by Eve Gray and Tobias Schonwetter
The Copyright Amendment Bill of 2017 currently undergoing the consultative process in South Africa, proposes overturning the longstanding prohibition against parallel importation provided for in the present South African legislation, an action that could undo more than a century of colonially-based market manipulation. Clause 11 of the 2017 Bill proposes the insertion of the following Section 12B into South Africa’s Copyright Act:
(1) Notwithstanding anything to the contrary in this Act, the Trademark Act, 1993 (Act No. 194 of 1993), and the Counterfeit Goods Act, 1997 (Act No. 37 of 1997), the first sale of or other transfer of ownership of a transferred original or copy of a work in the Republic or outside the Republic, shall exhaust the rights of distribution and importation locally and internationally in respect of such transferred original or copy.’’
This article reviews the proposed elimination of parallel import restrictions (PIRs) in the light of the South African legislature’s revision of copyright law in the draft Copyright Amendment Bill of 2017, currently under discussion with stakeholders. The issues are explored against the background of a colonial history, involving the power politics that still prevail in the former British colonial territories. As a hangover of British imperial politics, most countries in Africa have prohibitions against parallel importation.
The Background – What is Parallel Importation?
For those unfamiliar with the terrain, the question of parallel importation arises at the boundaries of copyright law and commercial practice across international markets. It is a term applied to goods protected by IP rights, including copyrights, and produced with the permission of the rights holder overseas, but then imported into another country without the permission of the rights holder in that country. This article will focus on the parallel importation, or the prohibition thereof, in the context copyright protection. If national copyright legislation contains PIRs — as is the case with most ex-British colonies, including South Africa (see s23(2) of the South African Copyright Act as interpreted by the courts in Frank and Hirsch (Pty) Ltd vs A Roopanand Brothers (Pty) Ltd 199) — this gives copyright holders the right to control importation of their works, enabling rights holders to charge different prices for different countries and to vary the quality of the products in different countries – in other words it provides for price discrimination based on geography. Importantly, PIRs are not required by international copyright instruments such as the Berne Convention and the TRIPS Agreement. This geographical discrimination is underpinned by the idea of ‘territorial rights’; the ability to provide different pricing and sales conditions in different countries. It is PIRs that allow for the enforcement of this price discrimination across different territories.
What happens in practice is that the publisher who has the right to publish a work issues a licence to a publisher or distributor in another country to sell a version of the work only in that territory. For example, a British publisher could conclude a deal with an Indian publisher allowing the Indian publisher to manufacture and distribute a college textbook in India and this agreement might include the right to produce a lower quality product to be sold at a lower price across India. Given the size of the Indian market, the bulk price per copy is likely to be low and the selling price much lower than the price charged by the British publisher in the UK, but still allowing for profits for both parties, given India’s population of around 1,4 billion people.
What is being achieved through this practice is that differential prices are being set in different countries, in markets in which the size of the population in a particular market is a determining factor in book pricing. However, in the case of the British/Indian deal, this could mean that if the Indian version books were sold across borders at the Indian price, this could undercut the profits of the British publisher in the target country as the British publisher will no longer be able to sell its own version at a higher price; an issue that has in fact been challenged by a recent judgement in a US court case as discussed below.
Prohibiting parallel importation in these cross-border cases runs counter to and effectively overrides the doctrines of ‘first sale’ and ‘international exhaustion of rights’ in copyright law. What these terms mean, in essence, is that, once a copyright protected work has been legally sold, the copyright owner can no longer control subsequent sales and distributions; his or her rights are said to be ‘exhausted’.
Yet, prohibition of parallel importation remain common in British ex-colonial territories, overrides these limitations, thus permitting differential pricing across different territories, blocking the first sale doctrine and denying exhaustion of rights. It means that publishers can profit through continual global price discrimination, retaining control of the sales conditions of their products in the different countries they supply. And this price discrimination does not necessarily serve the needs of the different markets they serve: for example, many very poor African countries may land up paying high prices simply because these markets are not large enough to merit low-cost territorial deals.
The kick-off point for this discussion is a US Supreme Court judgment in 2013 — the case of Kirtsaeng vs Wiley — that reversed a long history of legislative inertia in this field. Rejecting the legal basis of PIRs and setting this finding against the background not only of the law, but also of technological developments in copyright industries, has proved a game-changer.
