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Consequences of the Possible Loss of Respect for Territoriality

Note: This post explores the possible effect which a loss of respect for territoriality could have on the Publishing Industry, coupled with the adoption of international exhaustion. Its author, Nandita Saikia, has been involved in advising a number of organisations on the various aspects of the Copyright (Amendment) Bill, 2010, including the proposed amendment to Section 2(m).

The Proposed Amendment

Copyright owners have a right to sell copies of works protected by copyright. However, the right is a restricted right: a copyright owner may only control the first sale of a copy of a work. After this, he loses/exhausts the right to control subsequent sales.

Copyright regimes vary, and upon the first sale of a copy of a work, a copyright owner may lose the right to control subsequent sales only in the country where the first sale took place -- in technical terms, this is referred to as national exhaustion. Alternatively, he may lose the right to control subsequent sales anywhere in the world -- i.e. international exhaustion would come into play.

It has been proposed to amend Section 2(m) of the Indian Copyright Act, 1957 by inserting into the section a proviso which would state:
“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.”
The proviso, if it were to become law, could (along with amendments proposed to Section 14) leave no doubt that India follows the principle of international exhaustion with respect to all works protected by copyright including books. It would, in all probability apply in respect of both exports and imports despite the fact that the proposed amendment speaks of only imports. This is because it is unlikely that the copyright framework would be interpreted in a manner where the one form of exhaustion would apply to imports and another to exports. Further, considering that the law would silent with regard to exports, and explicitly state that international exhaustion was applicable with respect to imports, it is extremely likely that India would follow the principle of international exhaustion with respect to both imports and exports.

If there had been a specific exception carved out with respect to exports, the law applicable to exports could have been different. For example, it may have been possible to have national exhaustion apply to exports, and international exhaustion apply in respect of imports. However, this is not what appears in the Copyright (Amendment) Bill, 2010.

On the contrary, the proposed amendment is likely to have international exhaustion apply across the board. This means that once a copy of a book were sold in India, it could be resold anywhere in the world without the consent of the publisher/copyright owner. Considering that the business models of the copyright industries are founded on a respect for territoriality, the possible loss of respect for territorial divisions of rights is of concern to copyright industries across the Board.

As may be discerned from the report of the Parliamentary Standing Committee on the Copyright (Amendment) Bill, 2010, among the stakeholders who have voiced their concerns regarding the insertion of the proposed proviso into the Copyright Act are publishers.

Respect for Territoriality

Before discussing the concerns of publishers, it would be pertinent to note that the Copyright Act explicitly recognises territorial divisions of rights: Section 19(2) of the Copyright Act enables and, in fact, mandates that the territorial extent of an assignment of copyright be specified in an assignment deed, and Section 19(6) states that if the territorial extent is not so specified, the assignment would be presumed to apply solely to the territory of India. Further, Section 30A of the Copyright Act states that the provisions enumerated in Section 19 also apply to copyright licences.

There have also been a number of cases in which the courts have recognised territorial divisions of rights. In fact, in the case of John Wiley & Sons Inc. & Ors. v. International Book Store & Anr. [CS (OS) 2488/2008 & IA No.2856/2009 dated May 20, 2010],  Justice Bhat of the Delhi High Court unequivocally stated:
“Market segmentation – either vertically, or horizontally, in terms of geographical areas, or in terms of copies authorized to be made, or sold or rented, is an integral part of a copyright proprietor’s legitimate strategy to exploit his exclusive rights. The sale, and offer for sale, of such LPEs, meant for exclusive use in India, by the defendant, who is clearly targeting overseas buyers, to whom such products cannot be sold at Indian prices, constitutes acts of infringement under Section 51.”
Thus, under Indian law, territoriality has been respected by both the statute and by the judiciary. It by relying on this ability to specify territories to which assignments and licences would apply that publishers are able to ensure that copies of their books are sold only in territories they intend.

