The "Distribution Right" and Exhaustion Doctrine in Japan: What Does it Mean for Sales of Used Goods like Game Software?

The rise of secondary markets for copyrighted goods, particularly for items like video game software, has presented complex legal challenges worldwide. In Japan, the debate centered on the scope of the "right of distribution" (頒布権 - hanpuken) granted to copyright holders of cinematographic works and whether this right could be used to control the resale of used game software. This article explores this pivotal issue, tracing its legal development and the implications of the Japanese Supreme Court's landmark decision.

Understanding the Key Rights: Distribution vs. Transfer

To understand the used game software issue, it's crucial to distinguish between two key rights under the Japanese Copyright Act that control the circulation of copyrighted works:

1. Right of Distribution (頒布権 - Hanpuken) (Article 26):
   This right is exclusively granted for cinematographic works. "Cinematographic works" (映画の著作物 - eiga no chosakubutsu) in Japan is a broad category that notably includes video games. The right of distribution encompasses the right to distribute reproductions of a cinematographic work to the public by transferring ownership or by lending them. For films also intended for public presentation (like theatrical movies), it includes distributing reproductions for that purpose. Significantly, Article 26, which defines this right, does not contain an explicit statutory provision stating that the right is "exhausted" after the first lawful sale of a copy. This absence was central to the legal debate.
2. Right of Transfer of Ownership (譲渡権 - Jōtoken) (Article 26-2):
   This right applies to copyrighted works other than cinematographic works (e.g., books, music CDs). It grants the copyright holder the exclusive right to offer their work to the public by transferring ownership of the original work or its reproductions. Unlike the right of distribution, Article 26-2, Paragraph 2, explicitly states that the right of transfer is exhausted for a particular original or copy once it has been lawfully transferred to the public in Japan by the copyright holder or with their authorization. This "first sale doctrine" or "exhaustion doctrine" allows for the lawful resale of such items by their legitimate owners.

The differing statutory treatment of exhaustion for these two rights set the stage for significant legal contention regarding used game software.

The Used Game Software Controversy: A Battle Over Resale

Given that video games are classified as cinematographic works in Japan, their circulation was primarily governed by the right of distribution (Article 26). The lack of an explicit exhaustion clause in Article 26 led copyright holders in the game industry to argue that they could control or prevent the sale of used game software, as each subsequent transfer in the used market could be seen as an exercise of their unexhausted distribution right. This position directly threatened the burgeoning market for pre-owned video games.

The Path to the Supreme Court: Conflicting Judicial Views

The legality of the used game software market was tested in a series of influential court cases, revealing divergent judicial interpretations:

• Initial Lower Court Split: Early district court rulings were contradictory. The Tokyo District Court in the first instance of the Used Game Software Tokyo Case (May 27, 1999) initially questioned whether all video games automatically qualified as cinematographic works subject to an unexhausted distribution right, particularly if they lacked a fixed narrative. In contrast, the Osaka District Court in its first instance of the Used Game Software Osaka Case (October 7, 1999) affirmed that games were cinematographic works and upheld the copyright holders' ability to control their distribution, including used sales.
• High Court Appeals – A Shift in Reasoning:
  Both cases went to appeal, and while both High Courts ultimately found in favor of the legality of used game sales, they did so via different legal rationales:
  • The Tokyo High Court (March 27, 2001) in the Used Game Software Tokyo Case appeal held that video games were indeed cinematographic works. However, it ruled that the distribution right under Article 26(1) was intended for works distributed through traditional film industry channels (like theatrical movie releases) and did not apply to works, like video games, sold as mass-market consumer goods in the general retail market. Under this reasoning, the distribution right simply wasn't the appropriate tool to control the resale of game software.
  • The Osaka High Court (March 29, 2001) in the Used Game Software Osaka Case appeal also confirmed that video games were cinematographic works and that the distribution right applied. However, it introduced a novel interpretation of the distribution right's scope and exhaustion. It suggested that for cinematographic works (including games) sold as packaged goods to the general public, the distribution right should be considered exhausted after the first lawful sale, similar to how the right of transfer is exhausted for other types of works. It distinguished these from films intended primarily for theatrical exhibition, where the distribution right might retain broader control.

