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Tidal Wetlands Permits and the Importance of Maintaining Old Bulkheads in Good Repair

Posted: July 25th, 2013

If you own waterfront property and have a functional bulkhead that is at least 100’ long and has been in place since before August 1977, you have a very valuable asset. According to the regulations of the New York State Department of Environmental Conservation (“DEC”), anything landward of such a bulkhead is not subject to the DEC’s wetlands jurisdiction. In contrast, if the property is not bulkheaded or the bulkhead is less than 100’ long or was constructed after August 1977, then any construction in the area within 300 feet landward of the tidal wetland boundary is likely subject to tidal wetlands regulations, and will require a DEC tidal wetlands permit. All too often, people overlook the importance of their pre-August 1977 bulkhead being “functional”, and, through failure to apply routine maintenance, find that the DEC is claiming work done behind the bulkhead should have been done pursuant to a Tidal Wetlands permit. In such situations, it is not uncommon for DEC to require any structure built without a required permit to be removed and to impose substantial penalties on the offender.

What is a “functional bulkhead”? Essentially, it is a bulkhead that functions as designed and is maintained in working order. Factors considered by the DEC in the determination of functionality include: if more than 50% of the footprint of the structure is missing; if the structural integrity is compromised; if the tidal wetland boundary has moved landward of the bulkhead; and, if sections are missing. In practice, the DEC tends to err on the side of caution and often will declare even a slightly damaged bulkhead non-functional if it fails to operate as designed. For example, if the bulkhead does not prevent soil from eroding into the water or the wetlands from moving landward, it may be deemed non-functional and the DEC will assert jurisdiction landward of the bulkhead.

The DEC’s regulations allow ordinary maintenance and repair, not involving expansion or substantial restoration, reconstruction or modification, to be performed without a permit. While this should be done regardless of when the bulkhead was constructed to avoid having to obtain a tidal wetlands permit in order to make substantial repairs, for the reasons set out above, it is critically important that the property owner regularly perform routine maintenance if the bulkhead was built prior to August 1977.

Supreme Court Defines “Supervisor” for Purposes of Harassment Claims

Posted: July 22nd, 2013

An employer’s liability for workplace harassment could turn on whether the harasser meets the Supreme Court’s newly adopted definition of “supervisor” of the victim, according to the Court’s opinion in Vance v. Ball State University, handed down on June 24, 2013.

Petitioner Maetta Vance, an African-American woman, had worked in the Ball State’s Banquet and Catering Department since 1989. Over the course of her employment there, Vance made numerous complaints regarding her interactions with Saundra Davis, a white catering specialist in her department. Vance filed complaints with the university and charges with the Equal Employment Opportunity Commission (EEOC), alleging racial harassment and discrimination, mainly stemming from her interactions with Davis.

Despite these efforts, the problem persisted. Vance eventually filed a lawsuit in 2006 in the United States District Court for the Southern District of Indiana, alleging that she had been subjected to a racially hostile work environment in violation of Title VII of the 1964 Civil Rights Act. Vance alleged that Ball State was liable for the hostile work environment created by Davis, whom Vance alleged was her supervisor.

Under Title VII, an employer’s liability for workplace harassment depends on whether the harasser is considered a co-worker or a supervisor. If the harasser is the victim’s co-worker, the employer may defend itself simply by showing that it was not negligent in addressing harassment complaints. However, if the harasser is the victim’s supervisor and no “significant change in employment status” occurs, such as the victim’s firing or demotion, the employer may avoid liability only by establishing that “(1) the employer exercise reasonable care to prevent and correct any harassing behavior and (2) that the plaintiff unreasonable failed to take advantage of the preventive or corrective opportunities that the employer provided.” If a significant change in employment status does occur, the employer is strictly liable.

In Vance’s case, the District Court granted Ball State’s motion for summary judgment, finding that the university was not vicariously liable for Davis’s actions because Davis, who did not have firing power over Vance, was not, in fact, Vance’s supervisor. The Seventh Circuit affirmed, and eventually so did the Supreme Court. The Court rejected the “nebulous” definition of “supervisor” in the EEOC guidelines, instead specifically defining “supervisor” as an employee who has the power “to take tangible employment actions against the victim, i.e., to effect a ‘significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits.’”

