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Federal Court Accepts Unique Copyright Attack on “Grey Market Goods”

July 1989

The problem of “grey market goods,” also known as “parallel imports,” is pervasive in international trade. Grey market goods are products lawfully manufactured outside the U.S., and then imported into the U.S. without the permission of owner of the U.S. trademark, copyright or patent associated with the product. In the most common situation a U.S. dealer finds that, due to favorable exchange rates or for other reasons, it can obtain a product overseas for less than the price charged by the authorized U.S. distributor. The dealer then imports the product into the U.S., undercutting the price of the product sold by the authorized U.S. distributor.

The application of U.S. copyright law to the grey market sale of copyrighted works requires that an apparent contradiction be resolved. One provision in the law states that the owner of a copyright has a “bundle” of exclusive rights, including the right to distribute copies of the copyrighted work. Another provision of the law — the so-called “first sale” doctrine — states that once a copyrighted work is sold, the owner has no right to limit resale of the work.

The courts have resolved the inconsistency between the “distribution right” and the “first sale” doctrine by creating a “bright line” test: generally speaking, if goods are manufactured and first sold outside the U.S., the U.S. copyright owner can restrict their importation into the U.S. However, if the goods are first sold inside the U.S., and later sold outside the U.S. by a legal purchaser, the copyright owner cannot object to the sale of the goods back into the U.S. See, e.g., BMG Music v. Perez , 952 F.2d 318 (9th Cir. 1991), cert. denied , 112 S.  2997 (1992).

The case of Red Baron-Franklin Park Inc. v. Taito Corp. presented an interesting twist on the law of grey market goods. Taito manufactured a video arcade game called “Red Baron,” for which it owned the copyright. Red Baron operated video game arcades, where games manufactured by Taito were available for play. The key circuit boards for the games were manufactured in Japan, and were purchased by Red Baron in Japan for less than would have been charged by Taito’s U.S. distributor. In the classic “grey market” scenario, they were then sold in the U.S. at prices that undercut the prices of Taito’s authorized U.S. distributor.

Unfortunately for Taito, the trial court refused to apply the legal distinction discussed above. The court held that even though the boards were manufactured outside the U.S., the “first sale” doctrine protected Red Baron, and Taito could not use the Copyright Act to prevent imports of the circuit boards. Taito appealed the trial court’s ruling, but did not argue what might have been its strongest argument: that the trial court was wrong in concluding that the “first sale” provision outweighed the “distribution right” under the facts of the case.

Instead, Taito argued that in addition to a “distribution right” it had a “performance right” that was being infringed every time a video game was played using the circuit boards. Taito argued that the “first sale” doctrine did not extinguish its “performance rights,” and therefore Red Baron was an infringer. Taito had made this argument in the trial court, but the trial court judge had not addressed it.

Remarkably, the Appeals Court accepted this argument. The court held that (i) the video game was an “audiovisual work,” protected by copyright law; (ii) Red Baron was engaged in “public performances” of this work; (iii) the right of public performance was not lost by reason of the “first sale” doctrine; and (iv) accordingly, Red Baron had infringed Taito’s exclusive right of public performance.