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Tad Homma 

Working Paper 04-6-4  

Importation Right Excludes Foreign-made Music CDs—Japan’s Cultural Autism

For years, major Japanese sound recording companies (hereinafter “Japanese labels”) have been trying to establish an importation right (a right to prohibit importation) under Japanese Copyright Law, against music CDs made in other Asian countries under their license.  They are eager to license other Asian countries for local production of Japanese popular music (“J-Pop”) CDs that are becoming more and more popular there recent years, but do not want those CDs to return to Japan at an import price far lower than their Japanese price.  Generally speaking, a J-Pop album costs $25 a piece in Japan, while the same album made under license in other Asian countries costs less than $10. 

It is a common business practice to obligate local licensees not to export their CDs to Japan, but Japanese labels do not seem to trust their licensees to comply with their contractual obligations including to bind their customers not to export to Japan (that may cause some concern to their local competition authorities).  Or, it is suspected that they may have a far more ambitious objective—to stop importation of all foreign-made music CDs to Japan across-the-board as more fully discussed later. 

Japanese labels allege that they are just imitating their American and European counterparts, but international situation surrounding this issue is not so simple. 

Section 602 (a) of the U.S. Copyright Act provides copyright holders with a right to import copyrighted articles.  This right, however, is subject to the ‘first-sale doctrine’ provided in Section 109 (a) and the Federal Supreme Court decision in ‘Quality King’ case (1) applied this doctrine to this case and allowed return importation (“backflow”) of a copyrighted article first sold in the U.S. 

Although the importation of copyrighted articles first sold abroad with the consent of the copyright holder is yet to be decided, the direction is clear—more and more borderless in deciding whether or not to exercise copyright (2).  More than anything else, price of music CDs in the U.S. is so low (about $12 a piece) that no one may be seriously concerned about the backflow of foreign CDs made under U.S. license. 

Within the EU, the principle of free movement of goods whether or not copyrighted is firmly adhered to under EC Treaty.  Although there is a Community Directive requiring consent of the copyright holder for the exhaustion of his national distribution right (3), the Community free-movement principle supersedes any such private exercise of national distribution right.  And although there are a couple of Community court decisions denying to apply free-movement principle to sound recording products imported from outside the Community (4), their validity is now susceptible in light of the non-discrimination provisions of the TRIPS Agreement. 

Japanese labels allege that 65 countries of the world have a legal device, somehow or other, to prohibit backflow of music CDs, by way either of importation right, distribution right or ‘presumed infringement’ (as discussed later).  This allegation is not only an overstatement in that it counts each of EU’s 15 (or 25 as of May, 2004) member states forming a single market under the free-movement-of-goods principle, but also is a logical suicide: 

If Japanese labels want to imitate the EU, they should allow free trade between Japan and other Asian countries and at the same time should exclude import from the U.S. and the EU.  What they want to do actually is its exact opposite: selectively excluding Asian products and allowing import from the U.S. and the EU.  They are against the idea of the East Asian Community agreed upon during the Japan-ASEAN summit conference held in Tokyo in December 2003. 

Scared of growing oppositions, Japanese labels have since stepped back considerably from their original ambition of importation right as part of copyright (“importation right” in narrow meaning) to a more modest proposal for the ‘presumed infringement’ of importation of foreign-made music CDs that are under contractual obligation not to export to Japan (“importation right” in broad meaning). 

Article 113 of Japanese Copyright Law prohibits, at Section 1, importation of goods that may presumably have violated Japanese Copyright Law if produced in Japan at the time of importation.  For example, importation of pirated goods does not technically violate Japanese Copyright Law because unauthorized copying has occurred outside Japanese territory.  However, Article 113 protects the economic interests of copyright holders from the importation of pirated goods, although not as a copyright infringement (5).   

In April 2004, the Ministry of Education, Culture and Science introduced a bill at the Diet to amend Article 113 of Japanese Copyright Law.  The bill passed the Diet in June.  The Amendment has taken effect as of January 1, 2005. 

The key text of the Amendment reads as follows: 

Article 113, Section 5:  Where a copyright- or neighboring right-holder who is publishing himself or having others publish commercial musical records purported for distribution within Japan (hereinafter “Japan Distribution Records”) is publishing or having others publish identical commercial musical records purported for distribution solely outside Japan (hereinafter “Foreign Distribution Records”), an act of, knowingly, importing such Foreign Distribution Records for distribution in Japan, distributing the same in Japan, or possessing the same for the purpose of distribution in Japan is regarded as an infringement of such copyright or neighboring right, only in case the profit expected for such copyright- or neighboring right-holder from the publishing of such Japan Distribution Records is to be unreasonably undermined due to distribution in Japan of such Foreign Distribution Records. [Underline added]. 

The amendment gives copyright- and neighboring right-holders, Japanese or foreign, a power to stop, under certain conditions, importation of all musical records made in foreign countries including the U.S. and the EU under license from the holder, Japanese or foreign, of Japanese copyright or neighboring right.  This power is now far stronger than is necessary to stop backflow from Asian countries as envisaged by Japanese labels at first.  This is the necessary outcome of the non-discrimination principle of Berne Convention. 

