SUPREME COURT LIMITS COPYRIGHT PROTECTION
FOR U.S. EXPORTERS (1998)

American companies, from book publishers, the recording and film industries, to perhaps even software manufacturers, lost an important battle before the Supreme Court in March when the justices unanimously ruled that businesses cannot use the nation's copyright laws to stop discounters from buying U.S. products abroad and selling them in the U.S. at reduced prices.

The decision was seen by many as a blow to U.S. manufacturers and distributors that have been attempting to fight what has been dubbed the "grey market," a form of commerce in which another company buys their products and resells them outside the normal chain of distribution. Both sides in the dispute agreed that the grey market is a multi-billion dollar industry that includes items from shampoos and cosmetics to music CDs and videos. At issue are American consumer goods sold to an overseas distributor and intended for sale abroad. Those products are typically sold at substantially lower prices because they do not include the heavy costs of advertising and marketing that tend to raise the prices of goods sold in the U.S. What often happens, however, is that those distributors then sell the products not only in foreign countries but to others who in turn sell the products back to U.S. retailers for sale in the U.S.

Several retailers, including WalMart, Costco, and other discounters selling a wide range of imported goods, filed briefs supporting the position ultimately adopted by the high court. They argued that consumers benefit when companies can freely buy and resell popular products at reduced prices. Lawyers for manufacturers warned the Court that a ruling for the discounters would oversaturate the market and make it difficult for a consumer to obtain a warranty on a product, even products carrying popular brand names. Trade associations for the recording, motion picture, publishing, and software industries submitted briefs arguing that limiting copyright protection would upset the delicate balance of rewards and incentives Congress struck in enacting the Copyright Act.

The Supreme Court nevertheless ruled that once a U.S. company sells a copyrighted product abroad, it loses its right to control the product's distribution and, even though the product may have been intended for sale somewhere else in the world at a lower price, it can be imported back for sale in the U.S.

The Court's ruling still leaves open the question whether the doctrine will be applied to products, such as computer software, that are not sold outright but are "licensed" by the manufacturer to the consumer. Rulings in several U.S. District Courts suggest that licensors of software may be able to successfully avoid the first sale doctrine and continue to control the distribution rights of their licensed software. But armed with the March decision by the Supreme Court, opponents of a first sale exception for licensors of software will certainly attempt to undo the exception.

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