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Legal Alert

Supreme Court Ruling Favors Grey Market Resellers: U.S. Copyright Owners to Reconsider Sales Models

April 2, 2013

Last month, the United States Supreme Court issued a ruling that is likely to have a profound impact on U.S. copyright holders. In Kirtsaeng v. John Wiley & Sons, Inc., the Court held that a copyright owner does not have the right to restrict importation of lawfully purchased copies of that work into the U.S.

The case involved a copyright infringement suit filed by John Wiley & Sons, Inc. ("Wiley") against Supap Kirtsaeng, a Thai student in the U.S., for importing and selling lower-priced foreign-edition textbooks in the United States. Kirtsaeng's "first sale" doctrine defense—which essentially provides that once a copyright holder sells a copyrighted work, it may not interfere with its future sales—was not accepted by the district court. The jury found that Kirtsaeng had willfully infringed on Wiley's copyright, and damages in the amount of $600,000 were assessed against him.

On appeal at the Second Circuit, Wiley argued that denying Kirtsaeng the first sale defense was proper because it did not apply to the importation of lawfully purchased copyrighted works. The Second Circuit Court agreed. The case was then appealed to the United States Supreme Court. To the surprise of many, the Court ruled that the first sale doctrine does apply to works first sold abroad, and that importation of those goods for resale into the U.S. is not an infringement.

In Kirtsaeng, the Court has set U.S. copyright law policy in a way that is favorable to grey market resellers. Seeing the warning signs for potential revenue erosion, American copyright owners (not only publishers) are understandably concerned. Lobbying Congress to change the law and geographically limit the application of the doctrine to domestically made copies is just a matter of time. But until that happens (and if it happens), American copyright owners should rethink their sales models—and do so quickly.

A partial solution for copyright holders is to shift from a sale model to a licensing model. This adjustment can help alleviate the post-Kirtsaeng problem because the first sale doctrine does not apply to copyrighted works that are licensed. (Licensing is already the norm for eBooks.) It is important to keep in mind that converting to a licensing approach is only a "partial" solution given that technology-based license enforcement of non-digital media is virtually impossible. After all, digital rights management (DRM) and other rights management tools are simply inapplicable. That being said, legal enforcement for breach of a license agreement remains a viable option.

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Please contact Maslon's Intellectual Property & Technology Group if you have questions about how the information provided may impact your company.


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