Supreme Court Issues Significant Decision Regarding Importation and Sale of “Grey Market” Goods

The Supreme Court has just issued a significant decision that will make it more difficult for United States companies to prevent the importation and sale of "grey market" goods.

Grey market goods are goods that are only authorized for sale outside of the United States, usually at lower prices than the corresponding products sold in the United States. Under U.S. trademark laws, U.S. trademark owners can only prevent the importation and sale of “grey market” products if the products are "materially different" from the products authorized for sale in the United States.

As a result of this "material differences" requirement under trademark law, some companies have turned to copyright law in an effort to prevent the importation and sale of grey market products that are identical those sold in the United States.

The case decided by the Supreme Court, Kirtsaeng v. John Wiley & Sons, arose from publisher John Wiley & Sons' attempt to use the copyright laws to prevent the importation of grey market textbooks. The textbooks at issue were identical to those sold by John Wiley & Sons in the United States but were sold in Asia for far lower prices than the U.S. textbooks. The books explicitly stated that they were only authorized for sale in Asia, Europe and the Middle East and that the re-sale of the books in other territories was a violation of the publisher's rights.

An American student, Supap Kirtsaeng, had his friends and family in Thailand send him copies of the Asian version textbooks and then sold them on eBay for a significant profit. The lower courts found that Supap Kirstaeng had violated the U.S. copyright laws by importing and re-selling the Asian version textbooks without the permission of John Wiley & Sons.

Kirtsaeng appealed to the Supreme Court, arguing that under the "first sale" doctrine of U.S. copyright laws, Wiley had no right to control the further sale of the books after it introduced them into the stream of commerce (i.e. after the "first sale" of the books from Wiley to Asian retailers). Wiley argued that under the language of the Copyright Act, the first sale doctrine only applied to goods that were manufactured in the United States and not to goods made overseas (such as Wiley's textbooks). Wiley relied on a 2010 case, Omega S.A. v. Costco Wholesale Corp., in which the Ninth Circuit held that the first sale doctrine applied only to goods manufactured in the United States. That case was also reviewed by the Supreme Court, but the Justices split 4-4 since Justice Kagan recused herself, which had the effect of affirming the Ninth Circuit's decision.

However, upon reviewing the issue again in Wiley, the Supreme Court held in a 6-3 decision that the first sale doctrine also applies to goods that were manufactured abroad. The Court noted that the portion of the U.S. Copyright Act containing the first sale doctrine was not geographically limited and that "American law has generally thought that competition, including freedom to resell, can work to the advantage of the consumer." The Court also explained that libraries, used book dealers, museums and other types of organizations would be disadvantaged by a ruling that the first sale doctrine did not apply to goods manufactured overseas, since these organizations would then be required to obtain permission from the copyright owner before displaying, lending or re-selling goods that were originally made overseas.

Therefore, the Court reversed the Second Circuit and held that Kirstaeng's importation and sale of the grey market textbooks did not constitute copyright infringement.

The decision is important because it removes copyright law as a weapon for U.S. companies to prevent the importation and sale of grey market goods. Therefore, the trademark laws are even more important in terms of preventing the importation and sale of grey market goods. If U.S. companies want to prevent the importation of lower-priced grey market products, they must ensure that the goods sold overseas are somehow "materially different" from the corresponding U.S. goods, in order to prevent the grey market goods from being imported and sold in the U.S. in direct competition with the goods authorized for sale in the United States.

The threshold for a "material difference" under U.S. trademark laws is fairly low and can include differences in the composition or ingredients of the product; differences in the language of the labels, stickers, or owner's manuals; differences in the availability of warranty coverage; and any other differences that would be material to a U.S. customer.

The other option is for copyright holders to price their goods in other countries close to what they would sell for in the United States, in order to remove the incentive for grey market importers to import and re-sell the products in the United States. Some observers have already expressed concerns that by making it more difficult for companies to prevent the importation of grey market goods, the decision could force these companies to raise prices for creative works in other countries, thereby reducing the availability of textbooks and similar products in these countries (particularly in the developing world).