Cheat Sheet: The in-house lawyer’s guide to importation of cheaper foreign goods

Supreme Court decision makes it easier for people to sell “gray market” products

Murkier than the black market, the “gray market” involves the sale of lower-priced foreign versions of goods imported to the U.S. Our June issue took a look at this phenomenon and a recent Supreme Court decision—Kirtsaeng v. John Wiley & Sons—that makes it more difficult for companies to defend against this practice.

In this case, Supap Kirtsaeng got family and friends in his native Thailand to hook him up with Wiley textbooks that were sold cheaper in Thailand than in the U.S., which he then resold for a profit in the U.S. Wiley sued Kirtsaeng for copyright infringement. On the following pages, we answer major questions in-house counsel should consider about the decision and its implications.

Can you break down the decision for me?

Sure. In its 6-3 decision in Kirtsaeng, the Supreme Court found that the first-sale doctrine of the Copyright Act—which states that a copyright owner only has the right to control the distribution of a copy the first time it is sold—applies to every copy created with the copyright owner’s permission, even those made and sold outside the U.S. So Kirtsaeng’s resale of lower-priced Thai textbooks was perfectly legal, according to the high court.

Okay, but what about the Copyright Act’s import control provision?

Great question, and therein lies the rub. The import control provision allows copyright holders to file infringement suits against people who import these “gray market” goods (cheaper foreign-made versions of a company’s products). But in this decision, the Supreme Court places the first-sale doctrine above the import control provision.

To be fair, though, the high court has done this before. In 1998’s Quality King Distributors v. L’anza Research, the Supreme Court also said that the first-sale doctrine trumps the import control provision. But, in that case, the ruling did not apply to copies made outside the U.S. So, with its ruling in Kirtsaeng, the Supreme Court significantly broadened the reach of the first-sale doctrine.

What does this mean for publishers?

According to Prof. Jessica Litman of University of Michigan Law School, “Publishers will have to make some hard choices.” If they carry on as they have been, with high prices in the U.S. and low prices elsewhere, they can reasonably expect to see some damage to their U.S. sales, due to the import and resale of cheaper foreign versions. But, if they make prices uniform across the globe, they may well price themselves out of overseas markets.

The (somewhat) good news is that this is really only going to be a problem for book publishers. Music sold in the U.S. costs about the same as music sold overseas, and DVDs are restricted by geographical regions—a DVD sold in the U.S. won’t work on a DVD player in another region.

Is there anything book publishers can do to combat this problem?

There are a couple of potential work-arounds that publishers can look into. One option is to just publish different versions of a book in the U.S. and overseas, making it so that the overseas, cheaper copies are not adequate substitutes for the U.S. versions. Or, publishers can set up foreign affiliates which can then hold their overseas copyrights. Then, when the affiliates sell books overseas, the first-sale doctrine will likely only apply to the affiliates’ rights, not the U.S. copyright holders’ rights.

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