Supreme Court: Can A Retailer Resell Cheap Foreign Products For A Profit In The U.S.?

Attorney Mark D. Rasch is the former head of the U.S. Justice Department's computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

Buy low, sell high. Pretty simple. But a case currently before the U.S. Supreme Court tests whether manufacturers can prevent retailers from buying their products for the lowest price simply by, for example, printing the labels for the products outside the United States. By using an "anti-grey market" copyright statute, the holder of the copyrighted work (the company that designed the label) can prevent the importation of authentic products produced for a cheaper foreign market and keep prices to U.S. retailers artificially high. It can also impose liability on the retailer that acquires these perfectly good "grey market" goods.

Take the example of a bottle of L'anza brand shampoo. The manufacturer in California sells the shampoo for say $5 a bottle in the U.S., but sells the same shampoo overseas for only $3 a bottle. Unless it violates your distribution agreement with that manufacturer, it is perfectly legal for a retailer to buy the genuine shampoo overseas, import it back to the U.S., and then resell it for a profit. But add a label to the bottle of shampoo, and the situation may change.

Unlike the shampoo bottle, the label may be subject to U.S. copyright protection (although there are similar provisions for both trademark and patent laws). When the label (as a copyrighted work) is imported into the U.S. without the permission of the copyright holder, this may violate U.S. copyright law.

Nothing in the law is easy and, of course, there are two conflicting laws. One law says that it is illegal to import U.S. copyrighted works into the U.S. without the authority of the copyright owner.

The other law says that, even if you don't have the permission of the copyright holder, you can sell or dispose of the individual copy that you have bought and you don't have to pay the copyright holder to do so. It is this law, called the "first sale" doctrine that allows you to sell your used CDs, videocassettes and books. The theory is, when you lawfully bought the copyrighted work, the copyright holder got what they bargained for.

But the first sale doctrine only applies to copyrighted works "made under" U.S. copyright law.

In the case of the shampoo label, about a dozen years ago, the U.S. Supreme Court held that the first sale doctrine applied to what was called "round-trip" exports. The copyrighted work (the label) is made under U.S. copyright law in California, exported overseas, and then reimported to the U.S. without the consent of the copyright holder. Because the label was made under U.S. copyright law, the person who purchased it can both export it and resell it without the permission of the author.Mega-retailer Costco relied on this doctrine when it tried to sell foreign purchased (and foreign manufactured) Omega watches in the United States. The watches were etched with a U.S. copyrighted "Omega Globe Design" logo. A federal appeals court ruled that the watches were U.S. copyrighted (so they couldn't be imported without the consent of the copyright holder) but were not made under the U.S. copyright law (because they were manufactured overseas), so the first sale doctrine didn't apply. The Supreme Court split 4-4 on the Costco case (Justice Kagan abstained), tacitly affirming the appellate court.

Get it?

If the copyrighted material—even something as trivial as a label—is not made under U.S. law but is subject to a U.S. copyright, then it enjoys U.S. copyright protection (so it can't be imported without the permission of the copyright holder) but the first sale doctrine doesn't protect it. Under this rationale, courts have ruled that U.S. copyrighted music "manufactured" outside the U.S. was not lawfully made under the copyright law (which the court defined to mean "legally manufactured and sold within the United States") and, therefore, was not subject to the first sale doctrine. Similarly, by printing a U.S. copyrighted perfume box in France, a perfume manufacturer could prevent the importation of lawfully purchased perfume into the U.S.

The Supreme Court this week agreed to hear a case about whether an entrepreneur could lawfully purchase cheaper but authentic textbooks overseas from the publisher's foreign subsidiary, and then resell these same textbooks back into the United States at prices lower than what the publisher was charging. Naturally, the publisher believes these "foreign made" textbooks are not made under U.S. copyright law and, therefore, the first sale doctrine does not apply. The books can't be imported, they argue.

There are consequences to both manufacturers and retailers of this interpretation. First, manufacturers would have every incentive to "manufacture" their copyrighted works outside the U.S. but still be subject to U.S. copyright law. DVDs would be pressed in Mexico, labels printed in China and software compiled in the Philippines. This would perversely reward the U.S. company by denying the consumer of the foreign made product the right to resell it.

For retailers unsure of the provenance of products, it would not be good enough for them to show that the products sold were authentic (that is, they were manufactured by the company on the box). To avoid liability under copyright law, they would have to show that the product (and the embedded copyrighted material) was not unlawfully imported. It also means the monopoly created to the copyright (that is, label) manufacturer could be used not only to make money but to realize the "full value" of the work in the United States.

Copyright holders are entitled to be paid for their works. The Supreme Court will decide if retailers have to pay whatever the copyright holder decides to charge in the United States.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.