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The 9th Circuit Court of Appeals has ruled that the First Sale Doctrine does not apply to goods copyrighted for sale abroad that are gray marketed back into the United States. The trick is in interpretation of origin of manufacture, IE  “lawfully made under this title” translates into “legally made and sold in the United States.” While it is legal to resell imported goods, the first sale doctrine only applies if they were originally made and sold in the United States.  There is no doubt in my mind that the Supreme Court will have to review it since this is a wide reaching reinterpretation of “lawfully made under this title.” CostCo like other discounters will often buy using the vendor unauthorized venues referred to as the gray market. The problem with gray market business, from a vendor perspective, is that the vendor often has to respond to local distribution costs, laws and other obstacles by selling products into specific markets at differing prices – then the players in those markets turn around and sell them back to discounters, such as in the case above where a UK distributor sold goods to a partner in Malta, who then sold them back into the North American market.

Where this runs into trouble is where some partners are given exclusive or special license, and in turn those partners have special responsibilities in those markets. Some examples in the tech market are localization, support and returns management.  Here is a very concrete example. Mirye Software is the exclusive English publisher of Shade 3D, one of the oldest 3D products on the market today and the dominant 3D modeling, animation and rendering product in Japan. Some responsibilities of Mirye include translating and localizing Shade into English, marketing Shade, providing technical support to English speaking Shade customers and also managing channel issues for Shade. Now if E Frontier began selling an English capable version into China, and the Chinese partners sold these abroad, Mirye could easily be saddled with a customer base to support (costs) without actually having made the original sale.

Some games companies have come up with various tricks to deal with these problems. For example, if you bought a game import outside of your region and go to activate your game online, it would most likely fail, because the game company can match your region with the type of activation code you have. However this has problems too. Lets say I purchase a game in English, and want my friend who is living abroad in China to be able to play it. He may have a US residence, and even US credit cards, but there could be some indicator that shows his origin outside of the US – and he doesn’t want to play the Chinese version of the game because he can’t read Chinese. It is the same logic as the also flawed regional encoding system of DVDs to DVD players.

I can fully understand the problem from a vendor perspective.  Also – this may also hide something more insidious when applied to the medical and pharmaceutical industries which are doing their best to stop the gray marketing of their products into the United States.  I don’t have an easy solution to this – the courts have so far applied a very blunt and damaging instrument to it.