Importation of “Gray” Market Goods Allowed

By Robin D. Gross
March 1998

Last year, the U.S. Supreme Court held the Copyright Act does not allow copyright owners the right to prevent the importation of gray market goods, also known as parallel imports. Quality King Distributors, Inc. v. L'anza Research International, Inc. 1998 WL 96265.  In its decision, the Court settled this hotly contested dispute as to whether the copyright "first sale doctrine" applies to copies of a work imported back into the U.S. after being legally sold to a foreign distributor.  The first sale doctrine entitles the owner of a particular copy to sell or dispose of that copy without the permission of the copyright owner.

The case stems from a California company, L'anza Research, who manufactures and sells hair care products in the U.S. and abroad.  Copyrighted labels were placed on L'anza's products and shipped overseas to a U.K. distributor where they were then to be sold to consumers in Malta.  The prices L'anza charges foreign distributors for its products average 35 to 40 percent lower than the prices charged to domestic distributors.  A problem arose when the distributor in Malta instead sold the products to Quality King Distributors, a New York company, who arranged to ship the goods back to the U.S. and sold them to unauthorized distributors at discounted prices.

L'anza filed suit against Quality King, alleging that it's actions violated L'anza's exclusive rights under the Copyright Act, 17 U.S.C. §§ 106, 501, and 602, to reproduce and distribute the copyrighted material in the United States.  Both the district court and the Ninth Circuit agreed with L'anza, rejecting Quality King's "first sale" defense by concluding that § 602(a), which grants copyright owners the right to prohibit the unauthorized importation of copies, would be meaningless if § 109(a) provided a defense.

In its unanimous ruling the Supreme Court reversed, holding the first sale doctrine is applicable to imports.  "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," Justice John Paul Stevens wrote for the Court.

Rejecting L'anza's argument that permitting a first sale defense would undermine copyright owners' control over domestic distribution, Justice Stevens held, "Whether or not we think it would be wise policy to provide statutory protection . . . is not a matter that is relevant to our duty to interpret the text of the Copyright Act."

SCU copyright law professor, Howard Anawalt agreed with the court's decision.  "The court made a straight forward interpretation the Copyright Act.  Even though something may be an entirely proper policy for the country to have, it would be a huge distortion of current U.S. copyright law to exclude [gray market goods] for this reason," Anawalt commented.  "Congress can always change the copyright law, and I wouldn't be surprised to see an amendment come up that does just that," he added.

SCU intellectual property professor, Donald Chisum said the problem of importing gray market goods or parallel imports has been a recurring for years.  "The question is really to what extent can people use intellectual property laws to shore up exclusive distribution schemes," Chisum stated.  He added the Court's ruling was extremely narrow so its effectiveness will be narrow as well.  "The ruling did not speak broadly on the problem of parallel imports so it has never definitively been resolved," said Chisum, who also indicated that he expects the practice to continue.

© 1998 Robin D. Gross