Despite the looming menace of Hurricane Sandy, the Supreme Court is hearing arguments today in Kirtsaeng v John Wiley and Sons, a case that will have wide implications for how the United States handles copyright protections. Gabriel Rossman, an economic sociologist at UCLA and one of the unsung heroes of the blogosphere, has kindly agreed to share his thoughts with us.
In April, the Supreme Court granted cert to Kirtsaeng v John Wiley and Sons. In this case, Mr. Kirtsaeng purchased books in Thailand then imported them for resale in the United States, where the same books have a much higher cover price. The publisher then sued him for reimporting intellectual property. A petition is going around sponsored by “Citizens for Ownership Rights,” a coalition of internet freedom groups. The phrase “ownership rights” is a reference to the first sale doctrine which holds that if you buy a physical object with IP embedded in it you need permission to copy it but you don’t need permission to rent, sell, lend, or otherwise physically transfer the object. This is the doctrine that makes possible used book stores and libraries.
First sale is an important doctrine because by removing holdout rights for IP owners it dramatically lowers the transaction costs and barriers to entry for business model innovation. Most of us are familiar with the vast difference between the exhaustive selection of Netflix mail-order DVDs and the much more limited selection on Netflix streaming. This is entirely the result of the fact that Netflix has a legal right under first sale to circulate physical objects with embedded IP (ie, DVDs) whereas it has to negotiate with rights-holders for transformative uses (ie, streaming). As seen in the example of Netflix, first sale doesn’t translate particularly well into cloud and so there is a de facto diminution of the doctrine’s scope. (There was the possibility of a loophole to bring first sale to the cloud with Cablevision but so far attempts to use the precedent have lost in court).
In this sense I sympathize with the first sale camp in Kirtsaeng since I worry a lot about the de facto end of first sale as moving us away from arms-length exchange with low transaction costs to more strategic sorts of commerce with sluggish innovation and high barriers to entry. (Eg, pages 100–108 of my book). The thing is that the facts of the case actually make me sympathize with the publisher. Mr. Kirtsaeng wasn’t engaging in an innovative business model for books. Rather he was arbitraging price discrimination and these actions are not necessarily a good thing for either producers or consumers.
Price discrimination is to charge at each buyer’s reservation price rather than just having a single price for all. This especially makes sense in an international context where incomes (and by extension, reservation prices) vary dramatically. Thai college students are much poorer than American college students. If Wiley sets a price of $150 for a textbook, no Thai students would buy it. Conversely, if they set a price of $30, they’re leaving money on the table in the United States. The solution is to charge $30 in Thailand and $150 in the United States.
Now let’s imagine a world in which first sale doctrine is applied in Kirtsaeng. You would very quickly see large scale reimportation of discount textbooks and this would take a huge bite out of the domestic edition textbook market. The publishers would thus be unable to practice regional price discrimination. Their response will inevitably be to converge all prices on the rich country price, or just stop offering editions in middle income and low income countries altogether.
Notwithstanding the hopes of PIRG to the contrary, if Kirtsaeng prevails students in rich countries will still be paying $150 for textbooks (at least once the inventory available for reimportation clears). As for students in middle income and low income countries, one of two things will happen. Either they will do without textbooks or they will rely on pirated editions. On the margins, US trade diplomacy may be able to suppress piracy but it is the overwhelmingly strong natural market response in the absence of price discrimination. Indeed this is already how the modal act of piracy works. Piracy is at fairly low levels in the United States itself and most other wealthy countries but is at very high levels in poorer countries. As a Social Science Research Council report on the issue noted, this is mostly because prices are very high relative to income. In theory the solution to this is price discrimination, but that has proven difficult in practice. We have regional encoding on DVDs in order to allow price discrimination but software like DeCSS means this hasn’t worked very well and most studios don’t even bother enabling the region encoding on Blu-Ray. Similarly, laws against reimportation are intended to make price discrimination in things like textbooks feasible but Kirtsaeng would change that. This will only exacerbate the tendency of IP industries to make the rich country price the world price and then make Quixotic efforts to suppress the inevitable piracy that follows.
We’re in a pick your poison situation here. Either we have a legally enforced price discrimination scheme (with all the damage this does to the already weakened first sale doctrine) or we accept massive piracy in low and middle income countries. I’m honestly not sure how I hope SCOTUS rules in Kirtsaeng, but I find it difficult to get enthusiastic about either outcome.