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Costco Wholesale Corp
A graduate student’s money-making idea has led to a commercial showdown at the U.S. Supreme Court, with ramifications for publishers, retailers, entertainment companies, manufacturers and consumers.
The court will hear arguments on Oct. 29 in the case of Supap Kirtsaeng, who was ordered to pay John Wiley & Sons Inc. (A) $600,000 for importing the publisher’s copyrighted textbooks from his native Thailand and selling them in the U.S. for a profit. At stake is the future of the so-called gray market, the annual trade in tens of billions of dollars in goods outside their official distribution channels.
The case pits business against business. Retailers that offer gray-market products, led by EBay Inc. (EBAY) and Costco Wholesale Corp. (COST), are joining libraries and second-hand stores in backing Kirtsaeng. The motion picture, music, software and publishing industries are supporting Wiley, arguing that the practice illegally undercuts their U.S. sales.
“This is fundamental to the creative industries,” said Charles Sims, a Washington lawyer who filed a brief on behalf of the Association of American Publishers.
Gray market products are genuine goods that retailers acquire through unauthorized channels to exploit the lower prices manufacturers sometimes charge overseas. Imports of those products to the U.S. cost makers as much as $63 billion in sales a year, according to a 2009 Deloitte LLP analysis conducted for Bloomberg News.
The case poses a copyright question that deadlocked the Supreme Court 4-4 in a 2010 clash between Costco and Swatch Group AG’s Omega unit over discounted watches.
Justice Elena Kagan didn’t take part in that case and now stands to cast the deciding vote. That’s potentially bad news for the gray market because Kagan, a former top Supreme Court lawyer in the Obama administration, had filed a brief supporting Omega in the Costco case.
The dispute turns on a legal doctrine that says a copyright holder can profit only from the original sale of a product. In 1998, the Supreme Court unanimously said that so-called first- sale doctrine applies to U.S.-made products that are sold overseas. The ruling meant that purchasers could bring those goods back into the U.S. to sell or distribute even if the copyright holder objected.
The question now is whether that same reasoning applies when companies manufacture goods abroad. The New York-based 2nd U.S. Circuit Court of Appeals ruled that it doesn’t, siding with Wiley and upholding the jury award.
The appeals court pointed to a provision in federal copyright law that limits the first-sale doctrine to goods “lawfully made under this title.” The panel said foreign-made goods don’t fit that description.
Kirtsaeng, who studied mathematics at the University of Southern California, generated about $900,000 in revenue by selling textbooks published by Wiley and other companies. His family members bought the books from stores in Thailand and shipped them to the U.S., where Kirtsaeng sold them on EBay.
The Wiley books were virtually identical to the U.S. editions, though each was marked to say it was not to be exported to another part of the world.
A Manhattan federal jury found Kirtsaeng liable for copyright infringement and awarded the company $600,000. A judge later ordered Kirtsaeng to turn over personal property, including his computer and golf clubs -- something Wiley says occurred only because he had transferred at least $170,000 out of the country.
Kirtsaeng’s supporters in the Supreme Court case say the jury award and the 2nd Circuit’s reasoning would undermine one of the basic underpinnings of U.S. property law.
“If you buy a legitimate, authentic good, then you own it, plain and simple,” said Hillary Brill, EBay’s global policy counsel. “You have a right to resell it, lend it, give it away or donate it.”
Taken to its logical extreme, elimination of the first-sale doctrine for foreign-made goods would prevent libraries from lending books, bar consumers from re-selling items and even stop museums from displaying artwork in violation of the copyright owner’s rights, those critics say.
Such a ruling would have “absurd ramifications for our commerce and culture,” said Marvin Ammori, a legal fellow with the New America Foundation, a nonprofit policy group in Washington.
Kirtsaeng also contends that a ruling favoring Wiley would give manufacturers an incentive to move production facilities overseas.
Wiley and its allies say lower courts have uniformly ruled in favor of copyright owners on the issue, without any of the repercussions forecast by Kirtsaeng and his supporters.
“All of that is Chicken Little,” said Sims, the lawyer representing the publishing industry. “It’s made up. It’s not real. There is no threat to the museums of the United States or to the libraries of the United States.”
When Congress enacted the Copyright Act in 1976, lawmakers intended that publishers, moviemakers and other copyright owners would be able to control where their products would be sold and at what price, Sims said.
“You can distribute in the United States at the price appropriate for the U.S. market, and you can distribute less- expensive copies in India that may not have all the bells and whistles,” he said. “If they can’t protect those markets that way, what will happen is either they won’t sell abroad or they won’t be able to sell in the United States.”
As in the Costco case, the Obama administration is backing the copyright owners, contending that other provisions in the law provide protection against abuses. The government points to a provision it says guarantees that libraries could lend books they import legally.
In its clash with Omega, Costco may have forged a separate path for retailers to avoid copyright liability. That fight centers on Seamaster watches that bore a copyrighted logo on the back and were originally sold abroad. Costco acquired the watches from a distributor and sold them for $1,200, almost $700 below Omega’s suggested retail price.
The Supreme Court’s split in the case meant that Costco couldn’t invoke the first-sale doctrine. Costco later won dismissal of the suit anyway when a federal trial judge ruled that Omega had misused its copyright. Omega is appealing.
Costco sells gray-market handbags as well as luxury watches, says John Sullivan, the company’s associate general counsel. He says Costco acquires the vast majority of its products through authorized channels, tapping the gray market only when product-makers won’t deal directly with the retailer.
“Manufacturers are actually getting the benefit of the sales,” Sullivan said. “A company like ours exposing these goods to a broad group of highly desirable customers is a good thing for them.”
Bloomberg Press is an imprint of Wiley.
The case is Kirtsaeng v. John Wiley & Sons, 11-697.
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