U.S. Supreme Court Weighs Protection Against Gray Market Imports

Several justices on the U.S. Supreme Court voiced concern on Monday about letting U.S. copyright holders block the resale inside the country of products they make elsewhere, in one of the court’s biggest copyright cases in years.

The case, likely to result in a close decision, could profoundly affect the roughly $63 billion gray market, in which third parties import brand-name goods protected by trademark or copyright into the United States.

It also gives the court a chance to delineate copyright protections at the very time that products and information from international sources become much more freely available, whether in physical form or downloaded or otherwise available online. A ruling is expected by June.

At the center of the case is Supap Kirtsaeng, a Thai national who arrived in the United States to study math at Cornell University and the University of Southern California.

He subsidized his education by reselling textbooks through eBay Inc’s website that family and friends had bought in Thailand and shipped to him.

Eight of the textbooks came from an Asian unit of John Wiley & Sons Inc, prompting the publisher to sue Kirtsaeng for copyright infringement.

A jury ordered Kirtsaeng to pay $600,000 in damages. The 2nd U.S. Circuit Court of Appeals in New York upheld that award in August 2011, saying foreign-made copies can never be resold in the United States without permission of copyright owners.

But Kirtsaeng contended that his actions were protected under the “first-sale” doctrine, a provision of federal copyright law that lets owners of “lawfully made” copies sell or dispose of them without copyright owners’ permission.

Some justices were receptive to an argument by Kirtsaeng’s lawyer E. Joshua Rosenkranz said that could have a profound negative impact on the U.S. economy, and cost many jobs.

“The moment that a manufacturer learns that this court says you get what we’ve called the Holy Grail of manufacturing, endless eternal downstream control over sales and rentals, you can ruin secondary markets,” he said. “That will be yet another reason for manufacturers silently to decide that they’re sending their manufacturing overseas.”

Wiley’s lawyer Theodore Olson came under sharper questioning as he argued that the ban on resales should extend to products made outside the United States.

Justice Stephen Breyer suggested that used Toyotas could be covered by a ban, given that they may include copyrighted components made abroad, such as sound systems and GPS devices.

“When people buy them in America, they think they’re going to be able to resell them,” he told Olson. “Under (Wiley’s) reading, the millions of Americans who buy Toyotas could not resell them without getting the permission of the copyright holder of every item in that car which is copyrighted.”

But Olson said the 2nd Circuit got it right. “For 30 years, the statute has been interpreted the way that we are suggesting that it should be,” he said.

The court tried to address the same issue two years ago but deadlocked 4-4, in a case involving Costco Wholesale Corp’s resale of imported watches made by a unit of Swiss-based Swatch Group SA.

Justice Elena Kagan sat out that case but took part in Monday’s arguments, and also questioned Olson’s position.

“As far as I can see, there’s really nothing to support your argument that that language (in the law) was intended to address this gray market problem,” she said.

Justice Anthony Kennedy, often the swing vote on a closely divided court, also expressed concern. “If we write an opinion with the rule that you propose, we should, as a matter of common sense, ask about the consequences, he told Olson.

The United States supported Wiley’s position, rejecting Kirtsaeng’s contention that a decision in the publisher’s favor would encourage copyright owners to exercise “eternal” control over how its copies are resold.

Costco and eBay sided with Kirtsaeng, as did a group of major bookstores including Powell’s Books in Portland, Oregon; Strand Book Store in New York; and Harvard Book Store in Cambridge, Massachusetts.

“There are enough copyright owners out there – and enough crazy copyright lawsuits – that it is not always reasonable to rely on forbearance by copyright plaintiffs,” the bookstores’ lawyers said in a brief. “No one should be put to the choice of violating the law and hoping they don’t get caught.”