Copyright Law and Market Arbitrage - Ricochet.com

This coming October 29, the United States Supreme Court will hear oral argument in Kirtsaeng v. John Wiley & Sons, a case?on a question of copyright law with broad social implications. At issue in this case was whether Kirtsaeng is able, under the current law, to import into the United States copies of textbooks made and sold by Wiley for distribution solely in Thailand. Working in what is known as the ?gray market,? Kirtsaeng?s strategy was to buy up large quantities of books from his native Thailand at low prices, only to bring them back to the United States where he could resell them at a profit for prices lower than those that Wiley charged to American customers.?

As might be expected, the books sold overseas were in some ways inferior to those marketed in the United States, but that is par for the course for companies that do business internationally, where they must figure out what products to sell and what prices to charge for them across the globe. That challenge is not easy because wealth differences between countries are often large enough that it no longer makes sense (as with Thailand and the United States) to sell exactly the same product at exactly the same price in two or more markets. Thus, the imperative often becomes: sell the best versions at the highest prices in the U.S., where the demand is strong; sell a somewhat stripped-down version of the same basic product for a lower price in Thailand, where the demand is weaker.

This form of price and product differentiation produces large social advantages. Let the same firm sell only a single product across all markets and miscalibrations will happen at both ends.? Consumers in the strong market get an inferior product to what they prefer, while many consumers in weaker markets can be cut out altogether by a price/quality combination that they cannot afford. The seller loses out on revenues in both markets. The ability to segment markets therefore allows the seller of the copyrighted product to achieve a useful double value. It first reaches a larger number of customers from whom it can generate larger profits, which in turn increases its incentives to produce these copyrighted works in the first place.

Using this price and product discrimination does not come free because the manufacturer has to police the boundaries against arbitrageurs?those individuals like Kirtsaeng who seek to exploit the differences in price and quality across these different markets. Sometimes arbitrageurs perform a useful social service by making sure that prices of a wide range of standardized products in different markets are properly aligned. But in this case their social role is negative, because they upset price discrimination strategies that advance social welfare for the reasons mentioned above.

?The precise legal point in Kirtsaeng concerns the correct reading of section 109 of the Copyright Act, with provides that any person who owns a copy of a work ?lawfully made under this title? is entitled to resell or otherwise dispose of that copy without the legal permission of the owner. It is widely understood that this section allows any person who lawfully buys a copy of the book in the United States to resell it as he or she sees fit and to pocket all the profits. The technical question is whether that person has the same right when the book is purchased lawfully overseas and is then resold after importation into the United States.

As a textual matter, it looks as though the words ?under this title? extend only to works made in the United States pursuant to our Copyright Act. Any linguistic doubts on that matter, moreover, should yield to control the economics in these gray markets. That ?first sale? doctrine in Section 109(a) only allows the seller of a copyrighted product to control the initial sale of a product and not its resale. That rule makes sense in those cases where the first sale and resale take place in the same market, for then the initial price can fully capture the gains from selling the work, without the added administrative burden of seeking to monitor subsequent sales. But where the second sale is in a different market from the first one, the need for price discrimination is important,?so that gray market operators like Kirtsaeng should be shut down. As a matter of first principle, the Copyright Law should not be interpreted to upset these sensible social strategies.? Kirtsaeng (who lost below in the Second Circuit) should lose again.

Source: http://ricochet.com/main-feed/Copyright-Law-and-Market-Arbitrage

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