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Posted: April 12, 2013

Hey, that’s mine!

The ins and outs of grey markets and the law

Peter Lemire

At some time or another, anyone who produces a product or commercializes a copyrightable work will inevitably run into the situation where you see your products being resold by someone that is not you or one of your direct distributors.

Oftentimes, this becomes an issue for a business because of the price at which the items are being sold (usually lower than the business would like) or possibly because of the bad reputation of the seller in question. Other times, it is a grey market situation where goods that were originally produced and sold in overseas markets make their way back to the United States. 

The question my clients have is almost universally, “How do I stop this?” Generally speaking, the answer is that in the United States, it is either extremely difficult to stop it or you flat out cannot stop it at all, due to a theory of law called the Right of First Sale.

The Right of First Sale doctrine is recognized in both trademark and copyright law. Trademark law protects source identifiers of goods and services – basically brand names and logos. Copyright, on the other hand, protects creative works of authorship – books, movies, music, etc. While slightly different in the technical application, in copyright and trademark law the underlying theory is essentially that the owner of a branded item or creative work is entitled to control and receive compensation for the first sale of the product.

The first sale is just that, the first sale of the product – regardless if it is to a retail consumer or to a distributor/wholesaler. Therefore, authors are entitled to royalties only on the first sale of their book and not any subsequent resale of the book. On the basic level this makes sense and allows for a robust secondary market of used goods. Think of the pain it would be if you had to pay a royalty to J.K Rowling for selling a used copy of Harry Potter on Amazon, or if you sold your Specialized Shiv time trial bike on eBay.  

However, the questions can get a bit more sticky when the seller isn’t unloading unwanted items, but is instead engaged in a commercial enterprise and the goods might be new instead of used. For example, what happens if due to market conditions a product is sold at a lower price in a foreign country than it is in the United States?

Depending on the price differential, there may be an arbitrage situation where a foreign purchaser can purchase the product in the foreign country and then turn around and sell it to American consumers for less than the domestic retail prices at a guaranteed profit. This very scenario came before the Supreme Court in the case of Kirstaeng v. John Wiley & Sons. In the case, a student named Kirstaeng from Thailand came to the United States to study at Cornell and U.S.C.

Since college is not cheap, the entrepreneurial student sought ways to defer his expenses. One thing he noticed was that textbooks were a lot cheaper in Thailand than they are in the United States, so Kirstaeng arranged to buy legal copies of popular textbooks in Thailand, import them here and resell them at a large profit – somewhere in the ballpark of $100,000.

The publisher, not liking this, sued and originally obtained a $600,000 judgment against Kirstaeng. The Supreme Court in a 6-3 decision overwhelmingly overturned the lower court decision. The Court also did something that it normally doesn’t do in copyright cases – it drew a clear line in the sand.

As long as the copyrighted works that were made overseas were done legitimately (not counterfeited), then the first sale doctrine applied and the copyright holder cannot ban their importation and sale in the United States. Similarly under trademark law, as long as a party is merely stocking and reselling the goods (no modification to the goods), then the first sale doctrine applies.

So what is a business owner to do? There are a few different things to try to minimize the impact. The first would be to take a look at your pricing structure. Are there any markets in which you might be at risk for an arbitrage situation? In theory, exchange rates should equal out prices, but sometimes distortions do occur.

Don’t just look at foreign markets, because these situations can happen in domestic markets as well. An example would be a pricing decision concerning a large clearance sale. Could a savvy party buy a large amount of clearance items and then resell them on eBay? Careful pricing and quantity limit strategies can help eliminate this risk.

Additionally, if you sell your products through authorized distributors that you have contractual agreements with, you can add language that prevents the distributor from selling the products back into the United States, or allows you to revoke their distributorship if they violate lot size restrictions or if they knowingly sell to customers that intend to export the products back into the United States. While these strategies are not foolproof, they are the best tools that companies have to combat these sorts of situations.

Peter Lemire is a founding member of the intellectual property law boutique, Leyendecker & Lemire. Leyendecker & Lemire specialize in patents, trademarks and related complex civil litigation. Peter Lemire can be reached directly at 303.768.0641 or peter@coloradoiplaw.com. Visit www.coloradoiplaw.comfor further information, including Leyendecker & Lemire’s weekly blog, “Control, Protect & Leverage.” 

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