Suppose, for example, one of the American Five Majors, who owns a copyright/neighboring right in Japan and is making identical CDs both in the U.S. and Japan, decides to divide the two geographical markets to maximize its joint profit, it will undoubtedly stop parallel import of CDs made in the U.S. into Japan under the Amendment.  

I have a couple of questions in this amendment:   

My first question is whether this across-the-board import restriction is consistent with WTO/GATT.

As regards the importation right under copyright, neither the Uruguay Round negotiation nor the WIPO copyright/performers’ right conference could reach a consensus despite ardent proposals made by the USTR, to which Japan expressly objected.  The absence of international consensus in this matter poses difficult questions especially in light of WTO/GATT.  

Article XI of GATT prohibits quantitative restriction of goods.  Among many exceptions to this principle, Article XX(d) permits an import restriction “necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement [such as competition and intellectual property laws].”  In order to rescue the Article 113, Section 5 with this exception, Japan should establish that it is 'necessary' to secure compliance with Japanese Copyright Law. 

In comparison, although pirated goods do not infringe national intellectual property rights because unauthorized copying has occurred outside the national territory, as mentioned above, note 1 (b) of Article 51 of the TRIPS Agreement (6) defines pirated goods as those which would have constituted an infringement of a copyright or neighboring right under the law of the country of importation.  Based on this authorization, Article 113, Section 1 of Japanese Copyright Law presumes pirated goods as infringing and prohibits their importation.  For parallel import restriction of copyrighted musical CDs, however, there is no such authorization, express or implied, within WTO/GATT or anywhere else.  Parallel import good is entirely different from pirated good in WTO/GATT context.

Article XX (d) only exempts an import restriction measure necessary to secure compliance with domestic laws or regulations.  The term ‘necessary’ has been interpreted by GATT panels almost as severe as the word ‘indispensable.’(7)  No one may be convinced that the restriction of parallel import of genuine musical CDs is really ‘necessary’ to secure sustained creation of art that is the ultimate purpose of any copyright law.

My second question is whether the discrimination currently contemplated by Japanese labels between CDs made in Asian countries and in the U.S./EU is consistent with WTO/GATT. 

If Japanese customs adopts, based on an interpretation of the term ‘unreasonably’ proposed by Japanese labels, such a numerical threshold calculated from the difference in expected profits from different national markets as to effectively stop backflow from Asian countries while permitting importation of CDs from the U.S./EU, it is against many provisions of WTO/GATT: 

The main text (chapeau) of GATT Article XX reads:  The exemption given in Section (d) is ‘subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail...’  A numerical threshold set at such a level as to effectively stop backflow form Asian countries while permitting importation from the U.S./EU is nothing but an ‘arbitrary and unjustifiable’ discrimination.  Both geographical areas are in the same condition in making CDs under license for Japanese copyright or neighboring right. 

GATT Article I and TRIPS Article 4 would also apply.  

Now let me consider the issue from a different point of view.  Selling a product at a higher price within a closed home market than in an open foreign market is a symptom of dumping.  Although what Japanese labels are intending is not a typical dumping between domestic and export goods but a dumping between domestic goods and foreign-made goods under license, some of Japan’s Asian trade partners are now having an advanced trade regulations that may cover such non-typical dumping. 

The very moment Korea has opened its heretofore-closed market to Japan’s pop music, Japan is going to close its market to all foreign-made music CDs.  Because other media such as DVDs will follow this move, Japan will certainly fall into a cultural autism that may last for indefinite time period. 

NOTES

(1) Quality King Distributors, Inc. v. L'Anza Research International, Inc., 118 S. Ct. 1125 (Mar. 9, 1998).

(2) Quality King decision warns in its dicta not to extend its reasoning to ‘licensees’ or to ‘copies lawfully made under foreign law’, it does not deny such interpretation of Section 109 (a) at all.

(3) OJ L167, 22/06/2001.

(4) EMI v. CBS, [1796] 2 CMLR 235 (1976)/Polydor v. Harlequin Record Shops [1982] ECR 329 (1982).

(5) It is a consensus among Japanese copyright experts that “presumed infringement” is not an exercise of copyright.  See, e.g., Hiroshi Saito, COPYRIGHT LAW, 3rd ed. (Ichiryuusha, 1994) at 300 and Handa & Monya, COPYRIGHT KNOW-HOW, 5th ed. (Yuhikaku, 1995) at 265.

(6) “Pirated copyright goods” shall mean any goods which are copies made without the consent of the right holder or person duly authorized by the right holder in the country of production and which are made directly or indirectly from an article where the making of that copy would have constituted an infringement of a copyright or a related right under the law of the country of importation.

(7) GATT Panel Report in Akzo case (L/6439-36S/345, November7, 1989).