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U.S. Supreme Court Knocks Down Barrier To Cross-Border E-Tail

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The U.S. Supreme Court has removed a major barricade for cross-border E-Commerce. On Tuesday (March 19), the court ruled that so long as a product isn't pirated, U.S. retailers can import it without violating copyright law. In practice, that means an online retailer can sell U.S. customers many products that are lower priced—and were never intended to be sold in the U.S.—without breaking the law.

We're not talking about pirated goods here, but what's often called the "gray market"—legitimate products that aren't authorized for U.S. sale. Those products are usually priced lower, because they're intended for less-affluent markets than the U.S. Costco (NASDAQ:COST) and Kmart (NASDAQ:SHLD) have sold those types of products in the past and gotten into legal trouble. This week's ruling says they won't have that trouble again (at least until Congress changes the law or product manufacturers come up with new arguments).

But there are much bigger E-Commerce implications in the court's decision to get rid of those geographical limits.

As StorefrontBacktalk Legal Columnist Mark Rasch explained last April, when the Supreme Court decided to take this case, there are two competing bits of legalese involved here. One is the longstanding idea that when someone sells you something, it's yours to do with as you please, including reselling it. (As a legal principle, that goes back to the 15th Century, according to the justices.)

That seems to suggest anyone can buy anything anywhere to resell without limits, which is bad news for manufacturers who want to divide their markets up geographically, setting prices according to what they think the locals can afford. (Clearly, E-Commerce makes that really hard to enforce.)

On the other side is a specific phrase in U.S. copyright law that seemed to prevent anyone from importing a copyrighted work "lawfully made under this title" unless the copyright holder authorized the importing. Manufacturers couldn't copyright watches or shampoo, but they could copyright labels and packaging. U.S. courts decided that clause only kicked in for copyrighted works manufactured outside the U.S., so manufacturers used foreign printers to take advantage of the loophole.

This week's ruling says the lower courts got it wrong—"lawfully made under this title" means licensed under U.S. copyright law but not necessarily made in the U.S. Loophole closed. And, in theory, E-Commerce floodgates opened.

Or will they be? Big U.S. chains generally don't like to irritate the manufacturers they depend on.Or will they be? Big U.S. chains generally don't like to irritate the manufacturers they depend on. An exception is Costco, which was hauled into court by Swiss watchmaker Omega after Costco sold legally made Omega watches in its stores that weren't authorized to be imported into the U.S.

But consider Walmart (NYSE:WMT), which offers different product selections in different countries or regions. Say there's an unlocked mobile phone that could be used (but isn't sold) in the U.S. That could be an extremely low-end phone or something from Apple (NASDAQ:AAPL) or Samsung that's just not a U.S. product. Or maybe there's a food product that's only authorized to be imported to the U.S. by one supplier (at an inflated aficionado's price)—but is easily available locally in one of Walmart's countries.

Why couldn't Walmart's website offer those products and then have orders fulfilled by its own local stores around the world? Walmart wouldn't have to import the items itself, but it could leverage its global footprint.

For U.S. chains without such big feet (and that's most of them), why not partner with regional chains to do the same thing? That's a business currently being handled almost entirely by eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN) third-party sellers and small local businesses. For chains that don't want to hunt for a big local partner, why not create a small-seller marketplace specifically to offer products that aren't authorized for U.S. import?

Still other global chains without a U.S. presence might decide their easiest way to get a foothold is to specialize in those legal-but-unauthorized products. As long as they have good supplies from local distributors, it's not as if they have much to lose by annoying U.S. makers.

Ironically, what seems like the most obvious set of products for cross-border retail—digital goods—may not actually be such a good fit. Digital versions of movies, music and books are mainly limited by anti-piracy technology (which also serves to control what devices can display a movie or book). That makes crossing borders more complicated.

More important than any individual retail tactic, though, is the signal that the U.S. Supreme Court has sent with this ruling. In effect, the court said that manufacturers may want to divide up the world into geographic markets and control how products are priced and released. But the copyright law won't help them do it.

That's not just recognizing that a particular loophole should be closed. It's a conclusion on the court's part that carving up the world in such a way—and manipulating prices and product availability—doesn't make sense.

Congress may decide to change the law (always a possibility—there's no Constitutional right to buy a watch, phone, book or box of cookies that the maker would prefer not to sell in the U.S.). But at least the Supreme Court appears to understand that it's no longer practical to pretend that every retailer in the world is more than a click away.