Writing for the majority, Justice Alito explained that, in the Court’s mind, the newly adopted definition of “supervisor” would eliminate the question of supervisor status from a trial, which in turn “will focus the efforts of the parties, who will be able to present their cases in a way that conforms to the framework that the jury will apply.”

But Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, argued in her dissent that the majority’s decision “ignores the conditions under which the members of the work force labor, and disserves the objective of Title VII to prevent discrimination from infecting the Nation’s workplaces.” The majority’s definition of “supervisor,” according to Justice Ginsburg, “strikes from the supervisory category employees who control the day-to-day schedules and assignments of others.” Although Justice Ginsburg herself questioned whether Davis would qualify as Vance’s supervisor even under this more relaxed definition, she lamented that “the Court has seized upon Vance’s thin case to narrow the definition of supervisor, and thereby manifestly limit Title VII’s protections against workplace harassment.”

Employers should take care not to view this employer-friendly decision as shielding them from hostile workplace claims. Instead, employers should take the opportunity to review their internal policies to ensure they provide for the prompt investigation of any such allegations and that employees are trained and remain up-to-date with Equal Employment Opportunity laws.

New York Navigation Law Update

Posted: July 11th, 2013

New York’s Navigation Law deals with oil spills, who must clean them up, and who must pay for the damage. Despite the name, the law applies to discharges of petroleum on land that may adversely impact the “waters of the State,” which include groundwater. Some recent court decisions are of interest.

Benjamin v. Keyspan Corp., 104 A.D.3d 891 (2nd Dept. 2013).

The normal statute of limitations for a claim of damage to property from petroleum contamination is three years from when the property owner knew or should have known of the problem. In this case, defendant Keyspan showed that the plaintiff had agreed to the installation of monitoring wells on his property, had participated in a survey regarding possible contamination in the area, and was notified of monitoring and testing results in the vicinity of the property at least eight years before the plaintiff filed suit. Thus, the action was dismissed as time-barred.

This decision from the Appellate Division, which has jurisdiction over Nassau, Suffolk, Staten Island, Brooklyn, Queens, Westchester, Dutchess, Rockland, Orange and Putnam Counties, underscores the importance of timely action by a property owner who knows or reasonably suspects that his property has been contaminated.

State of New York v. Zurich American Insurance Co., 106 A.D.3d 1222 (3rd Dept., 2013).

The Navigation Law allows any injured party to recover damages, not only from the “discharger”, but also from that person’s insurance company, by suing the insurance company directly. In this case, New York State expended over $124,000 to clean up contamination at a gas station in Northport, SuffolkCounty. It then tried to recover its costs by commencing an action against Zurich. However, Zurich had already obtained a declaratory judgment against its insured, stating that the claim is not covered under the policy. It argued that this decision meant that it could not be now sued by the State.

The Appellate Division disagreed. It pointed out that the State had not been a party to the earlier lawsuit and was therefore not bound by that court’s decision. The State must be given its own opportunity to convince the court that the policy covers the discharge. Of course, if it cannot, the insurance company will be off the hook. Another possibility is that, to avoid litigation costs, Zurich will agree to pay some of the cleanup costs as part of a settlement agreement.

Thus, if there is a dispute over policy coverage of a petroleum spill, the insurance carrier should add as a party to any lawsuit the injured party who may have incurred costs as a result of the discharge. That will create “collateral estoppel”, i.e. be binding on all the participating parties and deter subsequent litigation. Of course, the downside of including the State in a declaratory judgment action is that doing so will guarantee that the State becomes aware of the potential insurance coverage.

State of New York v. C. J. Burth Services, Inc., 39 Misc. 3d 1221(A) (Sup. Ct. Albany Co. 2013).

Anyone who violated the Navigation Law may be subject to penalties of up to $25,000 per day, with each day of a continuing violation counting as a new offense. In this case, the State asked the court to impose these penalties on the owners of a gas station, even though the latter claimed that they did not cause any spill and that the contamination had occurred years earlier before they had purchased the property. The State’s rationale was that, once they became aware of the contamination, “defendants failed to take all necessary actions to abate [it]”, by rejecting the Department of Environmental Conservation’s proposed stipulation about the work that had to be done and not doing any cleanup on their own. The court agreed that penalties could be imposed in this instance and set the matter for trial.

