Discounters Can Reimport Goods: Court
Discount retailers won the legal right Monday to sell copyrighted U.S. goods in this country that they have bought for less in overseas markets.
Reversing federal court decisions in California, the Supreme Court ruled that copyright owners do not have the “exclusive right” to control such marketing of their products.
The decision affects products ranging from recordings and books to sunglasses and shampoo. It upholds a part of the estimated $130 billion a year “gray market” in U.S. goods that are reimported for sale here.
“This is a tremendous victory for American consumers,” said Peter J. Kadzik, a lawyer for the National Assn. of Chain Drug Stores. “It allows distributors and retailers to take advantage of the lower prices manufacturers offer overseas. It will result in lower prices here.”
Other experts, however, said that the domestic impact of the ruling will be more modest. Alan Carsrud, a consultant who advises firms on how to do business overseas and a lecturer on entrepreneurship at UCLA, predicted that only scattered U.S. industries are likely to cut prices for American consumers. He said that software, computer disks and designer apparel prices are likely to be among those affected.
U.S. producers often sell products at steep discounts in some foreign countries. Some say that they do so to build new markets. For example, in areas where video recorders are just coming into wide use, U.S. firms have sold videos at discounts.
The manufacturers also say that they can afford to discount their products if they ship them in bulk and do not pay for advertising, promotion and distribution as they do in their home market.
Until now, these companies have maintained that copyright law allows them to block other companies from reimporting those items for sale here. Recording studios, for instance, sometimes test market an album in a foreign country, confident that they could prevent its unauthorized distribution here.
Monday’s ruling calls that belief into question.
“I think they will have to reevaluate what they do abroad,” said Preeta D. Bansal, a New York lawyer who filed a brief on behalf of the Recording Industry Assn. of America and the Motion Picture Assn. of America.
Bernard R. Sorkin, senior counsel for Time Warner Inc., said the outcome at first glance presented “a very serious problem” for overseas marketing in the entertainment industry. He said he wanted to study the court’s opinion before commenting further.
John Carson, an intellectual property lawyer in Los Angeles, predicted that many U.S. manufacturers will try to curb gray market sales by moving away from the practice of selling identical or nearly identical goods in the United States and overseas. He said these manufacturers are likely to modify products intended for sale overseas so that they appeal mainly to foreign, rather than domestic, consumers.
In addition, Carson said manufacturers in some cases will raise prices overseas rather than cut prices in the United States.
Other lawyers said the impact of the decision is hard to gauge because it is not clear how companies will react. It could have the unintended effect of discouraging firms from exporting their products overseas, they said.
While it ended in a major ruling on copyright law, the case decided Monday began in Los Angeles as a dispute over the selling of shampoo.
Robert De Lanza, whose Azusa-based firm makes professional hair-care products for beauty salons, discovered to his irritation that his shampoos were being sold in supermarkets and drug stores in California.
In an interview, he said he had spent millions of dollars in promotion efforts and training for beauty salons that used his products.
However, he sold several cases of his shampoo to a British firm at a 35% discount on the understanding it would be sold on overseas. Instead, De Lanza learned, the British company simply shipped it to discounters in the United States.
His company, L’Anza Research, sued the discounter for copyright infringement.
A jury in Los Angeles awarded L’Anza $132,000 in damages in 1995 and the U.S. 9th Court of Appeals upheld the verdict. It relied on a provision of the Copyright Act of 1976 that gives owners of copyrights “the exclusive right to distribute copies” in the United States.
The Supreme Court overturned that decision on a 9-0 vote, citing a different provision of the law. The so-called “first sale” doctrine maintains that copyright holders have the right to sell their products. However, once sold, a “lawfully made” copy can be resold without the permission of the original copyright holder.
“The whole point of the first sale doctrine is that once a copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution,” wrote Justice John Paul Stevens in the case (Quality King Distributors vs. L’Anza Research International, 96-1470).
The ruling concerns only authorized copies, not “pirated” ones.
Times staff writer Stuart Silverstein contributed to this story from Los Angeles.
