Justices uphold 'gray market' Copyright protection on exports limited by Supreme Court ruling

Source of lower-priced goods

'Exclusive right to distribute' curbed

March 10, 1998|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court gave a significant boost yesterday -- the second in the past decade -- to the multibillion-dollar "gray market" that brings in brand-name goods from overseas for sale here at bargain prices.

In a unanimous decision, the court ruled that U.S. manufacturers who have copyrights on their goods lose the right to control the distribution once they sell the goods to overseas buyers.

The "gray market" has thrived as a source of lower-priced goods for mass-retailer discount stores like Kmart and Price Clubs. The Supreme Court ruled in 1988 that U.S. trademark laws generally could not be used to block the import of brand-name goods that were bought abroad.

After losing the trademark battle, U.S. manufacturers turned to the copyright law, hoping that the protections on their product labels would give them the sole right to determine whether their goods could be imported.

Yesterday, the court largely blunted that alternative strategy. The U.S. right to sell a product on which a copyright has been issued applies only to the first sale, the court declared. U.S. manufacturers who choose to make that first sale abroad can not stop the return of those goods to the United States for resale, the justices said in an opinion by Justice John Paul Stevens.

For owners of copyrights, the court declared, "the exclusive right to distribute" is a limited one. After the first sale, any later buyer -- whether a U.S. company or a foreign one -- is entitled to sell that item in the United States without the consent of the copyright owner, it added.

The case involved a U.S. company, Quality King Distributors Inc. Quality King was accused of copyright infringement for buying hair-care products overseas and bringing them back to the United States for sale at discounted prices at drugstores and other retail outlets.

Those products were made by L'anza Research International Inc., which holds copyrights on the specific labels it puts on its products. It refuses to sell its products in this country to anyone other than beauty salons, barber shops and professional hair-care colleges, thus avoiding the mass market of discounters.

But L'anza also sells its goods overseas. One of its shipments was sold to a British company for distribution in Malta and Libya, at prices 35 percent below L'anza's U.S. prices. L'anza assumed that the goods would be resold only overseas.

But some of those items were bought by Quality King Distributors and, without L'anza's permission, brought back for sale in the United States. L'anza sued after discovering some of its products on sale at a drugstore in Carmel, Calif. The company won its case in lower courts, but the Supreme Court overturned that result.

Pub Date: 3/10/98

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