United States: Retailers Line Up Behind Costco at the Supreme Court

In its 2008 decision in Omega v. Costco, the Ninth Circuit held that the "first-sale" doctrine of copyright law does not apply to goods manufactured and first sold abroad. In Omega, Costco had purchased authentic Omega watches at discount prices from a foreign distributor and imported them for resale in the United States. Omega alleged, and the Ninth Circuit agreed, that such an unauthorized importation and sale of its goods amounted to copyright infringement. This holding could have a significant impact on domestic retailers and importers of goods, particularly where the origin of such goods cannot be traced without difficulty or expense.

On April 19, 2010, the United States Supreme Court granted certiorari to hear Costco's appeal during the next term, which begins in October 2010.

I. The Right of Distribution and First-Sale Doctrine

Copyright is often characterized as a "bundle" of rights, codified at sections 106(1) through (6) of Title 17 of the United States Code. Section 106(3) grants to a copyright holder the exclusive right to distribute copies of a copyrighted work to the public, by sale or by other transfer of ownership. Any unauthorized importation of copies of copyrighted works, in violation of a copyright holder's section 106(3) rights, is an actionable infringement under sections 602(a) and 501(a).

The first-sale doctrine operates as an exception to this rule, and holds that the authorized sale of a single copy of a copyrighted work extinguishes the copyright holder's section 106(3) rights in that particular copy. The purchaser may thereafter resell, lend or otherwise dispose of the copy without infringing any of the holder's rights.

The watches in Omega were emblazoned with a tiny copyrighted "globe" logo; these watches, logos and all, were manufactured abroad. Codified at section 109(a), the first-sale doctrine by its terms applies to any copy "lawfully made under" title 17. The Ninth Circuit held that copies of copyrighted goods manufactured and sold outside the United States are not "lawfully made" under title 17 and, therefore, are not subject to the first-sale doctrine. To interpret section 109(a) as applying to foreign manufactured copies, the Ninth Circuit reasoned, would be to "impermissibly apply the Copyright Act extraterritorially." As a result, because Omega's section 106(3) rights were intact prior to their importation, such unauthorized importation amounted to actionable copyright infringement.

The Ninth Circuit distinguished Quality King Distributors, Inc. v. L'Anza Research International, Inc. In Quality King, the Supreme Court held that the importation of goods bearing copyrighted labels did not infringe the copyright holder's distribution rights in the labels. In contrast to Omega, the copyrighted labels in Quality King, although affixed to foreign-manufactured goods, had first been manufactured in the United States, and weresubject to the Copyright Act. In other words, and as the Ninth Circuit explains, unlike the Omega "globe" logos, the Quality King labels had completed a "round trip" that began with their manufacture within the United States.

II. The Impact of Omega on Retailers and Consumers

By permitting copyright holders to exercise distribution rights in foreign-made copies of copyrighted works, Omega arguably compels retailers to trace the origins of any copyrighted aspects of imported goods, or otherwise risk exposure to accusations of copyright infringement. In an amicus brief, the Retailer Industry Leaders Association and various retailer entities supporting Costco argue that such an undertaking may be impracticable in many cases. Many retailers, the amici claim, "cannot reasonably know the full provenance of each of the thousands of lawfully-produced goods they sell," because such goods may pass through several distributors before they ultimately reach the retailers.

The amici further assert that Omega harms consumers insofar as retailers accustomed to dealing on the "gray market" – obtaining goods sold in foreign markets at discounted prices and importing these goods for resale in the United States – may be dissuaded from doing so for fear of allegations of infringement. As a result, copyright holders will be free to price-discriminate in different markets without the threat of such arbitrage, and domestic prices may be inflated as a consequence, because retailers will be unable to pass these previously-realized savings on to consumers.

As noted by the amici, and as acknowledged by the Ninth Circuit in its opinion, Omega also provides copyright holders with greater control over goods that have been manufactured and sold abroad than over goods manufactured and/or sold in the United States. Such a dichotomy, the amici claim, "creates perverse incentives" for copyright owners to relocate their U.S. manufacturing to Canada or Mexico. Such a trend could have myriad "unforeseen consequences" for both retailers and consumers. The amici suggest, by way of example, that a copy of a book or DVD, if made and sold just outside the United States, may not be legally disposable in the United States as a "previously owned" copy, as a loaner by a library, or as a gift.

While the Ninth Circuit contends that other caselaw has "resolved this problem" by applying first sale doctrine to foreign-made copies "so long as a lawful domestic sale has occurred," it also concedes that, "in the absence of a lawful domestic sale," the copyright holder retains its rights over the goods.

III. What to Watch For

All eyes will be on the Supreme Court during the upcoming terms and the issue of extraterritoriality will likely be critical. In Omega, the Ninth Circuit relied in part on its own precedent in BMG Music v. Perez (1991) and CBS v. Scorpio Music Distributors (1983) in declining to "ascribe legality under the Copyright Act to conduct that occurs entirely outside the United States." The amici, on the other hand, maintain that such a characterization is inaccurate insofar as an authorization to make copies has been given by a U.S. copyright owner. Whether the Supreme Court sides with Costco, and agrees with the amici, on this issue could have a significant impact on the Court's holding.

Another issue potentially on the horizon is that of Omega's impact, if any, on the analogous, although wholly non-statutory, doctrine of international patent exhaustion. The Federal Circuit has held, as recently as May 2010, that the foreign manufacture and sale of goods covered by one or more U.S. patents does not exhaust a patent holder's rights in such goods, but the Supreme Court has not directly addressed this issue. The Supreme Court's handling of Omega may prove instructive.

Either way it comes down, Omega is certain to have a lasting impact on the domestic retail industry.

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