Supreme Court takes another look at gray market resales

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Posted: Apr 17, 2012 1:33 PM
Supreme Court takes another look at gray market resales

(Reuters) - The Supreme Court has decided to take a second crack at reconciling two apparently contradictory provisions in the Copyright Act: one that permits buyers to resell goods without worrying about permission from U.S. copyright holders, and another that controls the importation of copyrighted material into the United States.

It may sound arcane, but this is a hugely-consequential issue. The case in which the Supreme Court granted certiorari or judicial review involves a Thai graduate student reselling used foreign-manufactured books on eBay, but the court's ultimate ruling will profoundly affect the approximately $63 billion "gray market" business.

On Monday, the Supreme Court agreed to hear Kirtsaeng v. John Wiley & Sons, which stems from one man's enterprise to help pay his tuition fees. Supap Kirtsaeng, a University of Southern California graduate student from Thailand, had family and friends buy textbooks manufactured internationally and ship them to him in California. He then resold the books on eBay and pocketed the proceeds. (Kirtsaeng's attorney for the earlier portions of this case, solo practitioner Sam Israel, was joined in Supreme Court briefing by counsel from Orrick, Herrington & Sutcliffe. Orrick partner E. Joshua Rosenkranz said the firm had been watching the case and approached Israel about teaming up.)

According to his petition for certiorari Kirstaeng was a notably well-informed eBay dealer. He researched the first-sale doctrine of U.S. copyright law, which entitles the owner of lawfully-produced work to resell the work without the authority of the copyright owner. John Wiley & Sons, whose Asian subsidiary produced some of the books Kirtsaeng resold, disagreed with the graduate student's interpretation of the law. The publisher filed an infringement suit in Manhattan federal district court in 2008. A jury eventually found Kirtsaeng liable for infringing eight works and imposed statutory damages of $600,000.

But Kirtsaeng is just a small player in the vast gray market, which includes not only individuals re-selling items, but also huge discount businesses like Costco selling foreign-made goods. By the time his case reached the 2nd Circuit Court of Appeals the Supreme Court had already taken its first crack at regulating the market. In December 2010, in a 4-to-4 split ruling in which Justice Elena Kagan did not take part, the high court affirmed, without written opinion, a ruling by the 9th Circuit Court of Appeals, holding in Costco Wholesale Corp. v. Omega that the first-sale doctrine applies only to U.S.-made works.

The 2nd Circuit applied the Costco case when it decided Kirstaeng's case in August 2011, but acknowledged tension in the copyright law. In a 2-to-1 decision, Judges Jose Cabranes and Robert Katzmann (with a dissent from U.S. District Court Judge J. Garvan Murtha of Vermont, sitting by designation) upheld the verdict against the graduate student, ruling that the first-sale doctrine applies only to goods made in the United States. But the appeals court also noted a "particularly difficult question of statutory construction," because another section of the Copyright Act holds that importation of copyrighted goods without the authority of the copyright owner infringes the holder's right to distribute copies.

The decision has had the strange impact of giving foreign manufactures the right "to control how goods are resold in the American marketplace," said Andrew Berger of Tannenbaum Helpern Syracuse & Hirschtritt, who authors the blog IP In Brief.

He explained the implications via an extreme hypothetical: He might right afoul of the 2nd Circuit's Kirstaeng opinion if he tried to resell his foreign-made Nissan Altima despite any Nissan claims that dashboard elements are copyrighted. (That hypothetical might not even be so crazy -- the issue in the Costco case was a watch whose copyrighted component was a logo on the back.) "The Second Circuit seemed to say that this that is the kind of control Congress intended," Berger said.

It'll now be up to the Supreme Court to decide Congress's intent and reconcile the gap in rights between U.S. and foreign manufacturers when it comes to resale. (Kagan, who will participate this time around, would seem to be the key vote, given the high court's previous 4-to-4 split in Costco.) Orrick's Rosenkranz, who will likely argue on behalf of Kirtsaeng, said that the 100-year-old first-sale doctrine should also apply to foreign-made goods. "This notion that we would give foreign made goods greater protection than local goods makes no sense at all to me," he said.

Theodore Olson of Gibson, Dunn & Crutcher, who represents John Wiley, did not return a call for comment. A Wiley spokesperson sent this statement: "The 2nd Circuit correctly concluded that those seeking to profit from the creative works of others cannot evade our intellectual property laws by importing copies from overseas. We look forward to defending that decision in the Supreme Court."

(Reporting by Erin Geiger Smith)

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