Supreme Court Backs ‘Gray Market’ in Discount Goods

Tuesday, 19 Mar 2013 05:31 PM

 

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The U.S. Supreme Court ruled that publishers and manufacturers can’t block imports of copyrighted items made and sold abroad, bolstering the multibillion-dollar “gray market” in a victory for EBay Inc. and discount chains.

The justices, voting 6-3, Tuesday threw out a $600,000 jury award assessed against a graduate student who imported John Wiley & Sons Inc.’s textbooks from his native Thailand and sold them in the U.S. for a profit.

The case was one of the top business and consumer cases pending at the court, with implications for sales by Costco Wholesale Corp. and Wal-Mart Stores Inc. as well as on EBay, operator of the world’s largest online marketplace.

The gray market is the annual trade in tens of billions of dollars in genuine products outside of their official distribution channels to exploit lower overseas prices. Supporters of the gray market -- retailers, distributors and consumer advocates -- were battling publishers and manufacturers, which say their U.S. sales are being illegally undercut.

Writing for the court, Justice Stephen Breyer said a ruling in favor of Wiley would have subjected retailers to “the disruptive impact of the threat of infringement suits.”

Breyer also said the publishers’ and manufacturers’ position would “threaten ordinary, scholarly, artistic, commercial and consumer activities,” rendering libraries unable to circulate many books printed overseas.

Manufacturer Impact

Imports of gray market products to the U.S. cost manufacturers as much as $63 billion in sales a year, according to a 2009 Deloitte LLP analysis conducted for Bloomberg. American sales of copyrighted works, including books, music and movies, amount to more than $220 billion a year, Breyer said Tuesday, citing retail industry estimates.

“The Supreme Court’s ruling is a victory for all American consumers and businesses,” EBay said in an e-mailed statement. “The decision protects your right to buy and sell authentic goods, regardless of where they were made.”

The Association of American Publishers said the decision undercuts a law designed to let U.S. copyright owners set different prices around the world. The ruling “will discourage the active export of U.S. copyrighted works,” Tom Allen, the group’s chief executive officer, said in a statement.

Wiley’s chief executive officer, Stephen M. Smith, called the ruling “a loss for the U.S. economy, and students and authors in the U.S. and around the world.”

Kagan Role

The case centered on the 1976 Copyright act, posing a question that deadlocked the 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 because of her previous involvement in the case as an Obama administration lawyer.

Kagan Tuesday joined the majority, writing separately to say that Congress might want to revisit the issue to give manufacturers and publishers more power to control sales of their products.

Also joining the majority opinion were Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Sonia Sotomayor. Justices Ruth Bader Ginsburg, Anthony Kennedy and Antonin Scalia dissented.

The Obama administration backed the copyright owners in both cases.

First Sale

The legal issue concerned 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 latest question was 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 Copyright Act provision that limits the first-sale doctrine to goods “lawfully made under this title.” The panel said foreign-made goods don’t fit that description.

Breyer rejected that reasoning, saying the statute “says nothing about geography.”

Supap 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.

Foreign Editions

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.

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 said the 2nd Circuit’s reasoning would undermine the longstanding notion that the purchaser of a legitimate product has full ownership rights, including the freedom 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 said.

Overseas Production

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

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

Wiley contended 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.

Bloomberg Press is an imprint of Wiley.

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

© Copyright 2014 Bloomberg News. All rights reserved.

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