April 1, 2013
The 'Kirtsaeng' Case and the Future of 'Retail Arbitrage'

By Cliff Ennico
SucceedingInYourBusiness.com

Last week, the U.S. Supreme Court handed down a much-anticipated ruling in the case of Kirtsaeng v. Wiley Publishing.  The ruling will have a major impact on eBay, Amazon and other online merchants, but will have a particularly significant impact on the practice of "retail arbitrage" - buying something in a brick-and-mortar store at retail, and then reselling it online for an even higher retail price.

Here's what happened.

For many years, textbook publishers such as Wiley Publishing and McGraw-Hill have sold the same English-language college textbooks in foreign countries for lower prices than they do in the United States.  Supap Kirtsaeng, a U.S. immigrant from Thailand, started an online business buying these "foreign editions" from retailers in Thailand and other Asian countries, importing them to the U.S., and then reselling them on eBay to U.S. students who were looking to pay less than the U.S. sticker price for the same books.  These resales cut significantly into the profit margins of textbook publishers like Wiley, who sued.

Copyright law in the U.S. has long held that once a company sells a copyrighted product, the purchaser has the right to resell it later.  Kirtsaeng argued that this "first sale" rule, which allows the resale of U.S. products, should also protect the resale of foreign-made goods.  The Supreme Court agreed with Kirtsaeng.

Since the dawn of the Internet, manufacturers of high-margin goods have been trying to block resales of their merchandise on eBay, Amazon and other online retail sites.  The Kirtsaeng case removes one of their biggest weapons - the argument that such resales somehow constitute "copyright infringement" or "trademark infringement," and that websites (such as eBay and Amazon) that facilitate such sales are therefore engaging in "contributory infringement" of the manufacturer's copyrights or trademarks.

So is it safe to say that "resale arbitrage" - the buying of goods at retail and reselling them online at a higher retail price - is now officially legal?

Not so fast . . .

An important point in the Kirtsaeng case was the fact that Kirtsaeng's overseas textbook purchases were perfectly legal.  A U.S. college student hitting the beaches on Phuket Island in Thailand over spring break could easily purchase a textbook there and bring it back to the U.S. without any hassle from the Customs Department.

But what if the purchase violates other U.S. laws?  Certainly the Kirtsaeng case would not allow an eBay or Amazon seller to buy goods overseas that turn out to be counterfeit, or which cannot be imported legally into the U.S.

A more difficult case - and one I think we will be seeing lots of in the coming years - is the situation where a manufacturer prohibits its retailers from engaging in wholesale transactions at all.  For example:

• What if a manufacturer's contract with a retailer specifically prohibits them from selling to eBay and Amazon merchants?
• What if a manufacturer's contract with a retailer prohibits them from selling at wholesale, or to someone they have reason to believe has the intent to resell them at the time of purchase (e.g. someone buying five diamond bracelets from a jewelry store every week)?

If you think such contracts don't exist, try going to your local McDonald's and asking to buy 100 Happy Meal toys promoting the new animated movie The Croods (perfect merchandise for an eBay seller) without actually buying 100 Happy Meals - see what happens.  Even if you buy 100 Happy Meals, the store manager is bound to ask you some pointed questions.

It is illegal for a manufacturer to prohibit a wholesaler or retailer from reselling their goods below a minimum price, or (in some cases) over a maximum price.  This is called "resale price maintenance" and is prohibited by U.S. antitrust laws.

But the antitrust laws are fuzzier when it comes to manufacturers prohibiting retailers from engaging in wholesale transactions at all, without regard to price. 

At one time (pre-1980), the Supreme Court took the position that "resale price maintenance" by manufacturers was "per se illegal" under the antitrust laws - they simply couldn't do it.  Under more recent cases, however, the Court has softened its position and said that "resale price maintenance" cases are subject to a "rule of reason" - whether or not it is illegal depends upon the facts and circumstances of each individual case.

So my personal prediction is that the Kirtsaeng case, while extremely favorable for online retailers, does not resolve once and for all the legality of "retail arbitrage."  It merely shifts the legal arena from the field of trademark and copyright law - where the manufacturers' positions were weak anyway - to the field of antitrust and trade regulation law.  A Supreme Court sympathetic to big business - especially if it can be shown that "retail arbitrage" activities are costing jobs and putting U.S. manufacturers at a disadvantage to foreign competitors - might be more sympathetic to big companies that want to keep their merchandise off of eBay and Amazon.

Cliff Ennico (SucceedingInYourBusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller's Tax and Legal Answer Book, and 15 other books.  COPYRIGHT 2013 CLIFFORD R. ENNICO.  Permission granted for use on DrLaura.com.


Posted by Staff at 12:04 AM