While both High Court decisions effectively permitted the sale of used games, their legal reasoning presented challenges. The Tokyo approach created a somewhat artificial distinction in the applicability of the distribution right based on the method of distribution, while the Osaka approach read an exhaustion principle into Article 26 that was not explicitly stated, contrasting with the explicit exhaustion for the transfer right in Article 26-2.

The Supreme Court's Landmark Decision

The legal uncertainty culminated in the Supreme Court of Japan's decision in the Used Game Software Osaka Case (Final Appeal) on April 25, 2002. This ruling provided much-needed clarity:

1. Video Games are Cinematographic Works: The Supreme Court unequivocally affirmed that typical home video game software qualifies as cinematographic works under the Copyright Act.
2. Distribution Right Applies: Consequently, the distribution right defined in Article 26 is applicable to video game software.
3. Exhaustion of the Distribution Right for Mass-Marketed Copies: This was the core of the decision. The Supreme Court held that for cinematographic works (including video games) that are made available to the public through lawful sale of their reproductions as packaged goods intended for the mass retail market, the distribution right is exhausted with respect to those particular lawfully sold copies. This means that once a legitimate copy of a game has been sold, the copyright holder cannot use the distribution right to prevent the subsequent resale of that specific copy.

The Court's reasoning emphasized that Article 26 itself is silent on the issue of exhaustion. It found no compelling reason to treat cinematographic works sold as mass-market goods (like games on DVDs/cartridges) differently from other copyrighted goods like books or music CDs, for which the right of transfer is explicitly exhausted. The Court balanced the copyright holder's interests with the public interest in the free circulation of lawfully acquired property and the development of secondary markets.

Implications and Scope of the Ruling

The Supreme Court's decision had significant implications:

• Legitimization of the Used Game Market: It provided a solid legal foundation for the continued operation and growth of the used game software market in Japan.
• Distinction Based on Exploitation Model: The ruling implicitly maintained a distinction based on the primary intended method of exploitation. For films primarily exploited through theatrical exhibition (where the initial business model revolves around controlling presentations and rentals rather than outright sales of copies to end-users), the distribution right might retain a broader, unexhausted scope concerning certain acts. However, for copies sold into the mass consumer market, the aspect of the distribution right related to controlling further transfer of ownership of those sold copies is exhausted.
• Application to Other Retail Cinematographic Works (e.g., Movie DVDs): The logic of the Supreme Court's decision would naturally extend to other cinematographic works sold as packaged goods in the retail market, such as movie DVDs and Blu-ray discs. A subsequent Tokyo District Court decision in the Used Video Soft Hanbai Jiken (Used Video Software Sales Case) (January 31, 2002), issued after the Supreme Court's ruling, also held that the distribution right for video movie software sold at retail was exhausted by the first sale. However, it's noted that the Supreme Court case specifically addressed game software, which is typically not created with theatrical release as its primary exploitation model.

What Remains of the Distribution Right?

Despite the exhaustion of the "transfer of ownership" component for lawfully sold copies of mass-marketed cinematographic works, the right of distribution under Article 26 is not entirely extinguished. It's important to remember that "distribution" (頒布 - hanpu), as defined in Article 2, Paragraph 1, Item 19, includes not only the transfer of ownership of reproductions but also the lending of reproductions to the public.

The Supreme Court's ruling on used game sales primarily addressed the transfer of ownership (resale). It did not necessarily mean that the right to control commercial rental of those same lawfully purchased copies was also exhausted. The commercial rental of cinematographic works (including games and movies) remains a distinct activity generally subject to the copyright holder's authorization or specific statutory licensing schemes, separate from the right to resell purchased copies.

Furthermore, for films that are primarily part of the traditional theatrical distribution and exhibition circuit, the right to control their distribution for the purpose of public presentation remains a significant aspect of the copyright holder's prerogatives.

Conclusion

The Japanese Supreme Court's 2002 decision regarding used game software brought crucial clarification to the application of the distribution right and the doctrine of exhaustion for cinematographic works sold in the mass market. It established that, for such goods, the right to control their resale is exhausted after the first lawful sale, aligning their treatment with other copyrighted items like books and music CDs. This ruling has had a lasting impact on secondary markets for games and other retail audiovisual products in Japan. However, it is also important to recognize that the distribution right for cinematographic works is broader than just controlling sales, and aspects such as the right to control commercial lending may persist even for copies whose "transfer of ownership" right has been exhausted.