Will the Supreme Court Destroy the Channel?

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The little-known case of Kirtsaeng v. John Wiley & Sons could make it illegal for VARs to resell most used gear and subject resellers to complicated rules, tariffs and fees that could bring the channel as we know it to a grinding halt.

The U.S. Supreme Court is set to weigh in later this month on an arcane copyright case that, taken to extremes, could have chilling and dire effects on technology resales as we know them.

At the very least, the little-known case of Kirtsaeng v. John Wiley & Sons could, if upheld by the high court, make it largely illegal for VARs to resell used gear if any of its components were made overseas. The case could subject even conventional resellers of technology products to complicated rules, tariffs and fees that could bring the channel to a grinding halt.

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The case stems from an Appeals Court for the Second Circuit ruling in 2011 filed in the case of Supap Kirtsaeng, a Thai grad student studying in the United States, who purchased cheaper foreign versions of Wiley textbooks and resold them at a mark-up in the U.S. Wiley sued when it discovered Kirtsaeng’s eBay-fueled efforts had netted the student nearly $1.2 million in profits.

In upholding Wiley’s judgment in a lower court against Kirtsaeng, the Second Circuit court ruled that the so-called “first-sale doctrine,” which has protected sellers of used items from original copyright claims since 1908, does not apply to items produced or sold outside the United States. In effect, everything with any sort of foreign trademark -- from an Apple Inc. iPhone to an Omega watch to a piece of period furniture crafted in France – now requires express permission of, and presumably  additional payment to, the foreign entity that created it in order to be resold.

This disregard for the first-sale doctrine, which has always held that copyright holders were compensated during the initial purchase and held no sway over future sales, would almost immediately obliterate e-commerce sites such as Cragslist.org and eBay Inc., hence the latter’s friend-of-the-court brief in opposition to such an outcome. The key fear among technology industry advocates is not only the immediate effect on the sale of used goods, but the larger unintentional effect of giving American manufacturers incentive to move production overseas so they can gain lifetime control over the resale of their wares.

"This perverse application of copyright law could have severe impacts on global commerce, particularly on the Internet," said Patrick Ruffini, president of Engage LLC, a technology lobbying and advocacy agency in Washington. "The Internet has provided tremendous value for consumers enabling them to compare prices by shopping from other Internet users and businesses of all sizes, around the globe. We cannot sit idly by and allow manufacturers to use copyright law to eliminate ownership rights and place unfair restrictions on global commerce.”

In a joint brief filed before the Supreme Court, eBay, and advocacy groups NetCoalition, The Computer and Communications Industry Association, The Internet Commerce Coalition, TechNet, Netchoice and TechAmerica said the lower court’s dismissal of first-sale protections for foreign goods “is inconsistent with the terms, structure, history and purpose of the copyright act, but it also allows for significant adverse consequences for trade, e-commerce, secondary markets, small businesses, consumers, and jobs in the United States.

“As increased transaction costs may curtail trade, importers and resellers may face a diminishing market and concomitant job loss,” the group wrote. “The whole point of the first sale doctrine is that once the 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.”

“The Second Circuit’s holding is to the contrary, does not conform with the copyright act, and will precipitate a host of adverse policy results.”

Indeed, it’s no stretch to imagine the horrendous impact such a ruling could have on the channel. Forget for a moment the shutdown of any used-gear marketplace, which remains a small, if significant part of the reseller ecosystem. Clearly most information technology goods, hardware and software, contain enough foreign-derived elements to qualify under the new, draconian rules.  So, what of the normal resale of IT products? Will partners need express permission from Chinese manufacturers such as Lenovo and Huawei to resell hardware purchased through U.S. distributors? Must every piece of Cisco Systems Inc. gear be checked to determine the origin of its components before it can be safely and legally resold?

“Sometimes it’s impossible to tell where things have been manufactured,” Marvin Ammori, a First Amendment lawyer at the New American Foundation who specializes in technology issues told MarketWatch. “Who doesn’t buy and sell things? Millions of Americans would be affected by this.”

The hope is that the Supreme Court will resolve the issue and end the first-sale madness when it takes up the matter on Oct. 29. In the meantime there’s an online petition that anyone with an interest in reselling anything in America might want to consider signing. It urges the high court and President Barack Obama’s administration to rethink the Second Circuit ruling. More than 100,000 folks have already signed on.

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