It's true. Businesses routinely discriminate against U.S. consumers. Companies sell their products at higher prices in the U.S. than in overseas markets.

This geographical segmentation hurts U.S. consumers, but it helps companies' bottom lines. This business strategy has one inherent danger, however. Low-priced goods sold overseas may be imported to the U.S., and these so-called “gray market goods” could undercut more profitable domestic sales.

Congress tried to remove this danger for copyright holders. A provision of the Copyright Act provides that copyright holders can file infringement suits against anyone who imports gray market copies of their works.

Unfortunately for copyright holders, the Supreme Court shredded that statutory provision in its recent decision in Kirtsaeng v. John Wiley & Sons. The ruling will make it harder for copyright owners to keep their lower-cost foreign products from being resold in the U.S. and undercutting their more profitable U.S. sales. The decision, however, will hit some copyright owners much harder than others.

Broadened Reach

Kirtsaeng began in 2008, when Wiley sued a student who used an innovative way to pay for his education at Cornell University and the University of California, Los Angeles. Supap Kirtsaeng used textbook arbitrage.

Wiley made two separate versions of its textbooks: a high-priced version for the U.S. market and a low-priced version for the rest of the world. Both books contained the same copyrighted text. Kirtsaeng arranged for family and friends in his native Thailand to purchase and send him the low-priced Wiley textbooks that were made in Asia and intended for sale outside the U.S. Kirtsaeng resold those books at a profit in the U.S.

Wiley asserted that Kirtsaeng committed copyright infringement by importing and selling the foreign textbooks. Kirtsaeng contended that the Copyright Act's first-sale doctrine protected his actions. This doctrine states that a copyright owner's right to control the distribution or display of a copy ends upon the first authorized sale of that copy. Once Wiley sold the textbooks in Thailand, the company lost its right to control any further resale, Kirtsaeng argued.

This was not the first time the Supreme Court faced a conflict between the Copyright Act's first-sale doctrine and its import control provision. In 1998, the court held in Quality King Distributors v. L'anza Research that the first-sale doctrine trumped the import control provision—provided the copies were made in the U.S. Even if U.S.-made copies were initially sold overseas, they were subject to the first-sale doctrine and could be freely resold into the U.S., the court declared.

Dicta in Quality King declared that the first-sale doctrine did not apply to copies made outside the U.S. When such foreign-made copies were sold overseas, the U.S. copyright holder didn't lose its right to control further distribution of those copies in the U.S. Importing such copies without the copyright holder's authorization would constitute infringement, the court wrote.

However, the Supreme Court changed its mind when it handed down its 6-3 decision in Kirtsaeng, which explicitly rejects Quality King's dicta and holds that the first-sale doctrine applies to all copies created with the copyright owner's permission. The doctrine even covers copies created and sold outside the U.S., so subsequently importing these copies into the U.S. is not infringing.

Publishers' Problem

Kirtsaeng creates a big problem for the publishing industry. If publishers continue to sell their U.S. editions for high prices and foreign editions for low prices, unauthorized resales of imported foreign editions will undercut their U.S. sales. If they sell their books at a uniform global price, publishers will either obtain far less profit from U.S. sales or (more likely) price themselves out of the overseas market. “Publishers will have to make some hard choices,” says Prof. Jessica Litman of University of Michigan Law School (see “New Strategies” for some of their options).

Other content industries will be relatively unaffected by Kirtsaeng, according to experts. The music industry need not worry about imported CDs undercutting their domestic sales because there is little price differential between music sold in the U.S. and music sold overseas.

Movie and TV companies use technology to protect themselves. DVDs sold in one geographical sector will play only on machines sold in that same sector. Thus DVDs sold outside North America will not play on machines found in the U.S.

Software firms use another method to prevent the import of gray market goods. These companies claim they don't sell copies of their software to consumers; they merely license the copies. Some have disputed this characterization of software deals, but they have had relatively little success. “Overall, the courts have upheld software licenses and ruled they are not sales,” says James Burger, a partner at Thompson Coburn.

The first-sale doctrine applies only to sales, so a licensing transaction does not restrict the copyright owner's rights in the copy. Should a foreign licensee import a copy to the U.S., the U.S. copyright owner can sue for infringement, the Supreme Court stated in Kirtsaeng.

This legal strategy may be the best hope for book publishers. They are already licensing their digital books; they may try to do the same for their hard copy books. “They could try to use shrinkwrap agreements to license their [hard copy] books,” Burger says.

Even after Kirtsaeng, book publishers have ways to geographically segment their markets. Publishers can, for instance, produce different books for the U.S. and foreign markets, thus ensuring that foreign books won't adequately substitute for U.S. ones. However, the cost of developing unique foreign books may be too great to enable publishers to sell these books overseas at a profit.

