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Gray market case may pack Internet wallop

By MICHAEL KIRKLAND   |   April 22, 2012 at 3:30 AM   |   Comments

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WASHINGTON, April 22 (UPI) -- What do you do when a U.S. Supreme Court case involving a key area of commerce -- an area growing more important each day with the omnipotence of the Internet -- ends in a 4-4 tie decision and mass confusion in the lower courts?

Why, you give it another go, of course.

Last week, the high court agreed to hear new argument on how something called the "first-sale" doctrine affects the burgeoning "gray market" -- where copyrighted or protected goods are sold by vendors who have no connection to the people who produced the goods in the first place.

In December 2010, the justices let stand a lower court ruling that protection for the resale of copyright-protected goods does not apply to imports.

The justices split 4-4 in the case, issuing a brief unsigned opinion that the lower court "judgment is affirmed by an equally divided court" and noting that Justice Elena Kagan took no part in the decision.

As usual, the high court did not explain why a justice withdraws from a case but Kagan was U.S. solicitor general when the case began.

An equally divided court means the lower court ruling is allowed to stand, but no precedent has been set.

The "first sale doctrine" was articulated by the Supreme Court in 1908's Bobbs-Merrill Co. vs. Straus in a case involving books resold for less than the $1 imposed by a publisher.

The doctrine broadly holds a copyright owner's exclusive distribution right is exhausted after the owner's first sale of a particular copy of the copyrighted work.

As Justice William Rufus Day wrote for that unanimous court in 1908: "In our view the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract. ... To add to the right of exclusive sale the authority to control all future retail sales, by a notice that such sales must be made at a fixed sum, would give a right not included in the terms of the statute, and, in our view, extend its operation, by construction, beyond its meaning, when interpreted with a view to ascertaining the legislative intent in its enactment."

The first-sale doctrine, of course, is seen much more broadly than a simple ban on controlling the resale price of books. Almost anything -- whether bought on Amazon or eBay or Costco or Walmart -- that doesn't come with a manufacturer's warranty could be part of the gray market and protected by the first-sale doctrine. A resale may be unauthorized, but it could still be legal.

But the magic doesn't work if the product is manufactured overseas. Or maybe it does, depending on what the Supreme Court ultimately rules.

The 2010 case before the high court involved Costco and its gray market acquisition and sale of Swiss-made Omega watches.

Omega sells the watches all over the world through authorized distributors and retailers. Engraved on the underside of the watches is a U.S.-copyrighted "Omega Globe Design."

But Costco Wholesale Corp. obtained the watches with the copyrighted design from the gray market, a federal appeals court in San Francisco said.

Omega sold its watches to authorized distributors overseas; unidentified third parties bought the watches and resold them to a New York company, ENE Ltd., which in turn sold them to Costco. The wholesaler then sold them to California consumers.

Omega filed suit but Costco argued that under the "first sale doctrine," Omega's initial foreign sale of the watches precludes claims of infringing distribution and importation in the subsequent, unauthorized sales.

Eventually, the appeals court ruled: "Because there is no genuine dispute that Omega made the copies of the Omega Globe Design in Switzerland, and that Costco sold them in the United States without Omega's authority, the first-sale doctrine is unavailable as a defense to Omega's claims."

In the case accepted by the Supreme Court last week, lawyers for a plaintiff point out the confusion in the lower but powerful federal circuit courts of appeal following the 2010 case.

Under a section of the federal Copyright Act, "it is impermissible to import a work 'without the authority of the owner' of the copyright," the petition accepted by the Supreme Court last week said. "But the first-sale doctrine, codified [in a different section], allows the owner of a copy 'lawfully made under this title' to sell or otherwise dispose of the copy without the copyright owner's permission."

"The question presented" in the petition filed by a Thai immigrant "is how these provisions apply to a copy that was made and legally acquired abroad and then imported into the United States.

"Can such a foreign-made product never be resold within the United States without the copyright owner's permission, as the Second Circuit [in New York] held in this case?

"Can such a foreign-made product sometimes be resold within the United States without permission, but only after the owner approves an earlier sale in this country, as the Ninth Circuit [in San Francisco] held in Costco?

"Or can such a product always be resold without permission within the United States, so long as the copyright owner authorized the first sale abroad, as the Third Circuit [in Philadelphia] has indicated?"

The new case accepted by the high court involves Supap Kirtsaeng, a hardworking immigrant who came to the United States from Thailand in 1997 to attend Cornell University in Ithaca, N.Y.

He achieved his undergraduate degree and later was accepted into the University of Southern California's Ph.D. program in mathematics. But he needed to earn some money.

To subsidize his education, Kirtsaeng "asked family and friends in Thailand to buy copies of textbooks and ship them to him in the United States where he sold them on eBay," his petition said. "Before he began selling ... Kirtsaeng researched the law online, where he found explanations of the first-sale doctrine."

Kirtsaeng understood from his research of the doctrine "that it was legal for him to sell international editions of books in the United States so long as he legally purchased them abroad."

Among the books sold by Kirtsaeng were eight textbooks printed by the Asian subsidiary of John Wiley & Sons, a global publishing company headquartered in New Jersey. Wiley received 10 percent of Wiley Asia's net receipts for reprints.

Kirtsaeng's gross revenue from "selling Wiley's books totaled $37,000 -- and obviously his profits were far less," his petition said.

Wiley sued Kirtsaeng in Manhattan for copyright infringement. Even before trial, a federal judge rejected Kirtsaeng's anticipated first-sale defense, holding that the doctrine is "inapplicable to goods manufactured in a foreign country." The judge also refused to instruct the jury on the first-sale doctrine.

The jury then found Kirtsaeng liable for infringing the copyright on the eight textbooks, and said it was willful. The jury awarded Wiley statutory damages -- required by law -- of $75,000 per textbook, a total of $600,000.

The petition points out that was 16 times the gross revenues Kirtsaeng received from the sale of Wiley's books.

Finding the graduate student's pockets empty, a judge agreed at the company's request to award Wiley Kirtsaeng's golf clubs and his computer and printer.

A federal appeals court panel ruled 2-1 against him, and when the full 2nd U.S. Circuit Court of Appeals in New York declined to hear the case en banc, Kirtsaeng asked the U.S. Supreme Court for help.

Argument should be held sometime next term, which begins in October.

Kagan is participating in the Kirtsaeng case. Since a similar case ended in a 4-4 tie without her, it doesn't take a math professor to see that her vote may determine how the high court rules.

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