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Originally published March 19, 2013 at 8:11 PM | Page modified March 20, 2013 at 7:41 PM

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Costco scores win in Supreme Court ruling on imports of copyrighted items

Ruling on one of the top business and consumer cases pending before it, the U.S. Supreme Court ruled that publishers and manufacturers can’t block imports of copyrighted items made and sold abroad — a victory for Costco Wholesale and other businesses.

Bloomberg News

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In a victory for businesses including Costco Wholesale, the U.S. Supreme Court ruled Tuesday that publishers and manufacturers can’t block imports of copyrighted items made and sold abroad, bolstering the multibillion-dollar “gray market.”

The justices, voting 6-3, threw out a $600,000 jury award assessed against a graduate student who imported John Wiley & Sons textbooks from his native Thailand and sold them in the U.S. for a profit.

The case was one of the top business and consumer cases pending at the court, with implications for sales by Costco, Wal-Mart Stores and eBay, operator of the world’s largest online marketplace.

The gray market is the annual trade in tens of billions of dollars in genuine products outside of their official distribution channels to exploit lower overseas prices. Supporters of the gray market — retailers, distributors and consumer advocates — were battling publishers and manufacturers, which say their U.S. sales are being illegally undercut.

“We are very happy with the outcome” of the textbook case, said Joel Benoliel, chief legal officer at Issaquah-based Costco, which filed an amicus brief supporting the graduate student.

In 2010, the Supreme Court was deadlocked 4-4 in a similar case in which Swiss watch maker Omega sued Costco for selling its watches in the United States without permission.

Justice Elena Kagan did not vote in the Omega case because she had worked on it in the Justice Department, but she voted in Costco’s favor in the current textbook ruling.

Benoliel called the new decision a victory for consumers, “who will get the benefit of competitive pricing in those cases where the manufacturers or retailers in the U.S. artificially inflate pricing on imported goods to U.S. consumers over what the citizens of other countries pay for the exact same product.”

The holder of the copyright is still protected until the goods are sold, after which the new owner can resell the product without permission of the copyright holder, he said.

Writing for the court in the textbook case, Justice Stephen Breyer said a ruling in favor of Wiley would have subjected retailers to “the disruptive impact of the threat of infringement suits.”

Breyer also said the publishers’ and manufacturers’ position would “threaten ordinary, scholarly, artistic, commercial and consumer activities,” rendering libraries unable to circulate many books printed overseas.

Imports of gray-market products to the U.S. cost manufacturers as much as $63 billion in sales a year, according to a 2009 Deloitte analysis. American sales of copyrighted works, including books, music and movies, amount to more than $220 billion a year, Breyer said, citing retail industry estimates.

The Association of American Publishers said the decision undercuts a law designed to let U.S. copyright owners set different prices around the world. The ruling “will discourage the active export of U.S. copyrighted works,” Tom Allen, the group’s chief executive officer, said in a statement.

Wiley’s chief executive officer, Stephen Smith, called the ruling “a loss for the U.S. economy and students and authors in the U.S. and around the world.”

As part of the majority opinion, Kagan wrote separately to say that Congress might want to revisit the issue to give manufacturers and publishers more power to control sales of their products.

Also joining the majority opinion were Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Sonia Sotomayor. Justices Ruth Bader Ginsburg, Anthony Kennedy and Antonin Scalia dissented.

The Obama administration backed the copyright owners in both cases.

The legal issue concerned the first-sale doctrine, which says a copyright holder can profit only from the original sale of a product. In 1998, the Supreme Court unanimously said the doctrine applies to U.S.-made products sold overseas, meaning purchasers can bring those goods back into the U.S. through unauthorized channels even if the copyright holder objects.

The latest question was 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 Copyright Act provision that limits the first-sale doctrine to goods “lawfully made under this title.” The panel said foreign-made goods don’t fit that description.

Breyer rejected that reasoning, saying the statute “says nothing about geography.”

Supap Kirtsaeng, who studied mathematics at UCLA, 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 wasn’t 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.

Kirtsaeng and his supporters in the Supreme Court case said the 2nd Circuit’s reasoning would undermine the longstanding notion that the purchaser of a legitimate product has full ownership rights, including the freedom to pass the item on to someone else.

Bloomberg Press is an imprint of Wiley.

Seattle Times reporter Melissa Allison reported on the reaction of Costco’s Benoliel to the ruling.

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