On Tuesday (March 19), the U.S. Supreme Court struck a blow against manufacturers, who wanted to use copyright law as a way of keeping merchants from purchasing cheaper products overseas and then reselling them within the United States. The court ruled that the "first sale" doctrine, long established in common law and in copyright law, permits merchants and others to lawfully purchase products intended for distribution outside the United States and then import those products into the United States for resale without violating copyright law.
Manufacturers have long been using copyright law, which is intended to protect certain types of expression, to prevent this practice. The Supreme Court said no.
(Related story: "U.S. Supreme Court Knocks Down Barrier To Cross-Border E-Tail")
A few years ago, Costco (NASDAQ:COST) found a way to sell watches cheap. Rather than purchasing the watches in the United States, the chain went overseas and purchased lawfully made legitimate watches in foreign markets. Because of supply and demand, these watches could be purchased more cheaply overseas and then imported into the United States for later resale.
However, these weren't just watches. A watch cannot be protected by copyright law. What the watch manufacturer had done was to engrave a copyrighted logo on the watch itself. So although the watch was not covered by copyright law, the logo was. The watch manufacturer then argued that the importation of the copyrighted work to the United States violated U.S. copyright law. The watch was simply going along for the ride.
This is similar to what a California shampoo manufacturer did to prevent its shampoo from being purchased abroad and imported back into the United States for resale. The shampoo bottles, boxes and artwork were all copyrighted. The shampoo manufacturer argued that by purchasing the shampoo abroad and importing it into United States, the importer was infringing on the shampoo maker's copyright.
Now, it's important to recognize that in each of these cases the items were lawfully purchased and that the manufacturer was actually paid for the product. These were not black-market products, knockoffs or illegitimate materials. They were shampoos from the shampoo manufacturer and watches from the watch manufacturer.
The same thing happened when John Wiley and Sons sold textbooks both in the United States and abroad. A Thai college student noticed that the same textbooks he was using in college in the United States were substantially cheaper in Thailand. He purchased dozens or hundreds of these textbooks in Thailand, imported them into the United States and resold them.
This earned him the wrath of the publisher and, ultimately, a lawsuit that found its way to the U.S. Supreme Court.The Thai college student, like the importer of the watches and the shampoo, argued that the "first sale" doctrine permitted these imports. It is this doctrine that allows you to buy a record album and, after you're done listening to it and presuming you haven't made a copy of it, to sell that album at a used record store. The same is true for using textbooks. You bought it; you own it. The presumption is that the author has already been paid for his or her work. Authors don't get to be paid a second time when purchasers resell something their own.
The first sale doctrine has been around in the common law for hundreds of years. Unfortunately, it is inconvenient for those who want to get paid over and over again for their works. It is even more inconvenient for those who wish to use the copyright law not to protect intellectual property but to block a business model involving the importation of cheap goods from overseas into the United States.
So the publishers or manufacturers came up with a novel argument. The first sale doctrine allows the resale of works that are made "under this law," meaning under U.S. copyright law. The manufacturers argued that because the products—such as the textbooks, the watches or the labels affixed to the shampoo bottles—were manufactured overseas, they were not "made under copyright law."
In other words, they were copyrighted, but not made under U.S. copyright law. The products were physically made somewhere else.
The court majority thought that this argument was just a little too cute. Essentially, the justices held that the phrase "under copyright law" means subject to copyright law, not physically under the law of the United States. Therefore, the court held that the first sale doctrine allows people to buy textbooks in Thailand, bring them into the United States and then resell the books they had already bought.
This case may have no practical effect on merchants in the short term, because most suppliers will already be restricted from selling products to legitimate merchants from overseas. It is to the advantage of manufacturers and distributors to continue to persist in segmented markets, where they can take advantage of price differentials based on different geographic markets. And, in fact, technology can help this situation by, for example, creating DVDs that will only play in a particular geographic area.
But the U.S. Supreme Court is holding open the marketplace for entrepreneurial distributors to create a world market for goods. At least the copyright law won't be an impediment.
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.