The important lesson to be learned from this case is that the net of Navigation Law liability can ensnare not only the person who causes a spill and his/her insurance company, but also a subsequent owner who discovers the contamination and does nothing to address it. To avoid heavy penalties, the innocent owner may consider applying to the Brownfields Program as a “volunteer”. This status allows the owner to limit the cleanup to the boundaries of the property without requiring him or her to investigate and remediate the off-site contaminant plume.

Derivative Claims in Landlord/Tenant Court

Posted: June 24th, 2013

By Patrick McCormick

In a case of apparent first impression in New York, in Gorbrook Associates Inc., and Norman Fishman, derivatively on behalf of Gorbrook Associates, Inc., v. Ilene Silverstein, John Doe and Jane Doe1, Judge Scott Fairgrieve held that the summary holdover proceeding was properly instituted derivatively by a shareholder on behalf of the corporation.

The petition alleged that petitioner Norman Fishman was an officer and owned 25 shares of Gorbrook and that Fishman and Allen Silverstein were the only directors of Gorbrook. As set forth in the decision, the petition further alleged that Ilene Silverstein was the daughter of Allen Silverstein and sister of Eric Silverstein and that Allen Silverstein and/or Eric Silverstein “arranged for Ilene Silverstein and her husband to move into the premises without a lease or contractual or statutory grant, authority or other basis.” Further still, the petition alleged that Fishman had demanded that Allen Silverstein cooperate or not interfere with Gorbrook’s efforts to secure use and occupancy payments from Ilene or to remove Ilene and her husband from possession of the premises; that Allen Silverstein was aware that Fishman wanted to collect such payments or to obtain possession of the premises; that Allen Silverstein refused to cooperate with Gorbrook’s efforts and that Allen Silverstein opposed the relief sought in the petition so that “it would have been futile for N. Fishman to attempt to secure the approval of A. Silverstein to seek such relief assuming arguendo that such approval was necessary.” A thirty day notice to quit was served and upon the refusal to vacate the premises the holdover proceeding was commenced. Respondents moved to dismiss under CPLR 3211(A)(7) alleging that Norman Fishman did not have authority to bring the proceeding and that a shareholder could not maintain a summary proceeding derivatively.

Not surprisingly, there is more to the story. The moving and opposing papers revealed that Ilene Silverstein had entered into a contract to purchase the subject premises and that the contract was signed by Fishman. When the closing did not occur after the declaration of a “time of the essence” closing date, Gorbrook, by Fishman, terminated the contract and an action was commenced in Nassau Supreme Court wherein Ilene Silverstein sought a declaratory judgment that the contract was valid. Ilene Silverstein also alleged in an affidavit that Fishman owned 25% of Gorbrook’s shares, that Allen Silverstein owned 25% of the shares; 25% were owned by her sister-in-law Robin Silverstein and 25% were owned by Rita Fishman as beneficiary of the estate of Ted Fishman, Norman’s brother. Ilene also alleged that there were 3 directors of Gorbrook: Norman Fishman, Allen Silverstein and Robin Silverstein. Ilene also alleged that she moved into the premises with Fishman’s consent. Robin Silverstein submitted an affidavit wherein she claimed she was a 25% shareholder and was a director and secretary of Gorbrook and that Fishman commenced the proceeding “on his own volition and does not have authority to evict Ilene Silverstein.” Allen Silverstein submitted an affidavit claiming he owned 25% of the shares and was a director with Robin Silverstein and that he was the vice-president of Gorbrook. The Silversteins alleged that Fishman did not have authority to commence the summary proceeding and that the proceeding was vindictive and designed to force Allen Silverstein to make financial concessions in a dissolution proceeding for Gorbrook.

Norman Fishman submitted an affidavit stating that: “Respondents are trying to use Allen Silverstein and Robin Silverstein’s membership on the board of directors to prevent Gorbrook and Norman Fishman from acting derivatively on behalf of Gorbrook”; that he “has a 31.25% ownership interest and that Allen Silverstein has a 18.75% interest”; that the “only two members of the board are Norman Fishman and Allen Silverstein”; and that neither the sale contract or any modification permitted occupancy of the premises and that he protested the occupancy.