Given the origins of the practice of territorial rights manipulation in the history of the British Empire, the proposed revision in the Bill draws attention to a longstanding issue that is not only a matter of copyright law. It is also overdue for attention in the context of the fierce student protests that have been raging in South African universities in the #Rhodes Must Fall movement with its demands to #Decolonise the University, as well as raising questions relating to #FeesMustFall student activism that challenged the high cost of education, including the cost of textbooks in the country. In student debates the questions that have arisen are why textbooks are very much cheaper in some countries than in South Africa, and why our students are not able to buy these books in South Africa for these cheaper prices? Also, what implications does the prohibition of parallel importation have for the fragmentation of trade in African publications across the different countries on the continent? Finally, how would the abolition of PIRs affect the South African publishing industry?
Reviewing parallel importation as an issue in international publishing reveals its very colonial origins and the extent to which this colonial manipulation of the market still lingers.
What does this mean in relation to the publishing industry – especially in Africa – and the international trade in books? What is meant by the ‘first sale’ and the ‘exhaustion of rights’? What are the implications of ‘exhausting the rights of distribution locally and internationally’? And what are ‘territorial rights’? In particular, what would all this mean in terms of the pricing of books, and greater accessibility to affordable publications for students and general readers?
These issues can be unpacked by reviewing what was at stake in a US court case concerning the sale of books imported into the US at considerably cheaper prices than the US prices for the same books. It was this case, in fact, that led to stronger demands for the right of parallel importation – the free trade in books across borders.
Kirtsaeng vs Wiley (2013) – a Case that Changed the Playing Field
The decision to effectively move for the abolition of parallel importation prohibitions in South Africa has thus almost certainly been influenced by the judgement in the US Supreme Court case of Kirtsaeng vs Wiley, delivered in March 2013, which at long last overturned a much neglected but controversial aspect of global trade in copyright goods, long entrenched in US (and UK) copyright practice – the question of first sale rights and exhaustion of rights in international territorial deals negotiated between large US publishers and developing world markets.
The long persistence of this prohibition in the copyright legislation of ex-British colonies and the US is essentially a colonial hangover involving mostly large UK and US publishers using the imposition of nationally-based differential pricing as a way of maximising profits across the world.
The Kirtsaeng case involved a Thai student, Supap Kirtsaeng, who, when he arrived in the US, found that his college textbooks were absurdly expensive compares to the same books in his home country. So he contributed to funding the cost of his studies in the US by selling textbooks that he had purchased legally in his home country. (These were not pirated books). The fact that the books were cheaper was the result of territorial rights deals struck between US and Asian publishers. These deals would have involved transactions governed by contracts – rather than copyright law – between the originating publisher in the US and the local publisher.
Such a deal would have authorised the right to reprint a set number of titles of a particular book in order to create a local edition of this title. The books would be sold under the imprint of the local publisher. However, such a deal would have been constrained by Wiley’s control over the territory in which these books could be sold.
Kirtsaeng was sued by US-based global publisher Wiley, at first successfully, until the Supreme Court reversed the preceding judgements in 2013, with some harsh words for the US publishers’ expectation that it was their right to control global pricing to enforce different prices in different regions of the world and to try to block trade in these lower-priced products across other countries. One comment by the judges was that second hand car sales across different countries would become impossible if such conditions were applied given the quantity of copyrighted computer code contained within modern cars.
This practice is also in extreme contrast to the plea by Francis Gurry, the Director-General of WIPO, for a world that could not only provide a seamless global environment for copyright and the trade in creative goods, ensuring that creators can be rewarded for their work, but could also leverage the potential for digital media to democratise culture. The point is that the fragmentation if markets that is caused by this practice, runs counter to the fluidity and flexibility of modern markets and their technologies.
An Imperial Hangover
This territorial dispensation in the publishing industry in the English-speaking world has its roots in an imperialist/ colonial hangover entrenched in the early 20th century. Early copyright law in the colonial context incorporated ‘Imperial Copyright’, which assumed British control over publication and dissemination in the colonial empire. In this environment, copyright legislation functioned to protect the consumption of British copyright products in colonial subject territories. This thinking was carried over into national legislations when ex-colonies, such as South Africa, drew up their own copyright laws in the form of ‘His Majesty’s Imperial Copyright Act’, as the 1911 Act was named. The purpose was to protect and perpetuate the dominance of British goods across all its dominions.
