Kirtsaeng’s Economic Impact
The Supreme Court decided in Kirtsaeng v. John Wiley & Sons, Inc. that the first sale doctrine applies to book purchases made overseas. This means that it is legal to import large amounts of books manufactured, marketed, and sold overseas into the United States. This means that a copyright owner cannot segment the international market (market segmentation) into differentially produced and priced segments (discriminatory pricing).
While the legal issues in question included the reading of § 602 of the Copyright Act’s import prohibition, § 109(a)’s first sale doctrine and other associated sections, the analysis of the majority and concurring opinions largely sidelines the underlying economic concerns of about market segmentation in favor of a discussion of Congressional intent. Using the canon of a preference for “non-geographical” reading of a statute, as opposed to a canon that Congress must overtly state that a law applies outside the United States for it to apply extraterritoriality, the Court concluded that the first sale doctrine applies to books manufactured and sold abroad.
The dissent notes multiple issues with the majority’s decision. It argues that the majority’s reading reduces § 602(a)(1)’s to an impermissibly small reading, applying the import ban to only piratical copies and copies not owned by the importer, for example persons who are only leasing the product. It goes on to list a litany of provisions in the same section that would become superfluous by the majority’s reading of the first sale doctrine. These provisions are laid out in § 602(a)(3), and include and exception to the import ban for works for certain governmental, personal, scholarly, educational, and religious purposes. Finally, taking a pragmatic or practical approach, the dissent notes that despite many amici briefs arguing that a geographically restricted approach to the first sale doctrine would lead to a parade of horribles (that is, that the sky would fall and the world would end), no case was brought in the 30 years between the passage of the 1976 Copyright Act and Kirtsaeng.
A final issue, and the focus of this post, is that of the real economic impact of the Kirtsaeng ruling. A corollary but related issue implicates antitrust law. When Wiley attempted to practice market segmentation, it practiced what is termed vertical restraints. This means that, going down the chain of the sale, Wiley used what it understood to be the copyright law to make sure that a similar or identical textbook sold in a developing country at a law cost, due to the state of the market in said developing country, did not undermine or cannibalize sales in developed countries where the textbook is sold at a significantly higher price. Before 2007, the Court consistently held that such vertical price restraints to maintain a minimum price were per se (that is, innate in the practice) illegal and could not be practiced without violating antitrust laws. After the Court’s ruling in Leegin Creative Leather Products, Inc. v. PSKS, Inc., only vertical restraints that exhibited “manifestly anticompetitive effects” were per se illegal; other vertical restraints should be analyzed with the “rule of reason.” The majority opinion apparently concluded that a geographical interpretation of the first sale doctrine would by manifestly anticompetitive. It then goes on to conflate horizontal price constraints, where competitors collude as a cartel to keep prices high, with the vertical price constraints at issue in Kirtsaeng. However, the dissent does state that vertical price restraints are not per se illegal according to Supreme Court jurisdiction, and therefore should be evaluated under the rule of reason.
While the legal debate is certainly interesting, the economic concerns are just as enthralling to discuss. Notably, the majority opinion does not once state the word “economic” and is almost completely bereft of any discussion of the practical economic impact of its decision on the publishing industry. Instead, it takes a more formalistic approach in investigating statute, legislative history, and caselaw. The dissent clearly states the concerns of the United States and publishing concerns, who joined the case as amicus curiae on the side of Wiley. In footnote 27, the dissent states:
“It should not be overlooked that the ability to prevent importation of foreign-made copies encourages copyright owners such as Wiley to offer copies of their works at reduced prices to consumers in less developed countries who might otherwise be unable to afford them. The Court’s holding, however, prevents copyright owners from barring the importation of such low-priced copies into the United States, where they will compete with the higher priced editions copyright owners make available for sale in this country. To protect their profit margins in the U.S. market, copyright owners may raise prices in less developed countries or may withdraw from such markets altogether.”
Such analysis comports with theoretical economics. The price discrimination practiced by Wiley was “third-degree price discrimination,” which is price discrimination based on charging different prices to different groups, whether by their attributes, or, more importantly to this analysis, location. The general theoretical conclusion by some economists is that where certain markets are underserved, in this case developing countries’s book markets, welfare is improved. In using an analysis of market efficiency (Pareto efficiency) analysis, price discrimination might also be theoretically beneficial by reducing overall price to the consumer.
To analyze the issue deeper, in certain situations third-degree price discrimination can increase profits, allows a producer to serve markets otherwise underserved, and increase production overall. The academic literature largely deals with monopolies. As competition increases, the positive effect might still happen. This is estimated to be especially so when the costs to produce are highly different, as is true in the Kirtsaeng case.
The business logic to sell books at reduced prices overseas evaporates if such books will be imported and then cannibalize sales in higher profit jurisdictions. The macroeconomic effects will be equally corrosive, as markets will not be served and production will expand slower or contract faster than a world market in which gray market parallel imports were not allowed.