Judge Fairgrieve held that “a derivative action may be maintained by Norman Fishman on behalf of the corporation Gorbrook.” The court reasoned that “[t]he economic benefit of the summary proceeding belongs to the corporation and not to Norman Fishman, individually . . . Any recovery from a shareholder’s derivative suits inures to Gorbrook and not to the shareholder who instituted the suit . . . Thus any recovery belongs to the corporation. Since the corporation is the owner of the premises and will receive the benefit of the summary proceeding an action may be brought pursuant to RPAPL §721 because Gorbrook is the owner of the property.” The Court also found that Fishman’s pleading adequately pled grounds establishing that a demand on the board of directors to initiate the summary proceeding would be futile and that sufficient specific facts were alleged showing that the other directors would not be impartial and therefore, because “Gorbrook has the right to protest and enjoy the economic benefits to be derived from ownership of said premises . . . this summary proceeding may be brought by Norman Fishman derivatively on behalf of Gorbrook Associates.”

The Court’s Decision/Order is worthy of review not only for the discussion of the viability of the derivative claim but also for the Court’s analysis and determination that Norman Fishman did not have the authority as a director and treasurer to institute the proceeding directly in the name of Gorbrook. This proceeding and the Court’s Decision confirm that sometimes summary eviction proceedings can involve complex issues usually reserved for Supreme Court litigation.

1 District Court of Nassau County, First District, L&T Part, Index Number LT-004906-10, Decided May 14, 2013

Supreme Court Focuses on Arbitrations and Class Actions

Posted: June 23rd, 2013

According to Justice Elena Kagan, the Supreme Court’s recent decision confirming a corporation’s ability to require arbitration in the event of a dispute is “Too darn bad.” The June 20, 2013 decision in American Express Co. v. Italian Colors Restaurant (No. 12-133) considered the situation of an Oakland, California restaurant which, along with other merchants, had commenced a class action lawsuit against American Express for violations of the Sherman and Clayton federal antitrust acts. According to Italian Colors and its fellow merchants, American Express used its monopoly power in the credit card market to force merchants to accept credit cards at rates 30% higher than the fees for competing cards.

The credit card agreements between American Express and each of its merchants require that all disputes be resolved by arbitration, and provide that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.” Citing these agreements, American Express moved to dismiss the class action and to compel individual arbitration with each merchant under the Federal Arbitration Act. In opposition to the motion, the merchants submitted an affidavit from an economist who estimated that the expert analysis required to prove the merchants’ antitrust claims could cost “at least several hundred thousand dollars, and might exceed $1 million,” while each plaintiff’s maximum recovery would be $38,549. Even so, the District Court granted the motion, but the Court of Appeals reversed, finding that the merchants “would incur prohibitive costs if compelled to arbitrate under the class action waiver.” If all of the merchants could share the costs in a class action, pursuing these claims would be much more feasible.

Although the merchants argued that requiring each of them to individually arbitrate their claims would violate federal antitrust laws, the Supreme Court disagreed, finding that Congress had established the legality of binding arbitration agreements (such as that at issue in this case). As Justice Antonin Scalia, writing for the majority, noted: “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The Court found that even with a class action off the table, each merchant still had a remedy, albeit an expensive one: “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” The Court’s decision essentially validated the credit card company’s contract mandating arbitration and eliminating the possibility of a class action.

While some observers lauded the decision as an endorsement of alternative dispute resolution and a win for contractual freedom, others, such as Justice Kagan, voiced their concern. Recognizing that cost effectively barred Italian Colors from proving its case outside a class action setting, Justice Kagan wrote that under the majority’s decision, “Amex has insulated itself from antitrust liability — even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”

DOL Inspection Preparation for Employers

Posted: June 10th, 2013

Most employers know that the U.S. Department of Labor (DOL) oversees compliance with the Fair Labor Standards Act (FLSA) and other statutes that protect workers. What many employers may not be aware of, however, is that the DOL has the authority to conduct inspections of workplaces and bring enforcement actions against employers found to be in violation of the FLSA and related statutes
governing wage payments. Employers may be investigated, inspected, audited, or visited by the DOL Wage and Hour Division (“WHD”) without explanation. Most often, complaints prompt DOL visits, though the existence of a complaint is not always disclosed to the employer. It is critical for employers to prepare for and understand their rights during inspections, investigations and audits. The following highlights some key points to prepare you and your team for a U.S. Department of Labor investigation.

