U.S. Supreme Court Debates Copyright ‘Gray Market’ Case

The U.S. Supreme Court raised questions about the multibillion-dollar trade in goods outside authorized distribution channels, hearing arguments in the case of a graduate student sued for selling foreign-edition textbooks in the U.S. at discount prices.

The copyright dispute may restrict the so-called gray market, with ramifications for publishers, retailers, entertainment companies, manufacturers and consumers. Retailers that offer gray-market products, led by eBay Inc. and Costco Wholesale Corp., are seeking limits on copyrights. The motion picture, music, software and publishing industries say the gray market illegally undercuts their U.S. sales.

The high court case concerns Supap Kirtsaeng, who was ordered to pay John Wiley & Sons Inc. (JW/A) $600,000 for importing the publisher’s copyrighted textbooks from his native Thailand and selling them in the U.S. for a profit.

Allowing copyright holders to sue over such importations would give them “endless, eternal downstream control over sales and rentals” of their goods, Kirtsaeng’s lawyer, E. Joshua Rosenkranz, told the court. That would give companies an incentive to send their manufacturing overseas, he said.

“Your reading is, essentially, once a copy is sold anywhere, the copyright owner loses control of distribution everywhere,” Justice Ruth Bader Ginsburg told Rosenkranz.

Toyota Example

Justice Stephen Breyer asked Wiley & Sons’s lawyer Theodore Olson whether a ruling for the publisher would mean that someone who bought a Toyota that included copyrighted sound and global- positioning systems couldn’t sell the vehicle without getting permission from the copyright holders.

Olson said that in some cases an implied license, or “fair use” doctrine, would protect people.

Gray-market products are genuine goods that retailers acquire through unauthorized channels to exploit the lower prices manufacturers sometimes charge overseas. Imports of those products to the U.S. cost makers as much as $63 billion in sales a year, according to a 2009 Deloitte LLP analysis conducted for Bloomberg News.

The case poses a question that deadlocked the Supreme Court 4-4 in a 2010 clash between Costco and Swatch Group AG’s Omega unit over discounted watches.

Justice Elena Kagan didn’t take part in that case and now stands to cast the deciding vote.

Original Sale

The dispute turns on a legal doctrine that says a copyright holder can profit only from the original sale of a product. In 1998, the Supreme Court unanimously ruled that the so-called first-sale doctrine applies to U.S.-made products that are sold overseas. The ruling meant that purchasers could bring those goods back into the U.S. to sell or distribute even if the copyright holder objected.

The question now is whether that same reasoning applies when companies manufacture goods abroad. The New York-based 2nd U.S. Circuit Court of Appeals ruled that it doesn’t, siding with Wiley and upholding the jury award.

The appeals court pointed to a provision in the 1976 Copyright Act that limits the first-sale doctrine to goods “lawfully made under this title.” The panel said foreign-made goods don’t fit that description.

Chinese Rights

Kagan told Rosenkranz that a copyright isn’t “one right that applies everywhere in the world.” Instead, she said, “You have your U.S. rights and you have your Chinese rights, and you have your rights under each jurisdiction’s law.”

“Your position is essentially to say that, when I sell my Chinese rights to somebody, I’m also selling my U.S. rights to that same person, because the person who has the Chinese rights can just turn around and import the goods,” Kagan said.

Deputy U.S. Solicitor General Malcolm Stewart, arguing in support of the publishers, suggested the court adopt a middle ground in which copyright holders would have control over the import of foreign goods using copyrighted material, though not over future sales of those goods.

Kirtsaeng, who studied mathematics at the University of Southern California, generated about $900,000 in revenue by selling textbooks published by Wiley and other companies. His family members bought the books from stores in Thailand and shipped them to the U.S., where Kirtsaeng sold them on eBay.

The Wiley books were virtually identical to the U.S. editions, though each was marked to say it wasn’t to be exported to another part of the world.

$600,000 Award

A Manhattan federal jury found Kirtsaeng liable for copyright infringement and awarded the company $600,000. A judge later ordered Kirtsaeng to turn over personal property, including his computer and golf clubs -- something Wiley says occurred only because he had transferred at least $170,000 out of the country.

Kirtsaeng and his supporters in the Supreme Court case say the 2nd Circuit’s reasoning would undermine the longstanding notion that the purchaser of a legitimate product has full ownership rights, including the right to pass the item on to someone else.

Taken to its logical extreme, elimination of the first-sale doctrine for foreign-made goods would prevent libraries from lending books, bar consumers from reselling items and even stop museums from displaying artwork in violation of the copyright owner’s rights, those critics say.

Moving Overseas

Kirtsaeng also contends that a ruling favoring Wiley would give manufacturers an incentive to move production facilities overseas.

Wiley and its allies say lower courts have uniformly ruled in favor of copyright owners on the issue, without any of the repercussions forecast by Kirtsaeng and his supporters.

Wiley contends that Congress intended that publishers, moviemakers and other copyright owners would be able to control where their products would be sold and at what price.

As in the Costco (COST) case, the Obama administration is backing the copyright owners, contending that other provisions in the law provide protection against abuses. The government points to a provision it says guarantees that libraries could lend books they import legally.

In its clash with Omega, Costco may have cleared a separate path for retailers to avoid copyright liability. That fight centers on Seamaster watches that bore a copyrighted logo on the back and were originally sold abroad. Costco acquired the watches from a distributor and sold them for $1,200, almost $700 below Omega’s suggested retail price.

The Supreme Court’s split in the case meant that Costco couldn’t invoke the first-sale doctrine. Costco later won dismissal of the suit anyway when a federal trial judge ruled that Omega had misused its copyright. Omega is appealing.

Bloomberg Press is an imprint of Wiley.

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

To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Laurie Asseo in Washington at lasseo1@bloomberg.net

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

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