The ongoing history of this story of colonial dominance is quite extraordinary in terms of the casual assumptions that underpin it. In 1947, an updated version of this ‘ownership’ of colonial markets was entrenched in the British Traditional Market Agreement (BTMA). The agreement, which addressed the growing rivalry between the long-established British publishing industry and the threat of the burgeoning US industry, embodied an understanding brokered between British publishers that they would not license American publishers’ books for the British market unless rights were granted to all the colonies or former colonies of Britain, regarded as Britain’s ‘traditional market’. In other words, Britain behaved as if it ‘owned’ its colonies and ex-colonies and their markets. An American publisher granting a publication licence to a British publisher would have to extend this licence to these territories, or there would be no deal. In the same way, a British publisher licensing the UK edition of an African publishers’ title would often insist in ‘rest of the world’ rights, or no deal, something that lingers on to this day.
It is also interesting to note that the date of the BTMA, shortly after World War II places these events in the same time scale as the early foundations of British dominance of the the commercial scholarly journal system were laid by Robert Maxwell and the British Information Services. Control of scholarship and communications was clearly an important strategic imperative in a changing high-technology post-war world, where knowledge was becoming ever more valuable. What needs to be acknowledged now is that any provision for copyright and international trade has to take into account that the world has changed even further and that the book industry is operating in very different circumstances as print and digital publications moves towards greater integration of different media, facing very rapidly changing business models. This makes it even more important to have an open system of international trade in the creative industries.
In the longer run, as the US publishing industry grew in size and strength this became an agreement in which the British claimed a traditional right to markets in its ex-colonies and the US could operate in the large US market, its dependencies and the Philippines. The ‘rest of the world’ was an open market.
The End of the BTMA – A Shift to Contract
The BTMA became the subject of an anti-trust investigation by the United States Department of Justice in 1974. It was formally ‘terminated’ in 1976 by British publishers, who subsequently and vehemently insisted that there was no longer a ‘gentleman’s agreement’ to divide up the world markets in this way. However, both sides largely continued these practices through individual licence agreements and contracts, and through the mutually agreed practices of the British and US branches of multinational companies, so that the pattern persisted until at least the end of the 20th century. The prohibition of parallel importation became an important tool in these practices.
Essentially, two dominant publishing powers had agreed to carve up the world market between them, formally or informally. These practices also represented a shift from copyright to contract and licence to control international markets. The anti-competitive aspect of these practices has been vigorously debated in the context of the patenting practices and the ‘evergreening’ of patents in the pharmaceutical industry, and territorial limitations – or ‘geoblocking’ – on the release of digital products, but much less in publishing.
The history of the BTMA is illuminating, therefore, because it was simply the most overt form of a scheme that persists into the present: the leverage of scarcity market models for market dominance and the maintenance of high prices wherever possible through a system of ‘territorial rights’. yet very few people have paid much attention to this.
Rather than pricing products at the median price across markets and trying to attain affordability together with economies of scale, the publishers preferred to preserve price levels that were as high as possible in their richer Northern markets and then, if desirable or necessary, negotiate special deals for larger markets which could not pay the premium price. In these markets, predominantly in South and East Asian markets, profitability was achieved through very high volume sales at low prices.
The problem of Emerging Economies
In the copyright laws of ex-colonial countries, South Africa included, these territorial practices are protected by the prohibition of parallel importation, carried over from the concept of British imperial copyright.
This essentially violates the principle of exhaustion of rights after the first sale, substituting it with ongoing contractual control of price and distribution by the originating publisher. Hence the problem with a South African bookseller wanting to buy the much cheaper Indian editions of US and UK university textbooks into the South African market. The Indian publisher would also face a clause written into the contract for the Indian edition, limiting sales to an agreed territory – in other words, the first sale exhaustion of rights is being over-ridden by contracts and PIR provisions in national legislation.
The Potential Impact on Publishing Across Africa
These practices also give pause to generally reflect on the state of cross-country publishing in Africa, on a contact with a colonial legacy of illogical national boundaries. In Africa, the market for books has been fragmented by decades of territorial licensing between African publishers and British and US publishers in order to get international market reach for the African publisher. If an African publisher has a title with potential in the wider market, it will most often be licensed to a UK or US publisher, who would claim ‘rest of the world’ rights, while other African countries would have to buy this UK ‘world’ edition rather than the original African edition. And so, in the 1990s, for example, the African Literature department at a local university often found itself having to license photocopies of prescribed novels by African authors, as they were simply not readily available in South Africa, or only on special order at unaffordable prices, because British publishers were often reluctant to bother with distribution in as small a market as South Africa, and also because the international edition was simply too expensive.
The questions of first sale and the exhaustion of rights addressed in s12B of the Bill will effectively undo the prohibition of parallel importation that currently protects these practices and will allow booksellers to order books from the countries and editions that offer the best value.