Pre-inspection preparation. Before a government investigation begins, there are preventive measures that employers should take.
a) Check current and past 1099’s going back several years to review job duties to ensure proper classification of independent contractors vs. employees.
b) Review timekeeping systems to ensure that non-exempt employees are being paid for all work performed (including overtime).
c) Ensure that all required payroll records and written policies and procedures are current, accurate and complaint and updated regularly, keeping on top of applicable laws and regulations.
d) Train managers with key concepts of Wage Hour Law (exempt vs. non exempt).
e) Familiarize all employees with the basics of overtime and record keeping under the FLSA.
f) Familiarize key employees with DOL inspection procedure and appoint an employee representative for WHD inspector interviews.
Opening Conference & Preliminary Inspection. The inspection begins with the arrival of the investigator who will likely identify him or herself. The investigator will either present their credentials or an employer may request them. The investigator will request to meet with the employer or representative. An opening conference is conducted, which is when the employer is informed of the purpose of the inspection and the investigation process is explained. Some tips:
a) Clarify the scope of the investigation. Know exactly what they are looking for and don’t provide more than what is asked.
b) Consider your option to demand a subpoena vs. consenting to an investigation.
c) Know that the DOL must give the employer 72 hours to respond to demands and conduct the investigation during reasonable hours not to interrupt normal business operations.
d) Expect the DOL to request and be prepared to provide copies of at least the previous three years of payroll records, and all written policies, practices and procedures (i.e. timekeeping requirements
and procedures).
e) It is not unreasonable to request additional time to prepare the requested documents, although not all investigators will comply with this request.
Document Production. The investigator may request records for examination. Records are
examined to determine of the amount of business transactions, interstate commerce participation, government contracts, the layout of the facility, and payroll and time records.
a) Label all documents produced with “Confidential and Proprietary,” and keep all trade secrets or confidential business information under cover sheets.
b) Make and keep duplicates of every record produced to the DOL.
c) Bates-stamp each produced document to better track and reference what was produced.
On-Site Inspections and Interviews. Investigators may conduct private employee interviews that may occur on the employee’s premises, at the employee’s home, by mail, or by telephone. Both former and present employees may be subject to investigation interviews.
a) During the investigation have a manager escort the WHD representative at all times while on site (except during interviews).
b) Track the activity of the WHD representative; subjects of his questions, written notes, etc.
c) Employers do not have the right to participate in non-exempt employee interviews, but do have the right to attend all management interviews.
d) Once DOL decides who they want to interview, schedule all interviews in advance and prepare employees.
e) Remember that you must never retaliate against employees for agreeing to be interviewed or because of anything they say during an interview.
Closing Conference. A closing conference is conducted at the end of the investigation with the employer. The investigator will inform the employer of standards violated, corrections to be made, abatement dates, and citations may be issued. If the DOL finds any violations: a)Copies of the citation will be provided by mail and employers must post citations where affected employees can view them.
b) Be prepared for follow up inspections to ensure corrections are made and citations are posted.
c) Request time to provide supplemental information to correct any factual errors that form the basis of a proposed violation.
d) In deciding wither to contest the DOL’s findings, consult counsel to review whether the alleged violations are accurate, if the penalties are excessive and if the finding exposes you to costly
compliance measures.

During more in-depth investigations, compliance officers may conduct preliminary investigations including looking into whether or not a complaint is valid, and checking on prior or current investigations for the same employer. Additionally, they may collect copies of prior inspection reports, inspector’s notes, interviews, signed statements, and information on previous complaints. An employer may provide a written position statement and request time to consult legal counsel. Investigators may also subpoena documents and witnesses.

