Thursday, April 25, 2013

          Buyer Beware, of Copyright Laws

          Before you buy an expensive book or music CD collection, check the price online at .com sites and foreign domains, such as .co.uk for the U.K., or .de for Germany.

          This article is reprinted with permission from the April 25, 2013 edition of The Recorder.

          by Lothar Determann

          Even after taxes and shipping costs, the price differences are noticeable. In many cases, you can save a few bucks. How come, you may ask. The economy is becoming evermore global. Highly efficient online marketplaces should level the playing field and pricing.

          One reason is that laws are still not as global as markets. Every country has enacted its own national intellectual property law regime that it considers best suited to promote commerce and innovation. This allows intellectual property owners to control where their products are sold. Once a copyright owner has sold a particular copy of a book, movie DVD, music CD or other product, in most countries the buyer is free to resell such a copy without further authorization. The copyright owner has already been compensated with respect to such particular copy. This principle is referred to as "first sale doctrine" or "exhaustion."

          In many countries, only a domestic first sale exhausts national intellectual property rights. The intellectual property owner can object to the import and sale of a copy that was made and sold in another country. This allows intellectual property owners to set different prices for different countries. Drug companies, for example, are willing to sell drugs at a cheaper price in developing countries with dire needs yet less funds available — but only so long as the same drugs do not come back to undermine price levels in developed countries where higher prices can be obtained. Similarly, book publishers charge different prices depending on market particularities.

          Price and value considerations are particularly relevant with respect to software products. A computer program can be of immense value for a large enterprise, which is consequently willing to pay hundreds of thousands of dollars for a license, whereas a student, an educational institution or a small business can derive a much smaller economic benefit and afford much less to pay. If the software copyright owner had to charge each user the same price to recoup development costs, it would have to pick a price somewhere in the middle and miss out on prices large enterprises would be willing to pay while rendering the programs unaffordable for students. If the copyright owners charge different prices and do not control distribution, however, they create a potential for arbitrage. For example, a student or educational institution could buy a software copy at a low price, resell at a higher price to a large enterprise and pocket the arbitrage margin. The copyright owner misses out on an opportunity to sell at a higher price to the large enterprise.

          Consumers in high-price countries tend not to view price discrimination as favorably. Also, the development and operation of innovative global online marketplaces — provided by companies such as Amazon and eBay and used by businesses and consumers around the world ­— is adversely affected by intellectual property owners' control over distribution of their products. Courts and legislatures are concerned about keeping markets for products efficient by minimizing the existence of hidden restraints in the form of complex restrictions in license agreements.

          On March 19 the U.S. Supreme Court decided a case involving arbitrage in Kirtsaeng v. John Wiley & Sons. Supap Kirtsaeng came from Thailand to study mathematics in the United States. He imported English language academic textbooks from Thailand and generated arbitrage profits on revenues of around $1 million in only a few years. When a U.S. copyright owner, John Wiley & Sons Inc., sued him for copyright infringement, Kirtsaeng asserted the first sale defense, based on purchases from John Wiley's Asian subsidiary company. Lower courts rejected the defense based on territoriality considerations: The first sale doctrine did not apply, because the copies were not made in the United States and no authorized first sale had occurred in the United States. The U.S. Supreme Court reversed and found that a first sale outside the U.S. counts, too.

          Kirtsaeng's case was about books. Yet, the Supreme Court noted that many products these days contain or come with some copyrighted materials, including automobiles, microwaves, calculators, mobile phones, tablets and personal computers. In the past, companies have asserted copyrights in text and artwork on product labels to prevent "gray imports" of various kids of products, including shampoo bottles. Based on the recent Supreme Court decision, companies may no longer be able to prevent owners from importing and reselling lawful copies made and first sold abroad based on U.S. copyright laws. The dissenting justices expect this will cause some copyright owners to raise prices abroad to reduce the potential for arbitrage.

          Importers and resellers have to make sure they own their copies as a matter of U.S. copyright law to avoid infringement liability. Software companies have prevailed in U.S. courts for decades and avoided the exhaustion doctrine with the position they never sell, but only license software copies. Also, the U.S. District Court for the Southern District of New York decided on March 30 in Capitol Records v. ReDigi that the first sale doctrine under U.S. copyright law does not allow owners of digital music files to create an additional copy for resale, even if ReDigi's service ensures that the original copy is immediately deleted bit by bit as the new copy is created bit by bit. In Europe, courts have blessed digital resales of software copies, but U.S. courts may view ownership of copies differently as a matter of U.S. copyright law, regardless of where foreign-made copies are first sold. Additionally, the Supreme Court decision in Kirtsaeng applies only to copyright law. Different rules apply to trademarks, patents and other forms of intellectual property.

          Before you venture into international importation or exportation, you need to ensure you own your merchandise free and clear of restrictions under intellectual property laws in each country where you plan to sell. Buyers beware, too: Music and movie publishers have been busy suing individual consumers, not just distributors like Kirtsaeng.

          Lothar Determann is a partner at Baker & McKenzie in Palo Alto, and teaches computer, data privacy and electronic commerce law at UC Berkeley, UC Hastings College of the Law and the Free University of Berlin.

          In Practice articles inform readers on developments in substantive law, practice issues or law firm management. Contact Vitaly Gashpar with submissions or questions at vgashpar@alm.com.

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