Discounted ‘Gray Market’ Goods Draw Top U.S. Court Review

The U.S. Supreme Court agreed to consider whether discount retailers violate copyright laws by selling tens of billions of dollars in “gray market” products after buying them overseas at a reduced price.

The case promises to be one of the top business and consumer cases in the court term that starts in October, affecting sales on EBay and at stores including Costco and Wal- Mart. It will pit supporters of the gray market -- retailers, distributors and consumer advocates -- against publishers and manufacturers that say their U.S. sales are being illegally undercut.

Gray market products are genuine goods sold by U.S. retailers outside official distribution channels to exploit the lower prices manufacturers sometimes charge for their products overseas. Imports of those products to the U.S. costs manufacturers as much as $63 billion in sales a year, according to a 2009 Deloitte LLP analysis conducted for Bloomberg.

It “represents a multibillion-dollar benefit to American consumers,” according to a brief urging Supreme Court review filed by the Retail Industry Leaders Association, whose members include Wal-Mart Stores Inc. (WMT), Target Corp. (TGT) and Costco Wholesale Corp. (COST) EBay Inc. (EBAY) filed a separate brief asking the court to take the case.

The justices today said they will hear an appeal from Supap Kirtsaeng, who was ordered by a jury to pay publisher John Wiley & Sons Inc. (JW/A) $600,000 for violating the company’s copyrights when he imported foreign-edition textbooks from his native Thailand and sold them in the U.S. for a profit.

Kagan Decides

The case poses a question that deadlocked the court 4-4 in a 2010 clash between Costco and Swatch Group AG (UHR)’s Omega unit over discounted watches. Justice Elena Kagan didn’t take part because of her previous involvement in the case as an Obama administration lawyer. Kagan now stands to cast the deciding vote on the issue.

The legal dispute concerns the first-sale doctrine, which says a copyright holder can profit only from the original sale of a product. In 1998, the Supreme Court unanimously said the doctrine applies to U.S.-made products sold overseas, meaning purchasers can bring those goods back into the U.S. through unauthorized channels even if the copyright holder objects.

The question now is whether that same reasoning applies when companies manufacture goods abroad. The 2nd Circuit ruled that it doesn’t, siding with publisher John Wiley and upholding the jury award.

‘Astounding’ Consequences

Kirtsaeng contends the 2nd Circuit ruling would have “astounding” consequences. He argued in court papers that, under the 2nd Circuit’s reasoning, movie producers could “demolish” rental services, including Netflix Inc. (NFLX), by manufacturing DVDs in Mexico.

The lower court ruling “affords copyright owners not just one opportunity to sell their works at a bargained-for price but perpetual control,” Kirtsaeng argued in his appeal.

Wiley urged the Supreme Court to reject the appeal without a hearing. The publisher said its case is different from the movie example because its foreign-edition textbooks weren’t authorized for sale in the U.S.

In a brief filed jointly with a Pearson Plc (PSON) unit involved in a similar case, Wiley contended Congress intended to let copyright holders charge less for their products overseas.

“Market segmentation creates many benefits for consumers and producers,” Wiley and Pearson argued. “Among other things, it permits the copyright holder to license the printing of lower-priced editions in foreign countries, including developing countries, without, in effect, losing U.S. copyright protection for, and profits on, their higher-priced U.S. works.”

The case is Kirtsaeng v. John Wiley & Sons, 11-697.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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