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April 2013

Supreme Court Rules Against Publishers, Providing Boon To Gray-Marketers

The U.S. Supreme Court held on March 19, 2013, that U.S. copyright holders cannot prevent the importation and resale of their products made elsewhere, effectively eliminating the use of copyright law to support international market segmentation, and providing a boon to importers of gray-market goods into the United States. The Court’s earlier attempt to address the issue – in Costco Wholesale Corp. v. Omega, S.A. – was equally divided. However, in Kirtsaeng v. John Wiley & Sons Inc, U.S. Supreme Court, No. 11-697, with a 6-3 majority, found that copyright law's ‘first sale’ doctrine applies to copies of a copyrighted works lawfully obtained, regardless of whether the copy was manufactured in the United States or abroad.

The dispute centered on Supap Kirtsaeng, a Thai citizen studying in the U.S., who purchased lower-priced English language textbooks printed by Wiley and Sons in Thailand, and resold them on eBay to defray his education costs while attending University of Southern California and Cornell University. Wiley sued Kirtsaeng in 2008, claiming, among other things, infringement of its distribution rights which include the ability to withhold permission to import a copyrighted work made abroad. That case went to trial, and a jury found Kirtsaeng liable for willful copyright infringement, awarding statutory damages of $600,000 to Wiley. Kirtsaeng appealed. The 2nd U.S. Circuit Court of Appeals in New York upheld the award, holding that foreign copies cannot be resold in the United States absent permission of copyright owners.

On review by the Supreme Court, the publishers argued that the ‘first sale’ doctrine, which allows legally-acquired copyrighted works to be resold without the permission of the copyright owner, does not apply to goods made abroad. The core of the dispute turned on the Court’s interpretation of the meaning of the term “lawfully made.” Does that phase only describe a narrow geographical reading “made in the United States” or a much broader “made according to copyright laws” without regard to location? The Court found that the statutory “language, its context, and the common-law history of the ‘first sale’ doctrine, taken together favored a non-geographical interpretation.” The Court agreed with Kirtsaeng’s interpretation of this five-word phrase, saying that it meant nothing more than “in compliance with” or “in accordance with” and “says nothing about geography.” In this case, because the publisher (Wiley) indisputably authorized the making of the copies, the copies were “lawfully made under this title,” so the ‘first sale’ doctrine applied.

Justice Breyer delivered the opinion of the Court, in which Chief Justice Roberts, and Justices Thomas, Alito, Sotomayor and Kagan joined. In the majority opinion, the Court acknowledged that its decision will “make it difficult, perhaps impossible, for publishers (and other copyright holders) to divide foreign and domestic markets.” The Court went on to say that a “publisher may find it more difficult to charge different prices for the same book in different geographic markets. But we do not see how these facts help

Wiley, for we can find no basic principle of copyright law that suggests that publishers are especially entitled to such rights.” This decision effectively removes copyright law as an impediment to the burgeoning business of the gray-market importation of goods.

A concurring opinion was written by Justice Kagan and joined by Justice Alito. The concurring opinion points out that the combination of the Kirtsaeng decision and the Court’s 1998 decision in Quality King v. L’anza destroys the copyright owner’s ability to engage in market segmentation and price differentiation. Justice Kagan points out that that result is due to an incorrect decision in L’Anza, not the decision in Kirtsaeng. She then calls on Congress to fix the problem if it deems appropriate.

There is little doubt that Kirtsaeng’s influence may extend beyond copyright law into patents – but not yet. Last year, the Federal Circuit affirmed that patent exhaustion does not apply to foreign made works not first sold in the United States. However, on March 27, 2013, only a week after issuing the Kirtsaeng decision, the U.S. Supreme Court declined to hear a case involving whether patented goods purchased abroad and resold in the United States are subject to the ‘first sale’ doctrine. The case is Ninestar Technology Co v. ITC, U.S. Supreme Court, No. 12-552.

Intellectual Property

Intellectual Property