U.S. Supreme Court Splits on Application of Copyright Act’s First Sale Doctrine to Gray-Market Goods, Ninth Circuit’s Decision In Favor of Copyright Owners Upheld

December 13, 2010
News | Patents

On December 13, 2010, an equally divided U.S. Supreme Court upheld the Ninth Circuit’s decision in Omega S.A. v. Costco Wholesale Corporation, without an opinion. The 4 to 4 split was caused by the recusal of Justice Kagan, who submitted a brief regarding the case on behalf of the government while serving as Solicitor General.

This case regards the application of the first sale doctrine to “gray-market” goods. Gray-market goods are genuine products protected by a trademark or copyright. They are typically manufactured abroad and purchased and imported into the United States by third parties, thereby bypassing the authorized U.S.-distribution channels. Retailers are able to sell these products at a discount because the gray market arbitrages international discrepancies in manufacturers’ pricing systems.

In this case, Omega manufactured abroad watches displaying copyrighted logos and sold them to authorized distributors overseas. Through a series of middlemen, Costco purchased the watches and sold them to consumers in California at a significant discount relative to Omega’s suggested retail prices. Although Omega authorized the initial foreign sale of the watches, it did not authorize their importation into the United States or the sales made by Costco. Omega sued Costco for infringement of Omega’s exclusive distribution right under U.S. copyright law.

Costco’s defense was based on the first sale doctrine, which generally provides that once a copyright owner consents to the sale of particular copies of his work, he may not thereafter exercise the distribution right with respect to those copies.

At issue in this case is the effect of the Supreme Court’s unanimous decision in Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998). In that case, a product with a U.S.-copyrighted label was manufactured inside the United States, exported to unidentified parties overseas, shipped back to the United States without the copyright owner’s permission, and then sold in California by unauthorized retailers (a “round trip” importation). The Supreme Court determined that the first sale doctrine provided a defense to the seller.

Unlike Quality King, the manufacture in Omega v. Costco occurred abroad. It is because of this difference that the U.S. Court of Appeals for the Ninth Circuit refused to apply the first sale doctrine, while maintaining its position that, “the [Copyright] Act presumptively does not apply to conduct that occurs abroad even when that conduct produces harmful effects within the United States.” 

The application of the first sale doctrine to “one-way” importation will have broad implications in international trade. For example, Costco’s supporters, including e-commerce companies such as eBay, argued that limiting the first sale doctrine to works made in the United States might encourage U.S. copyright owners to outsource manufacturing of copies of their works overseas, and would result in higher prices on secondary goods for U.S. consumers. On the other hand, Omega’s supporters, including the Intellectual Property Owners Association, argued that extending the first sale defense to an unauthorized importer would encourage copyright owners to only sell their works in countries in which the works could command a relatively high price, so as to avoid undercutting the market for their works elsewhere. This would result in decreased sales of works in countries that would otherwise justify a lower price, such as developing nations. Still others, such as the film and music industries, argued that overruling the Ninth Circuit’s decision would diminish the ability to plan and control the timing and manner of release of their works, thereby preventing these industries from realizing the full value of their copyrights in the United States.

The Supreme Court’s split decision in Omega v. Costco likely will encourage copyright owners and one-way importers to litigate this matter in the future.


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