A Supreme Court Case that Could Put Retailers at the Mercy of Manufacturers

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As much as we like to imagine business happening in a free market, commerce is only possible because of the law. One of the most important laws to protect business is copyright. I can't take the articles off this site and republish them as "The Botley Bool," something the Gardner brothers are no doubt very thankful for.

One important piece of copyright law is the doctrine of first sale. What it means is that if I buy a book or a CD, I have the right to sell or give it away however I see fit. The publishers can't do a thing about it, even though they own the copyrights. This doctrine is responsible for the phenomenal growth of eBay (NASDAQ: EBAY), which posted a profit of $3.2 billion last year.

A recent court case, Kirtsaeng v. John Wiley & Sons (NYSE: JW-A), has placed that doctrine in jeopardy. Supap Kirtsaeng, a graduate student and a native of Thailand, enlisted his family back home to buy textbooks from his native country, where they were much cheaper, and resold them on eBay, pocketing around $1.2 million.

Wiley sued Kirtsaeng for copyright infringement, but Kirtsaeng countered that he was allowed to resell the books due to the first sale doctrine. The 2nd U.S. Circuit Court of Appeals decided that the first sale doctrine only applied to works created in the U.S.

The case has been appealed to the Supreme Court, which is scheduled to hear the case later in October. If the Supreme Court upholds the lower court's decision, it will be a major reversal in the way we've handled copyright law in the past.

Like it or not, we have a globalized economy. Just about anything we buy was either made overseas or has parts within it that were made overseas, including the device you're reading this on. If the court rules in favor of Wiley, a lot of companies will accelerate the process of moving overseas just to take advantage of the copyright law against sellers who do things the companies don't like.

The law will make it difficult for eBay and Craigslist to operate, for one thing. The sites will have to constantly police their offerings to make sure they're not running afoul of copyright laws. Do you really want eBay to cancel your order just because some publisher with an obsolete business model served the site with a takedown notice?

Even Amazon (NASDAQ: AMZN) isn't safe. Although the company posted a profit last year of $631 million, with sales of $48 billion, the company sells used goods as well,; this means that Amazon would have to police what its user base was selling  through its Marketplace. Amazon, however, hasn't specified in its 10-K how much of its sales come from used items, but complying with the new ruling would probably take a lot of time and money.

Don't think companies selling new stuff are exempt. Manufacturers could use this against retailers who they think aren't charging enough for their products. Omega, a manufacturer of expensive watches, sued Costco (NASDAQ: COST) because it was selling Omega watches below a price the company found acceptable. The Supreme Court heard the case in 2010, but ended up deadlocked.

If the Supreme Court upholds the lower court's decision, it will put retailers at the mercy of manufacturers. The doctrine of first sale is what makes retail possible, and depending on how the court rules, it could make doing business, both for individuals clearing out their closets on eBay and big box retailers alike, very difficult and more expensive.

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ddelony has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Motley Fool newsletter services recommend Amazon.com, Costco Wholesale, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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