Effect of the Proposed Amendment

If the proposed amendment to Section 2(m) of the Copyright Act were to be passed, it could have the effect of negating the respect accorded to territoriality. This is because, as the Association of Publishers in India pointed out, "[B]ooks published in one country could be freely made available and sold in India without amounting to infringement of copyright. Publishers/agents/authors would hesitate from designating India as an exclusive territory in which (cheaper) Indian Editions could be produced as India would not be a “secure” market. It would not be possible for Indian publishers to sell Indian Editions into protected markets abroad since other countries recognize territoriality. The API also stated that the insertion of the proposed proviso into the Copyright Act would be: "a retrograde step diluting the ability of various stakeholders in the publishing industry to uphold and enforce the territorial division of rights, the very basis upon which the publishing industry operated."

Academic Publishers, Leakage and the LPE Programme

Being able to contractually designate territories under Indian law enables publishers to make available Low Priced Editions (LPE) in the Indian market at prices which are possibly the lowest in the world. This gives the Indian academic community, and students in particular, access to high quality international content at extremely affordable prices.

The PSC stated in its Report that during the course of the oral evidence before the Committee, the Federation of Indian Publishers and the Association of Publishers in India pointed out that "with this amendment, the low priced editions meant for Indian sub-continent could be exported back to the country of their origin where they were priced at much higher rates. Consequently, the publishers would lose the incentive to sell books in India or in the Indian sub-continent at subsidized prices. Reason being that foreign publishers would not like to grant the reprint rights to Indian publishers fearing low priced Indian editions flooding and diluting their own markets". This would be because the export or “leakage” of LPEs from India into developed, primary markets would adversely affect the sales of publishers in those markets as LPEs would cost less than foreign editions intended for sale in developed countries.

Trade Publishers and Remainders

Trade publishers (which focus on publishing general fiction and other such non-academic books) would also be adversely affected if India were to explicitly adopt the principle of international exhaustion. This is because while the current law inhibits the dumping of remainders of foreign editions of books (which remain unsold in their own territories) into India, if the proposed amendment were to become law, the situation would change.

Dumped foreign editions would eat into the market for domestic Indian editions, as the average Indian consumer would not differentiate between an Indian Edition of a book, and a dumped foreign edition. Further, in addition to thereby affecting publishers' revenues, dumping would also adversely affect authors' revenues. This reduction in authors' revenues would take place along two different lines. Firstly, authors' revenues would decrease as  royalties are not typically paid for remainders. (So, on one hand, authors would make no money off the sale of foreign remainders in India. And on the other hand, the sale of foreign remainders in India would also decrease royalties earned from the sales of Indian Editions which would necessarily decrease due to the presence of foreign remainders in the Indian market.) Also, when foreign remainders are dumped into India at low prices, the savings made by middlemen may not actually be passed on to the consumer. As such dumping would not benefit Indian consumers, publishers or authors.

Secondly, if it were clear that India followed a principle of international exhaustion, publishers would hesitate to buy rights for India since anyone would be able to re-sell legally-produced copies of books in India after their first sale. This would make it well nigh impossible for publishers to recoup their investment in acquiring Indian rights, which would in turn discourage them from making Indian Editions. If publishers were not to make Indian Editions in the first place, it is obvious that authors would not earn any royalties from the sale of Indian Editions.

It is also pertinent to note that the adoption of the proposed proviso into the Copyright Act would lead to the creation of an extremely uneven playing field in the international arena. Respect for territoriality is not a uniquely Indian concept. On the contrary, territoriality is respected internationally in all the major English-language markets. Therefore, while the Indian publishers would not be protected from, for example, foreign editions being dumped into India, Indian publishers would not be able to dump remainders of Indian editions into foreign countries.

Inhibiting the Development of the Indian Publishing Industry

Since the adoption of the principle of international exhaustion would decrease the revenues of publishers, it would cause a corresponding reduction in the ability of publishers to invest in new technologies, and in nurturing new authors.

Further, there has been a trend to contractually designate India as a separate rights market, and to develop it as market which would be at par with the primary markets of publishers in other countries. If this amendment were to be passed, this trend would be severely inhibited as it depends, for its existence, on the ability to contractually designate countries in which specific copies of books may be sold. Enacting a law which would explicitly adopt the principle of international exhaustion in the realm of copyright would make such contractual designations of territories in assignments and licenses infructuous since it would become impossible to ensure that such contractual designations were respected.

227th Report of the Department-Related Parliamentary Standing Committee on Human Resource Development on the Copyright (Amendment) Bill, 2010

(This post was first published at Indian Copyright.)