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Price Discrimination for Copyrighted Works Post-Kirtsaeng

Supreme Court

The Supreme Court ruled 6-3 this week in Kirtsaeng v. John Wiley and Sons in favor of Supap Kirtsaeng, a college student from Thailand who was challenging a copyright infringement charge for textbooks he bought overseas and resold in the United States. The publishers argued that the first-sale doctrine, which allows legally-acquired copyrighted works to be resold without the permission of the copyright owner, does not apply to goods made abroad. The heart of the case depended on the court’s interpretation of the meaning of the term “lawfully made.” Does it mean “made in the United States” (i.e. where Congress has jurisdiction) or “made according to copyright laws” (i.e. not a counterfeit copy)?  Ultimately, the majority opinion rejected the geographical interpretation put forth by the publishers and found that the first sale doctrine applies to copies of copyrighted works lawfully made abroad.

The majority opinion acknowledged potential difficulties that could arise if it ruled in favor of the publishers, such as requiring libraries to get permission to lend books that were printed overseas or requiring owners of foreign-made cars to get permission from the copyright holders of the software in their car before selling it on the used car market. However, it also recognized that the ruling makes price discrimination difficult, if not impossible.

Price discrimination occurs when producers sell goods to different consumers at different prices (but at the same constant rate). For example, students or senior citizens may get charged a lower rate for admission to a museum. Publishers use price discrimination to sell books at lower rates in countries with lower income levels, but retain their higher prices in countries with higher incomes. Price discrimination benefits both the publishers who can sell more books and the consumers in other countries who otherwise would not be able to afford the higher prices.

Writing for the majority, Justice Breyer acknowledges this point when he states:

“…Wiley and the dissent claim that a non-geographical interpretation will make it difficult, perhaps impossible, for publishers (and other copyright holders) to divide foreign and domestic markets. We concede that is so. A publisher may find it more difficult to charge different prices for the same book in different geographic markets. But we do not see how these facts help Wiley, for we can find no basic principle of copyright law that suggests that publishers are especially entitled to such rights.”

He goes on to state that whether or not price discrimination is allowed should be decided by Congress. He writes:

“…the Constitution’s language nowhere suggests that its limited exclusive right should include a right to divide markets or a concomitant right to charge different purchasers different prices for the same book, say to increase or to maximize gain. Neither, to our knowledge, did any Founder make any such suggestion. We have found no precedent suggesting a legal preference for interpretations of copyright statutes that would provide for market divisions… To the contrary, Congress enacted a copyright law that (through the “first sale” doctrine) limits copyright holders’ ability to divide domestic markets. And that limitation is consistent with antitrust laws that ordinarily forbid market divisions. Whether copyright owners should, or should not, have more than ordinary commercial power to divide international markets is a matter for Congress to decide. We do no more here than try to determine what decision Congress has taken.”

In a dissenting opinion, Justice Ginsburg comes to a similar conclusion about the likely impact of the ruling on differential pricing. She writes:

“Because economic conditions and demand for particular goods vary across the globe, copyright owners have a financial incentive to charge different prices for copies of their works in different geographic regions. Their ability to engage in such price discrimination, however, is under-mined if arbitrageurs are permitted to import copies from low-price regions and sell them in high-price regions.”

But how much of an impact will the ruling actually have on the ability of copyright owners to engage in price discrimination?

First, if publishers cannot prevent their books from being resold, their ability to offer different pricing to different consumers is constrained. However, some price discrimination can still occur with non-digital goods, such as books, as long as the price difference is less than the cost of transporting the goods. However, in our increasingly connected global economy, the cost of shipping goods internationally has dropped so this limitation is not as great as it used to be.

Second, some publishers may simply abandon certain foreign markets. If price discrimination is not possible, publishers may just stick with the higher-income markets that maximize their revenue. Alternatively, publishers may create inferior international editions to discourage imports but still grow their revenue. Either way, this would represent a loss for both publishers and consumers in un-served or under-served countries. This may also increase online piracy since consumers who are unable to acquire a good legally may resort to illegal means.

But what about digital goods? Price discrimination of digital goods in foreign markets will likely continue for two reasons.

First, copyright owners can use a combination of technological and legal means to allow differential pricing for digital content. On the technology side, region codes on DVDs and DVD players allow content producers to segment markets by geography. Similarly, various types of digital rights management (DRM) can be used to limit the sale of goods based on location, such as restricting online streaming services to IP addresses located in a specific country. On the policy side, restrictions on circumventing DRM in laws like the DMCA further protect the ability of content owners to offer differential pricing.

Second, differential pricing is still viable because many digital goods are licensed, not sold. Consumers do not necessarily own the music, movies, or e-books they download, but instead have a license to use that content according to specific criteria. Thus, in these cases, the first sale doctrine doesn’t apply.

Of course, the move to licensing digital goods also creates some problems. Since individuals cannot typically resell licensed goods (although companies like ReDigi are trying to change this), this eliminates the market for used goods which provides some access to these goods for some low-income individuals. (Certainly used goods markets are not the only way of creating access, and perhaps this problem can be alleviated with other policy solutions, but it is one solution that has been used in the past.)

Since much of the content produced today is now digital, and for the reasons outlined above, we should expect price discrimination for digital goods to continue. But this type of market segmentation will be dependent on technology, rather than a clear and consistent policy decision supporting regional price discrimination that is technology-neutral. Register of Copyrights Maria Pallante recently argued that Congress should “apply fresh eyes to ensure that the copyright law remains relevant and functional.” If Congress does take up this challenge, it should certainly consider new challenges that arise from both digital content and this recent ruling, including how to allow differential pricing to maximize public benefit.

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About the author

Daniel Castro is vice president at ITIF. His research interests include health IT, data privacy, e-commerce, e-government, electronic voting, information security, and accessibility. Previously, Castro worked as an IT analyst at the Government Accountability Office where he audited IT security and management controls at various government agencies. He has a B.S. in foreign service from Georgetown University and an M.S. in information security technology and management from Carnegie Mellon University.