Challenge on Textbook Pricing

Textbook companies have faced a number of challenges in recent years, such as open course content, an increasingly vibrant used-book marketplace, new publishers proposing alternative pricing models, and new federal rules requiring the unbundl

November 22, 2010

Textbook companies have faced a number of challenges in recent years, such as open course content, an increasingly vibrant used-book marketplace, new publishers proposing alternative pricing models, and new federal rules requiring the unbundling of expensive add-ons from the traditional texts.

But a case that came before the U.S. Supreme Court last week suggests that the textbook companies might soon face an even stronger threat: themselves.

If the case Costco Wholesale Corporation v. Omega, S.A., falls for Costco (the high court heard oral arguments last Monday), the textbook publishers could see the U.S. market flooded with less fancy editions they have produced for students in poorer countries. The foreign editions might be flimsier, but their content is the same as in the editions the textbook companies sell to U.S. students — and they are “often half or a quarter of the price of the domestic editions,” according to an amicus brief filed in the case by the Association of American Publishers.

In other words, students who don’t mind shoddier textbooks could buy editions intended for students in poorer countries at a fraction of the cost of what they would normally buy at their campus bookstore.

The textbook companies, meanwhile, say such a ruling would be disastrous. The anticipated decline in revenues from domestic sales, their lawyers say, would make it impossible for them to afford “the extensive research and development necessary to ensure that the information in textbooks is current and accurate.”

Watch Where You Sell

Oddly enough, it all started with watches. Omega, a Swiss luxury watchmaker, noticed that Costco had started selling one of its trademark timepieces in its California stores for less than Omega was charging. Omega sued Costco for copyright violation, noting that Costco had bought the watches from a New York company, which had bought them from “gray market” merchants overseas, which had bought the watches from Omega’s overseas distributors. Since Omega itself did not authorize the sale of its watches in the United States, the watchmaker’s lawyers argued that Costco had violated its copyright.

Costco countered that Omega’s copyright authority does not reach that far: once Omega sells a watch, the wholesaler argued, it has no say over where the watch can be resold, or for what price.

Fittingly, this rule — called the “first sale doctrine” — was invented when, in 1904, the publisher Bobbs-Merrill published a fictionalized biography of the poet Lord Byron, called The Castaway, by Hallie Erminie Rives. On its inside cover, the publisher stated that no dealer could sell the book for less than one dollar. Macy’s priced it at 89 cents, and in 1908 Bobbs-Merrill sued for copyright infringement and lost. The “first sale doctrine” was codified into law seven decades later, with the Copyright Act of 1976.

The question at hand in Costco v. Omega is whether the same rules apply when copies of a product are made overseas and then imported for sale in the United States. The 1976 law prohibits “the importation into or public distribution in the United States” of materials copyrighted in the United States but manufactured elsewhere. But if the “first sale doctrine” applies, that copyright is forfeit and the importation and resale is legal.

After a district court ruled in favor of Costco, a Ninth Circuit court reversed the decision on an appeal from Omega, saying that since the Omega watches were originally made and sold outside the United States, the watchmaker did not make a “first sale” in the jurisdiction of U.S. copyright law — and therefore still held the copyright when Costco started selling the watches in California.

Costco then appealed to the Supreme Court, and here we are.

Relevance to Textbook Publishers

The case is relevant to U.S. textbook companies for the same reason it is relevant to other parties that have filed amicus briefs to the court, such as the Motion Picture Association of America: laws against the importing and reselling of cheap, foreign-made versions of their products are crucial to allowing them to charge as much as they can in different countries.

“Most educational publishers currently print at least two different editions of their textbooks — one for domestic distribution and one or more for international distribution,” the Association of American Publishers wrote in its note to the court. “The domestic editions are often printed in the United States using high quality products and binding and are bundled with supplemental materials including teaching aids and online resources.”

The editions made outside the United States, the publishers continue, are made cheaply “using lower quality paper and covers, removing color images, and using inferior bindings,” and “priced based on what the purchasers in the intended market can afford.”

If the Supreme Court interprets copyright law such that books manufactured abroad may be legally sold to U.S. college students for the same price as they are sold to, for example, Indian students, the publishers argue, all hell will break loose.

“Copies of foreign editions would be imported en masse, by large campus-based bookstores, Internet resellers, and others,” they write. “The loss of revenue from domestic editions would drastically reduce the ability of publishers to compensate authors for their work and lead to significant changes in the publishers’ business models which, in turn, will cause ripple effects beyond the publishing industry.”

Gray Area

Nicole Allen, textbooks advocate for the nonprofit Student Public Interest Research Groups, says that would not be a bad thing. Her organization and others have long argued that the current model — which historically has limited the power of students to choose how much they pay for their course materials — is on its way out. Earlier this year Student PIRGs endorsed a new model pioneered by Flat World Knowledge, which lets students choose whether to pay for binding, color, e-learning supplements, and so on.

A Supreme Court ruling that makes it legal for “gray market” dealers to buy inferior foreign editions of textbooks and sell them in the United States would create similar tiers of quality for U.S. students to choose from.

Allan Adler, vice president of government and legal affairs for the Association of American Publishers, says he is confident that the justices will make their decision based not on what is best for the consumers or the publishers, but on what Congress is most likely to have intended when it codified the “first sale doctrine” into law in 1976 — and that there is not much in the legislative history to imply that Congress wanted to ensure the rights of “gray market” merchants to resell foreign-made products stateside at a discount, nor the rights of U.S. consumers to buy such items.

Adler said the Internet has made it a lot easier for such merchants to take advantage of the ambiguity of the law as it stands, and that a definitive ruling by the Supreme Court would bolster the publishers’ position as it tries to shut them down. There are already two lawsuits pending in lower courts between textbook publishers and Web-based businesses that resell their foreign editions to U.S. students online, Adler says, and the Supreme Court’s decision in Costco v. Omega is likely to affect the publishers’ odds of winning those cases.

The Supreme Court is expected to rule on Costco v. Omega sometime before June.

The American Library Association also filed an amicus brief in the case, noting if the court affirms the decision of the lower court in favor of Omega (and by proxy the publishers), it should make sure to reiterate fair-use exceptions for libraries that wish to lend books and other media manufactured overseas.

Still, the association made clear that it is pulling for Costco. "Conceivably it would encourage publishers to move in a totally different direction, maybe to become open-access publishers," says Jonathan Band, counsel for the library association. "It's just a matter of time before that market completely collapses, so anything that hastens that day is a good thing.” Band mentioned that he has two kids in college and is not happy with the lack of price and quality options that textbook publishers currently provide. “I think my kids would be perfectly well-served by lower-quality books on cheap paper,” he says.


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