It’s often called the “gray market,” the practice of obtaining products and goods at lower prices overseas, then reselling those goods in the U.S. at retail prices that are lower than normally charged in the U.S. markets.

The products are obtained over seas legally (these goods are not stolen, counterfeit, or otherwise pirated) in quantities that range from just a few to larger shipping containers where the goods are sold in marketplaces from flea markets to eBay to Costco. Gray marketing exists because products are sold at different price points in different countries, and they are sold at enough of a difference so that gray marketers can exploit the pricing differences for profit.

The term “gray market” came out of some questionable legality of these practices. (In contrast, “black markets” are where products or their sale is clearly illegal in either the original sales location or the new resale location.) Gray markets raise a number of legal issues including compliance with import or export laws, acceptance of warranty claims, and regional lockouts such as with DVDs that are coded by region.

Copyright Sections 106, 109, and 602

Copyright was also a questionable legal issue in the gray market economy. Copyright owners are empowered to control the distribution of their works under Section 106 of the Copyright Act and to control importation of their works under Section 602 of the Copyright Act. (Both sections are available online at law.cornell.edu/uscode.)

The issue arose when owners of copyrighted material objected to gray market activities and sued for copyright infringement. In response, the purchasers of the works frequently claimed that copyright’s First Sale doctrine protected their activities. First Sale (Section 109 of the Copyright Act) notes that once the “first sale” of a particular copy of has been made, the owner of that particular copy can resell, lend, or otherwise dispose of the work without interference by the copyright holder.

Over the past several years, various lawsuits have arisen from gray market copyright conflicts with inconsistent results. In some cases, courts found that the First Sale doctrine applied, and the sales were legal. In other cases, the opposite decision was made: First Sale did not apply because the works were made overseas where U.S. law did not apply, and the gray market sales constituted copyright infringement. Yet, other cases resulted in a split-the-baby solution where sales were only legal if the copyright owner specifically authorized the first sale of the item in the U.S.

Regardless of the Manufacture Origin

These inconsistent results were the reason the U.S. Supreme Court took on the issue in the case of Kirtsaeng v. John Wiley & Sons, Inc. The court’s decision (www.supremecourt.gov/opinions/12pdf/11-697_d1o2 .pdf), released on March 19, 2013, provided a resounding holding that the First Sale doctrine applied to legally copyrighted works regardless of where they were manufactured. But even with 30 pages of reasoning supporting its decision and the support of six of the nine justices of the court, the decision will likely have long-term ramifications for copyright, international copyright, international trade, and U.S. trade policy.

The specifics of the case and the decision have now been well-reported. [See the related NewsBreak at newsbreaks.infotoday.com/NewsBreaks/A-Total-Victory-for-the-First-Sale-Doctrine-from-the-Supreme-Court-88589.asp.] The case arose from the actions of Supap Kirtsaeng, a student from Thailand, who essentially funded his U.S. education by arranging the purchase of lower-cost text books in Thailand, and then reselling them in the U.S.

John Wiley & Sons, Inc. owned the copyright for the works and had licensed them for manufacture and sale through its Asian subsidiary; since sales were limited to selected Asian countries, Kirtsaeng was sued for copyright infringement. Lower courts found that Kirtsaeng’s First Sale defense did not apply because the works were made overseas. The implications of the lower courts’ decision for libraries, museums, and resellers were enormous because of the potential that permission would be needed simply to lend a foreign printed book, resell a foreign-made car, or display foreign art works. Gray market sales would have been severely curtailed.

‘Lawfully Made Under This Title’

The Supreme Court’s decision simplified the matter with its finding that as long as the works were manufactured in accordance with U.S. copyright law, First Sale applied regardless of the country of manufacture. The court found that the key phrase in the First Sale doctrine, stating that the works were “lawfully made under this title” (with “this title” referring to U.S. copyright law) and referred to works made in accordance with U.S. law and not where they were manufactured. The court also expressed concern about the historical reliance of libraries, museums, and resellers on First Sale to support their activities.