6. Remedies for Violations. Depending on the violation, type of investigation, and who performed the investigation, remedies will vary. Financially, employers may be subject to the payment of back wages, civil money penalties, employee suits for recovery, and Secretary of Labor lawsuits brought on behalf of employees. Legally, employers may be subject to court injunctions brought by the Secretary of Labor, criminal penalties, and court injunctions that prohibit further violations. Certain statutes subject employers to the withholding of funds, administrative hearings, court actions, loss of federal contracts, and the declaration of ineligibility for future contracts. Protection will be provided to the employees who file complaints or provide information for the investigation. Charges of retaliation, and potentially criminal sanctions, may occur if employees are affected after an investigation.

7. Conclusion. Employers should be proactive as opposed to reactive in this area. They should conduct self-audits at least yearly to make sure they are in compliance with applicable laws enforced by the United States Department of Labor. Employers should also train their employees what to do if when an investigator shows up at the facility. Early planning and knowing how to respond to an inspection could
potentially save an employer thousands of dollars and protect the employer from criminal prosecution.

July 21 – New York Civil Practice & Discovery Update CLE

Posted: May 28th, 2013

gavel freeimages.com Please join us on Thursday, July 21 for a complimentary CLE focusing on critical updates to the CPLR and court rules as well as recent case law that significantly impacts New York civil practice and discovery. Taught by two experienced litigators, CMM partners Scott Middleton and Patrick McCormick, the course will cover a wide variety of topics of interest to all who practice in New York State courts including deposition rules, subpoena standards, privilege issues, electronic evidence, and discovery hurdles facing every practitioner.

The application for New York accreditation of this course is currently pending.

A light dinner will be served.

Thursday, July 21, 2016

5:00 p.m. – 7:00 p.m.

Campolo, Middleton & McCormick, LLP
4175 Veterans Memorial Highway, Suite 400
Ronkonkoma, NY 11779

This seminar is free but registration is required. Please RSVP to Lauren Kanter-Lawrence, Esq., Director of Communications, at Lkanter@cmmllp.com or (631) 738-9100, extension 322.

Study Finds the Roberts Supreme Court the Friendliest Court to Business in Decades

Posted: May 28th, 2013

The decisions of the current Supreme Court are the friendliest to business of any court since World War II, according to a recent study published in the Minnesota Law Review.

In “How Business Fares in the Supreme Court,” Lee Epstein, William M. Landes, and Richard A. Posner discuss their analysis of nearly 2,000 decisions from 1946 through 2011. The study considered cases with a business on only one side. A vote in favor of the business was considered a pro-business vote.

The authors concluded that five of the ten Supreme Court Justices who have been most favorable to business currently serve on the Court, and two of them, Chief Justice John G. Roberts, Jr. and Justice Samuel A. Alito, Jr., ranked at the top of the list of the 36 most pro-business Justices in the study. The study found that after Roberts and Alito were appointed to the Court, the other three conservative Justices became more business-friendly in their decisions. The authors surmise that “the three may not have been as interested in business as Roberts and Alito and decided to go along with them to forge a more solid conservative majority across a broad range of issues.”

In an article about the Minnesota study that appeared earlier this month in the New York Times (http://nyti.ms/19krzbQ), Adam Liptak highlighted two areas in which the Supreme Court has recently exercised its pro-business view: (1) by protecting companies from class action lawsuits, and (2) favoring arbitration to resolve business disputes.

In March, the Court dismissed an antitrust class action that Comcast subscribers brought against the company, finding that the plaintiffs were not sufficiently cohesive as a class to allow the suit to continue as a class action. In that decision, Comcast v. Behrend, the Court affirmed its 2011 decision in Wal-Mart v. Dukes, in which the Court threw out a sex discrimination class action brought by a million and a half female employees. As Liptak noted in his article, “[t]he decisions essentially required early scrutiny-by a judge, not a jury-of the ultimate legal question in high-stakes cases [i.e., which party should prevail], sometimes before all the relevant evidence has been gathered.” Business groups, which have sought to limit plaintiffs’ ability to bring class actions, applauded the decision.

The Supreme Court has also given businesses extra protection in the area of dispute resolution. In AT&T Mobility LLC v. Concepcion, the Court found that a form AT&T required its customers to sign requiring the resolution of disputes through arbitration rather than in court was a valid contract. As Liptak notes, this decision empowered businesses by allowing them to shield themselves from class actions by way of arbitration agreements.

