A Supreme Court Win for U.S. Consumers

Mar 26, 2013   
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The Economic Effect of the Supreme Court’s Ruling in Kirtsaeng v. Wiley

In a 6 to 3 decision handed down on March 19, 2013, the United States Supreme Court chalked up a rare victory for consumers over text book publishers, record labels, and others who sought to restrain the resale of copyrighted materials manufactured abroad.

Ruling in the landmark case Kirtsaeng v. John Wiley (568 U. S. ____ (2013)), the Supreme Court extended the “first sale doctrine” to foreign made goods. The Justices’ decision in the matter overturned the Second Circuit’s determination that the “first sale” doctrine did not apply to works made abroad without express consent of the copyright holder. The entire decision of the Court may be read here.

Back in a November 2012 blog post on this case, we discussed the first sale doctrine in detail. Simply put, the doctrine states that the owner of a lawfully purchased copy of copyrighted work may resell that work without limitations imposed by the copyright holder. For example, if you purchase a textbook, you may resell the book if you’d like. In this case, the Court was considering whether the doctrine applied to foreign-made copyrighted works. In a prior ruling that was potentially disastrous for worldwide markets, the resale (secondary) market and consumer pricing, the Second Circuit held that foreign-produced works could be restricted from resale by the copyright holder.

The U.S. Supreme Court did not agree. The majority decision, which did not follow traditional political patterns, was delivered by Justice Breyer and joined by Justices Thomas, Alito, Sotomayor, and Kagan. The liberal Justice Ginsberg wrote a rather lengthy and scathing dissent that was joined by Justice Kennedy and the normally conservative Justice Scalia.

In his opinion, Justice Breyer raised many of the same concerns we mentioned regarding the consequences of a restrictive reading of the first sale doctrines applicability to foreign goods. He stated, “[a]ssociations of libraries, used-book dealers, technology companies, consumer-goods retailers, and museums point to various ways in which a geographical interpretation would fail to further basic constitutional copyright objectives.” Justice Breyer went on to discuss the disruptive impact that a geographical interpretation of the first sale doctrine could have on imports of consumer products containing foreign-made component parts such as automobiles, microwaves, PCs, and calculators. He also warned that new litigation exposure to infringement suits could have a costly effect on the nearly $2.5 trillion retail import market.

The potential fallout had the Supreme Court not taken this position would have been enormous, not to mention economically unmanageable and horribly inefficient. Resale of all manner of consumer products would have dried up as individuals would be required to hire a lawyer before having a yard sale, selling a car, or even a house due to all of the copyrighted components contained therein.

The Majority opinion took a rather logical and real-world economic approach in its rationale in rendering its verdict in favor of consumers. As the court pointed out, Wiley (the publisher’s) ultimate interest was not to protect the copyright holder, but rather to be able to geographically price discriminate by protecting a publisher’s right to charge different prices in different countries. Laws still require the copyrighted products to be legally produced and legally purchased, so why rule in favor of protecting a copyright holder’s profits to the detriment of the domestic consumer? As Breyer noted in the opinion, the time-barred copyright monopoly afforded under US Copyright Law had the constitutional purpose of “promot[ing] the progress of science and useful arts[,]” not stifling that progress to maximize profits.

So what are the potentially negative consequences that could arise out of this decision? The American Association of Publishers or “AAP” – which understandably supported the limitation on resale of copyrighted works – argues that the inability to price discriminate could cut into copyright holders’ earnings, which in the short term would threaten the survival of small independent start-ups, non-profit publishers, and emerging content creators. At the same time, having a more equalized international pricing model could afford for a larger volume of product being sold. Ultimately, pricing and profit maximization would require a bit more economic intelligence, but this is not an insurmountable dilemma.

A greater, and more imminent negative outcome from the Court’s decision is that the economically prudent copyright holder most likely will no longer print “foreign edition” items or may be required to charge higher prices abroad. In fact, the plaintiff in this case, Supap Kirtsaeng, began this matter by importing the copyrighted textbooks from his native Thailand and selling them in the U.S. secondary market (e.g., eBay) for a profit. The fear now is that these “international edition” textbooks which are a mainstay of college and graduate school campuses may no longer be available at 50-75% discounts over the U.S. versions. Also, the AAP warns that less developed countries’ consumers would suffer due to higher costs or inability to purchase U.S. goods, and it could negatively effect those respective international markets. However, the U.S. Supreme Court seemed unswayed by these international arguments.

From the perspective of pure economic theory, allowing a more freely competitive global marketplace will force the publishers’ products to set their prices based on worldwide demand. Copyright holders may be forced to focus on a more uniform pricing model and attempt to ensure that they have a more universally appealing product. If such policies are implemented correctly, the copyright holder stands to gain a much larger consumer base for its product and still maximize profits. However, this macro-economic proposition that a copyright-protected work has one price – the lowest price that the copyright owner agrees to sell the work wherever in the world (plus shipping) – may also negatively effect domestic manufacturing as publishers of copyright-protected works may shift manufacture of works from the United States and other countries with high manufacturing costs to countries where such costs are much lower. This form of cost competition is always a possibility in a competitive market, however.

All tolled, the Supreme Court’s decision in Kirtsaeng is a win for the U.S. consumer, but not without some general shortcomings. The central problem with copyright law (and law in general at many times) is that the national laws and governing international treaties typically have not been revised for the present-day business environment. Legal disputes often flow from technology that didn’t exist at the time the laws were contemplated, reflecting the disconnect between technology and the law.

This fight is long from over, though. You can expect to see a strong lobbying effort by publishers, copyright holders, etc., for Congress to establish some additional copyright protections by narrowing this ruling and/or legislating some exceptions to it. No matter what the outcome, it will be good to see Congress giving a more focused look into U.S. copyright law and its effects on the American consumer and the copyright holders.