However positive the decision is for owners of copyrighted works, the decision is likely to have a significant impact on copyright holders and their ability to price and sell their products in different global trade markets de pending on local conditions. A dissenting opinion in Kirtsaeng written by Justice Ruth Bader Ginsburg, along with a number of commentators, expressed broader concerns about the impact of the decision on U.S. trade policy, trade negotiations, even the U.S.’s “credibility on the world stage.”

Different Pricing in Different Markets

There are a number of valid reasons why products (whether or not they contain copyrighted material) might be priced at different levels in different markets. Writing in the Harvard Business Review’s Blog Network, commentator Larry Downes noted that being able to price books according to market conditions in various markets (lower in Thailand where consumers have less to spend on books and higher in the U.S.) encourages more access to content, one of the goals of copyright law. The Kirtsaeng decision limits the role that copyright can play in keeping these markets separate.

But keeping global markets separate is increasingly difficult for reasons that have nothing to do with copyright. The Harvard Business Review Blog referred to “near-perfect market in formation” that is now available to consumers, allowing them to obtain more information than ever about “price, quality, and location of goods.” This information, along with decreasing global shipping costs, lets consumers obtain less expensive goods more readily such as Asian published textbooks. The Kirtsaeng decision recognized this in conceding that its decision will make it “more difficult, perhaps impossible” to differentiate domestic and foreign markets. However, the court noted there is no “principle of copyright law that suggests that publishers are especially entitled to such rights.”

Ginsburg’s Dissent

Dissenting in the Kirtsaeng case, Ginsburg focused on a separate part of the Copyright Act. Section 602 states: “Importation … without the authority of the owner of copyright … of a work that [has] been acquired outside the United States is an infringement. …” Under Ginsburg’s interpretation of the case, Section 602 was intended to be copyright’s “remedy against … importation” and that in finding that First Sale applies to foreign-made works, Section 602 is reduced to “insignificance.” In Ginsburg’s perspective, Congress would not have enacted the importation protections of Section 602 if they could be trumped by First Sale.

Ginsburg also argues that a limited First Sale doctrine, along with the importation restrictions of Section 602, is more consistent with the U.S. position in international trade negotiations. First Sale is considered a copyright “exhaustion” remedy, in that the First Sale of the particular copy of a work “exhausts” the copyright holder’s ability to control that copy. Within the context of international trade, there is a distinction between “national exhaustion” where the copyright holder’s ability to control particular copies is “exhausted only within the country in which the copy is sold.” In contrast, international exhaustion provides that any sale in the world exhausts the copyright holder’s rights throughout the world.

U.S. Credibility

While acknowledging that “strong arguments” exist in support of both options, U.S. trade posture has been focused on national exhaustion as more protective of the U.S. economy. Ginsburg argues that the Kirtsaeng decision is inconsistent with that posture and “risks undermining the United States’ credibility on the world stage.” Blogging for user’s rights group Public Knowledge, commentator John Bergmayer responds to Ginsburg by arguing that it is not up to trade negotiations or negotiators to determine what the law is. He says that is what the courts are for and what the Kirtsaeng decision did.

One challenge to both sides of the First Sale argument is that copyright is no longer just “traditional” works such as books, movies, plays, music, and artworks, but it now encompasses works such as product designs, fabrics, product packaging, and software that are often integrated into everyday products. A broad First Sale doctrine maintains the consumers’ expectation that their purchase of any product comes with the expectation that they can resell, lend, or dispose of that product as they see fit. But it also limits copyright owners’ ability to adjust to their markets.

‘Start Your Lobbyists’

Congress may weigh in on this issue. Although this issue has received less attention than the opinion and the dissent, Justice Elena Kagan wrote a concurring opinion that strongly supported First Sale, but she suggested that Congress could consider adjusting Section 602 in a way that provides more ability for “market segmentation,” without having an im pact on traditional First Sale rights.

This view was echoed by New York University law professor James Grimmelmann, in a post (publishersweekly.com) where he noted that publishers have lived with first sale in the consumer and library markets for years. He wrote that publishers care more about import protection, providing Congress with a gap that could contain a solution. I think he summed up the future of Kirtsaeng, First Sale, and import restrictions quite effectively with his words: “Ladies and gentlemen, start your lobbyists.”