft [Certificate of Authority] labels. Harrison bought COAs in stand alone form. . . . from a few . . .sources. Used licenses were purchased from companies that had already used their licenses and were ready to upgrade. He also bought COAs from one individual. He also purchased items through Original Equipment Manufacturers. When COAs were purchased with other items, employees were charged with opening boxes and separating the COAs from the software. The COAs would then be sold with a similar type of software or in a stand alone format.

In 2005, after learning of a change in the law, Harrison ceased selling COAs for a period of time. However, after consultation with several attorneys and believing there were defenses to the new law, he resumed his sale of COAs but on a much smaller scale. In July 29, 2005, after an undercover purchase of software . . . by the FBI, a search warrant was executed upon the residence/businesses. No further sales of COAs occurred. . . .

Brief of Appellant in U.S. v. Harrison, No. 07-13808-GG (U.S. Court of Appeals for the Eleventh Circuit), 2008 WL 2857833.

On July 7, 2006, a federal grand jury in the Northern District of Georgia returned an indictment charging Harrison with four counts of violating. 18 U.S. Code § 2318. On May 18, 2007, he pled guilty to two counts of the indictment, but reserved his right to appeal his use of a particular defense: the first sale doctrine (or first sale defense). Brief of Appellant, supra. What had happened was that Harrison wanted to raise the defense at his trial, but the government filed a motion to exclude him from doing so, and the court granted the motion. He saw no point, apparently, in going to trial without being able to raise his defense, so he pled guilty while reserving his right to ask the Court of Appeals to reverse the trial court’s order and let him use it, at a later trial.

The first sale doctrine is used as a defense in copyright infringement cases. Here is how the Department of Justice manual I mentioned earlier describes the defense:

A common defense to a claim of infringement of the distribution right is the `first sale’ doctrine, codified in 17 U.S.C. § 109, which provides that ` . . . the owner of a . . .copy . . . 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 . . . that copy’. . . . In other words, once a copyright-holder sells or gives a . . . copy to another person, the copyright-holder generally cannot control how that . . . copy is subsequently sold or transferred. . . . Putting it in terms of the purchaser's rights, the first purchaser and any subsequent purchaser of that specific copy may further distribute or dispose of that particular copy without the copyright-holder's permission.

The first sale doctrine does not grant the purchaser or anyone else the right to make additional copies of the work he has. Making unauthorized copies of a lawfully-obtained work still violates the law. . . . Consequently, the first sale doctrine is a defense only against an allegation of infringement by means of distribution.

U.S. Department of Justice, Prosecuting Intellectual Property Crimes Manual § II.

As the Eleventh Circuit noted in its opinion, Harrison “essentially wished to argue that because he legitimately owned the COAs it did not violate federal law to distribute those COAs.” U.S. v. Harrison, supra.

In its brief to the Eleventh Circuit, the Department of Justice argued that the first sale doctrine does not apply in prosecutions under 18 U.S. Code § 2318:

The United States criminal code, Title 18, criminalizes certain copyright violations. For example, 18 U.S.C. § 2319 criminalizes violation of 17 U.S.C. § 506(a). The statute violated in the instant case, however, requires no copyright violation. The indictment here alleges violation of 18 U.S.C. § 2318. Nowhere within 18 U.S.C. § 2318 does the statute require any violation of Title 17, nor does the United States allege in the instant indictment that the Defendant infringed any copyright. . . . Instead, the United States alleges precisely what is required by § 2318, that is, that the Defendant knowingly trafficked in illicit labels.

Brief of Appellee in U.S. v. Harrison, 2008 WL 2857834. The Department of Justice also pointed out that the first sale doctrine only applies to items subject to copyright, so since “the COAs charged in the indictment are not subject to copyright, the first sale doctrine dos not apply.” Brief of Appellee, supra.

Harrison lost. The Eleventh Circuit held that the

first-sale doctrine is not available to an 18 U.S.C. § 2318 defendant. . . . [T]he statute defines a distinct crime; Harrison was not charged with copyright infringement. Congress could have easily incorporated the first-sale defense into § 2318, but chose not to. Nor would Congress choose to, for allowing a first-sale defense to a § 2318 prosecution would swallow the statutory scheme in its entirety. The statute targets the secondary market in authenticating labels; the first-sale doctrine eliminates restrictions on secondary markets. Therefore, to allow a first-sale defense would be to allow precisely the secondary market Congress intended to eliminate.

U.S. v. Harrison, supra.

That presumably leaves Harrison to comply with the sentence the federal district court imposed after he pled guilty: He was sentenced to imprisonment for 46 months, a fine of $25,000 and ordered to pay restitution to his victim(s).