Friday, July 30, 2010

Cutting edges

Most teachers of introductory economics ("Econ 101") touch on price discrimination practices and also on copyright controversies. But I did not know that in the "real world" these are joined. And the inevitable litigation has implications for eBay, garage sales and your local public library. Today's WSJ includes this column by Eric Felten. Here is the story:

Omega, you see, sells its watches for far less money in some countries than in others, a common enough practice known to economists as "geographical price discrimination." The U.S. market will generally bear more than the market in a Latin American republic, and so Omega offers its goods to distributors in places such as Paraguay for less than it does to American distributors.

Which is where the grey market comes in. Given the difference in prices, there is a tempting arbitrage opportunity in importing Omega watches from Paraguay to the U.S. It is just such watches that Costco bought from a stateside importer, allowing the warehouse store to offer an Omega Seamaster for $1,299 when the brand preferred them sold in the U.S. for $1,999.

Omega eventually sued, after some savvy planning. The company couldn't complain that Costco was peddling fakes—the watches were authentic goods. Nor did U.S. trademark law give the Swiss company the power it needed to block the sales. And so Omega crafted a copyright strategy. They fashioned a small globe logo and copyrighted the device in the U.S. By engraving the tiny logo on the back of the watch, Omega could claim that it created a copyright in the watch as a whole, one that would give the company more control over when and where the watches are sold.

The appeals court ultimately agreed with Omega, and in so doing limited a long-standing principle of U.S. law known as the "first sale doctrine." The doctrine holds that, once a copyright holder sells a copy of his work, he loses any say in what the buyer can do with that particular copy. That doesn't mean making extra copies—by buying a book I don't gain the right to publish a new edition of it. But I can turn around and sell my copy of that book to whomever I choose without having to acquire the permission of the copyright holder.

The appeals judges decided that, since the first sale of the Omega watches in question happened outside of the U.S., America's first-sale doctrine doesn't apply. It is a small technicality that, in a global economy, could have large implications.

Constrain the first-sale doctrine and you throw a wrench into the business of used-book stores, garage sales (including the electronic garage sale that is eBay), and any and every sort of secondhand shop. And yes, even public libraries might find themselves facing the challenge of figuring out which books on the stacks were first sold in the U.S., and which were first sold abroad.

No doubt Omega was smart to turn to copyright law, given what an increasingly powerful tool it is. The number of years copyright lasts has been repeatedly lengthened, and juries have been known to hand down fines in the millions for illegally downloading a few dozen songs.

Fancy wristwatches are peculiar international signals of status. This is increasingly exposed for what it is because wearers of an Omega Seamaster are ever more likely to be carrying a smart phone that tells time (and much more). While there are cutting edge folks designing and building ever finer smart phones, there are also cutting edge lawyers watching out for the brands and the profits of the much more traditional companies.