Another option: Publishers can create foreign affiliates to hold their overseas copyrights. When these affiliates sell books overseas, the first-sale doctrine will limit only the affiliates' rights in the books, not the rights of U.S. copyright holders, according to some experts. “I don't see how the sale of a copy by a separate foreign company, even if affiliated with the U.S. copyright holder, would be considered a sale by the U.S. copyright holder,” says Matthew Siegal, a partner at Stroock & Stroock & Lavan. If this analysis is correct, a U.S. copyright holder could bring infringement suits against anyone importing its foreign books into the U.S.

It's true. Businesses routinely discriminate against U.S. consumers. Companies sell their products at higher prices in the U.S. than in overseas markets.

This geographical segmentation hurts U.S. consumers, but it helps companies' bottom lines. This business strategy has one inherent danger, however. Low-priced goods sold overseas may be imported to the U.S., and these so-called “gray market goods” could undercut more profitable domestic sales.

Congress tried to remove this danger for copyright holders. A provision of the Copyright Act provides that copyright holders can file infringement suits against anyone who imports gray market copies of their works.

Unfortunately for copyright holders, the Supreme Court shredded that statutory provision in its recent decision in Kirtsaeng v. John Wiley & Sons. The ruling will make it harder for copyright owners to keep their lower-cost foreign products from being resold in the U.S. and undercutting their more profitable U.S. sales. The decision, however, will hit some copyright owners much harder than others.

Broadened Reach

Kirtsaeng began in 2008, when Wiley sued a student who used an innovative way to pay for his education at Cornell University and the University of California, Los Angeles. Supap Kirtsaeng used textbook arbitrage.

Wiley made two separate versions of its textbooks: a high-priced version for the U.S. market and a low-priced version for the rest of the world. Both books contained the same copyrighted text. Kirtsaeng arranged for family and friends in his native Thailand to purchase and send him the low-priced Wiley textbooks that were made in Asia and intended for sale outside the U.S. Kirtsaeng resold those books at a profit in the U.S.

Wiley asserted that Kirtsaeng committed copyright infringement by importing and selling the foreign textbooks. Kirtsaeng contended that the Copyright Act's first-sale doctrine protected his actions. This doctrine states that a copyright owner's right to control the distribution or display of a copy ends upon the first authorized sale of that copy. Once Wiley sold the textbooks in Thailand, the company lost its right to control any further resale, Kirtsaeng argued.

This was not the first time the Supreme Court faced a conflict between the Copyright Act's first-sale doctrine and its import control provision. In 1998, the court held in Quality King Distributors v. L'anza Research that the first-sale doctrine trumped the import control provision—provided the copies were made in the U.S. Even if U.S.-made copies were initially sold overseas, they were subject to the first-sale doctrine and could be freely resold into the U.S., the court declared.

Dicta in Quality King declared that the first-sale doctrine did not apply to copies made outside the U.S. When such foreign-made copies were sold overseas, the U.S. copyright holder didn't lose its right to control further distribution of those copies in the U.S. Importing such copies without the copyright holder's authorization would constitute infringement, the court wrote.

However, the Supreme Court changed its mind when it handed down its 6-3 decision in Kirtsaeng, which explicitly rejects Quality King's dicta and holds that the first-sale doctrine applies to all copies created with the copyright owner's permission. The doctrine even covers copies created and sold outside the U.S., so subsequently importing these copies into the U.S. is not infringing.

Publishers' Problem

Kirtsaeng creates a big problem for the publishing industry. If publishers continue to sell their U.S. editions for high prices and foreign editions for low prices, unauthorized resales of imported foreign editions will undercut their U.S. sales. If they sell their books at a uniform global price, publishers will either obtain far less profit from U.S. sales or (more likely) price themselves out of the overseas market. “Publishers will have to make some hard choices,” says Prof. Jessica Litman of University of Michigan Law School (see “New Strategies” for some of their options).

Other content industries will be relatively unaffected by Kirtsaeng, according to experts. The music industry need not worry about imported CDs undercutting their domestic sales because there is little price differential between music sold in the U.S. and music sold overseas.

Movie and TV companies use technology to protect themselves. DVDs sold in one geographical sector will play only on machines sold in that same sector. Thus DVDs sold outside North America will not play on machines found in the U.S.

Software firms use another method to prevent the import of gray market goods. These companies claim they don't sell copies of their software to consumers; they merely license the copies. Some have disputed this characterization of software deals, but they have had relatively little success. “Overall, the courts have upheld software licenses and ruled they are not sales,” says James Burger, a partner at Thompson Coburn.

The first-sale doctrine applies only to sales, so a licensing transaction does not restrict the copyright owner's rights in the copy. Should a foreign licensee import a copy to the U.S., the U.S. copyright owner can sue for infringement, the Supreme Court stated in Kirtsaeng.

This legal strategy may be the best hope for book publishers. They are already licensing their digital books; they may try to do the same for their hard copy books. “They could try to use shrinkwrap agreements to license their [hard copy] books,” Burger says.