According to the Minnesota study, the Roberts Court is far friendlier to businesses than any of its recent predecessors. This blog will trace decisions of import from the Roberts Court and analyze the impact of these decisions on business.

Supreme Court Holds that the “First Sale” Doctrine Applies to Copies of Copyrighted Works Lawfully Made Abroad

Posted: April 21st, 2013

Copyrighted works imported into the United States from abroad are subject to the same “first-sale” rules as items purchased in the United States, according to a Supreme Court decision issued last month (Kirtsaeng v. John Wiley & Sons, Inc., No. 11-697).

Supap Kirtsaeng, a citizen of Thailand, came to the United States in 1997 to study mathematics at Cornell University and the University of Southern California. While working on his degrees, Kirtsaeng asked friends and family in Thailand to buy copies of foreign edition English language textbooks in Thailand, where they were sold at low prices, and mail them to him in the United States, where he then sold the books, reimbursed his family and friends, and kept the profit.

Publisher John Wiley & Sons commenced a copyright infringement lawsuit against Kirtsaeng in 2008, alleging that Kirtsaeng’s resale of the books infringed on Wiley’s exclusive right to distribute under §106(3) of the Copyright Act. Kirtsaeng countered that he had acquired the books legitimately and that the “first-sale” doctrine codified in §109(a) of the Copyright Act allowed him to resell or otherwise dispose of the imported books without permission from the copyright owner.

The first-sale doctrine is a limitation on the exclusive right of copyright owners to distribute copies of their work under the Copyright Act. The first-sale doctrine provides:

Notwithstanding the provisions of §106(3) [the section granting the owner exclusive distribution rights], the owner of a particular copy or phonorecord lawfully made under this title . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

Kirtsaeng’s defense, therefore, was that although §106(3) forbids distribution of a book without the copyright owner’s permission, once he lawfully obtained a copy, he was free to dispose of it as he wished. Essentially, that “first sale” in Thailand, Kirtsaeng argued, exhausted the copyright owner’s exclusive distribution right under §106(3).

However, the District Court sided with Wiley at trial, finding that the first-sale defense did not apply to “foreign-manufactured goods.” On appeal, the Second Circuit agreed, noting that the first sale doctrine applies only to “the owner of a particular copy . . lawfully made under this title.” According to the Second Circuit, works made abroad could not have been made “under this title” or under American law, and thus the first-sale doctrine was inapplicable.

But the Supreme Court rejected this argument last month, holding that the first-sale doctrine indeed applied to copies of copyrighted works lawfully made abroad. Writing for the majority, Justice Breyer noted that the phrase “lawfully made under this title” was not intended to exclude works made overseas. (The Court also observed that “geographical interpretations create more linguistic problems than they resolve.”) Instead, the Court focused on the serious consequences of upholding the Second Circuit’s analysis, such as preventing a buyer in the United States from selling or giving away copies of a foreign film or a dress made abroad, finding that this scenario could not possibly have been the legislative intent.

The Court’s decision in Kirtsaeng affirmatively settled a long ambiguous question as to whether the first-sale doctrine applied to copyrighted works manufactured abroad and imported into the United States. The Supreme Court had previously held in Quality King Distributors, Inc. v. L’Anza Research International, Inc., 523 U.S. 135 (1998) that the first-sale doctrine applied to works manufactured in the United States but first sold outside the United States, then imported back. But the Quality King court never resolved the issue ultimately decided in Kirtsaeng as to the more common situation in which copyrighted works manufactured abroad are then imported into the United States.

The Kirtsaeng decision may result in lower prices in the United States on copyrighted works such as books, because publishers can no longer use American copyright law as a basis to sell similar versions of the same work at greatly varying prices depending on the country. But, copyright owners may respond by localizing their offerings in particular markets so that, for example, the English language version of a textbook sold in Thailand would no longer serve as an adequate substitute for the American version of the same book. Others may rely more heavily on encoding products in region-specific formats, so that a DVD purchased in one country will not play on a player in another country. Undoubtedly, although long awaited, the Court’s decision will not be the last word on this issue.