Battle Over Net Firm’s Sales of Music CDs to Play Out in Court

Tired of paying retail for compact discs, music buyers have been flocking to CD Wow’s website in increasing numbers since it was set up in 2000.

In Britain, the key to its popularity is a flat-rate price of about $16.50 for albums – about $7.30 cheaper than the average price in British bricks-and-mortar stores – with free delivery. Some are even cheaper, with Dido’s “Life for Rent” – last year’s best-selling British album – selling for less than $13.

Operating across the world but with a focus on the British, German and Australasian markets, the Hong Kong-based business is estimated to have had sales of about $184 million in 2003. Having spent barely a penny on advertising, it has weathered the technological meltdown of the last few years to emerge, seemingly, as one of the most successful dot-coms.

But for the record industry, CD Wow is a company built on a flawed and potentially illegal business model. It is able to sell CDs so cheaply because it gets products from a variety of countries, mainly in Asia, where prices are low. This enables it to undercut traditional retailers deeply when the CDs are imported to Britain and elsewhere.

The recording industry says CD Wow is engaging in parallel importing – in which genuine goods from outside the European Economic Area (which consists of all 15 European Union countries plus Liechtenstein, Iceland and Norway) are imported into the EEA without the copyright owner’s consent.

“We take a very, very dim view of parallel importing,” said a British executive at one of the five major record labels.

Soon the recording industry – through its trade body in Britain, the British Phonographic Industry – will put its anger to the legal test. The British High Court will next month become the battleground for the highest-profile parallel-importing case since Tesco, the British supermarket chain, sued Levi Strauss & Co. to be allowed to sell cut-price jeans.

The heart of the record industry’s case is that, under British and continental European law, products bought outside the EEA can be imported only with the copyright owner’s consent. The European Court of Justice decided in the Tesco case that such consent could not be implied and had to be “unequivocally demonstrated.”

In this case, the court relied on the intellectual property doctrine of “exhaustion of rights,” said Richard Kemp, a lawyer at Kemp Little. It reaffirmed that goods put on the market outside the EEA need the right-holder’s consent to be brought into the area. But, once they are, the right-holder cannot object to any future resale.

Mark Blair, a lawyer at Marks & Clerk, said the Tesco case made the situation under trademark law very clear. But the British Phonographic Industry is bringing its case under copyright legislation, which has been used in far fewer parallel-importing cases. Legal experts say this should cause few problems for the record industry.

For the record industry, copyrights are all-important.

“The music industry, just like any other content industry, relies first and foremost on its copyrights,” said Simon Baggs, a solicitor at Wiggin & Co, the law firm representing the British Phonographic Industry.

Philip Robinson, chief executive of CD Wow, said the legal action would be vigorously defended.

“I would not have set the business up if there was something intrinsically wrong with it,” he said.

His critics, however, point to the copyright problems he suffered with a previous company, budget music business Tring International.

Robinson said CD Wow’s case had two main thrusts. First, it has received consent from the record companies to sell the products. Lawyers not connected with the case point out, however, that such consent must come from the copyright holder itself – in this instance the British record company and not its Asian subsidiary – and must relate to the selling of CDs inside the EEA.

“Consenting to the goods being put on the Hong Kong market is not the same as allowing them to be imported into the U.K.,” one London-based lawyer said.

CD Wow’s second argument seeks to overcome that objection by claiming that it does not import anything – ownership changes hands in Hong Kong, with the consumer then personally importing the CD. Another lawyer said that this argument had little merit. “With the website cdwow.co.uk, they clearly are selling to consumers in the U.K. It’s just semantics to say otherwise.”

Robinson is, however, perplexed that the music industry is pursuing a firm it acknowledges is buying genuine products and paying artists their royalties.

“At the end of the day I can’t see it as being in anybody’s interest to sell less product.”