The current market mechanism results in commercial illogicalities. While one could make the assumption that territorial licences are exercised in order to rationalise prices in line with circumstances in different countries, this is by no means always the case. While low prices have often been negotiated for territorial deals in the very large Indian (and other Asian) markets, these deals have not been extended to Africa, where lower prices are much needed, but markets are smaller and more fragmented. Nor do publishers authorise the sale of cheaper Indian editions into the African market.
Instead, International Student Editions, discretionary lower-cost editions – but more expensive than the Indian versions – are offered by UK and US publishers for some of the larger-volume titles in these markets, and for the rest, students have to pay the full US or UK price for their textbooks – something applying particularly to upper-level specialist textbooks, which tend to be excluded from international rights or discretionary price reductions in these smaller markets.
Another discretionary practice was a British ‘charitable’ scheme for the provision of heavily discounted books into African markets, the Educational Low-Priced Book Scheme (ELBS). As a charitable initiative, these books were bought at wholesale prices from British publishers and sold in some African countries (excluding South Africa) at very heavily discounted prices. This effectively undermined regional publishing, as publishers in more affluent African countries such as South Africa could not compete with the low pricing levels. And so, for example, as an unintended consequence, an Africa-relevant obstetrics textbook could not sell across African borders in the mid-1990s, as the British edition, with little African relevance, was much cheaper.
While the international publishing industry has long regarded these practices as a natural right, it is interesting to note the tone of the Kirtsaeng vs Wiley judgement, which draws attention to the wide-ranging implications of the overriding of first sale rights in a world in which manufacturing of print and electronic goods takes place across the globe and in which IP rights pertain to a wide array of products. ‘[T]he Constitution’s language nowhere suggests that [the] limited exclusive right should include a right to divide markets or a concomitant right to charge different purchasers different prices for the same book, say to increase or to maximize gain’, the judgment argued.
From an IP perspective, this industry manipulation of territoriality raises the further questions of first sale rights and the exhaustion of rights at a national level in the context of the rise of new media and changing market circumstances. The ‘first sale right’ that was at the heart of the Kirtsaeng case is the right of the purchaser of a copyrighted product to own it fully once it has been legally purchased. This means being able to sell it to someone else, lend it, rent it, or give it away. Thus, you can sell on not only a book, but also a CD, or a car stuffed full of computer programmes that you have legally purchased; a library can lend books without worrying about where they were manufactured; and video rental companies can hire out movies. These are free of PIRs. Why should books be treated differently? the judges in the Kirtsaeng case asked.
An International View on the Abolition of PIRs – the Case of Australia
Now, with South Africa proposing the abolition of PIRs from our copyright legislation, and the Productivity Commission in Australia producing yet another report that argues for the lifting of parallel import prohibitions on books, a closer look is needed at the impact that this has had in other countries: will it lead to higher prices, or set up a more competitive local industry at a time of very rapid digital change? And what impact has the Kirtsaeng case had on changing practices in international trade?
Although publishers (and Australia is no exception in this regard) have tended to raise vehement objections to the lifting of restrictive copyright practices, the questions that have to be asked require a realistic evaluation of the likely impact in the light of current market circumstances. First of all, book markets are currently made up of a mixture of print and digital products, so that a consumer already has the choice to buy a book from a local bookseller, or order a digital version from an overseas provider. The supply chain includes services for printing on demand across national borders, with a digital file in one country being printed – via Lightning Source, for example – in another. Altogether, market possibilities are expanding, but PIRs could threaten this, as is witnessed by the conflict about international pricing of Kindle books.
The biggest fear of publishers appears to be that the removal of PIRs would be that the market would be flooded with very cheap goods, to the detriment of the local publishing industry. The Australian Productivity Commission, after an extensive financial analysis of the market conducted by Deloitte in 2012, concluded that, in a comparison between New Zealand, which removed PIRs in 1998 and Australia, this appeared not to be so. Overall, the finding was that Australian booksellers could have sourced and supplied international trade titles from overseas for less than what they were charged for by Australian publishers. This at a time when Australian book prices were between 20 and 33 per cent higher than the UK for the same titles. Another finding was that ‘PIRs ‘impose an implicit tax on Australian consumers that largely benefits foreign copyright holders.’ Most of all, however, it would be very instructive to evaluate whether there would be greater potential for the expansion of publishing across southern Africa, with the removal of PIRs and the potential for greater cross-country collaboration for market growth using mixed-media strategies.
Overall, therefore, it looks as though abolition of PIRs would be of benefit, rather than harming the book trade and its customers. In Africa, I would argue. It would almost certainly increase trade and broaden the reach of African books and other copyright goods across the continent. A detailed study of this tangled web is well overdue.
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