By Scott Cameron
United States copyright law saves for the copyright owner the exclusive right to distribute copies of his copyrighted work. That is, of course, unless an exception applies. There are many exceptions, some of which can be confusing. Among the confusing exceptions is the First Sale Doctrine. According to the First Sale Doctrine, once a copyright owner has made an authorized sale of a copyrighted product, the copyright owner no longer has any rights to that copy of the product. The First Sale Doctrine sounds simple enough so far. Enter the Ninth Circuit.
In a recent case, Omega S.A. v. Costco Wholesale Corp., the Ninth Circuit analyzed the First Sale Doctrine as applied to sales that occurred outside of the United States. Omega, the watch maker, manufactures watches in Switzerland. These watches are emblazoned with a logo on the back of the watch which Omega has copyrighted in the United States. Omega sells these watches to distributors both in the US and abroad. The watches sold to distributors outside the US are significantly less expensive than those sold to US distributors. Costco purchased some of these watches from a distributor in New York who had purchased them from a foreign distributor. Again, these were genuine Omega watches, were originally intended for foreign sale, not for US sale, so they were less expensive for Costco to purchase. (So that’s how Costco does it!)
Omega sued Costco for copyright infringement, claiming it did not authorize Costco’s sale of the copyrighted products in the US. Costco moved for summary judgment, claiming that Omega’s rights were extinguished by the first authorized sale it made to the foreign distributor. The ultimate question was whether Omega could control the U.S. distribution of the watches it sold to foreign distributors. The US District Court for the Central District of California agreed with Costco, and entered judgment in its favor. The Ninth Circuit reversed, holding that the First Sale Doctrine does not apply in this situation because the watches were manufactured in Switzerland.
The District Court relied on Quality King Distributors, Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998), in which the U.S. Supreme Court held that the first sale doctrine applied to imported copies of copyrighted goods. The Ninth Circuit held in Omega v. Costco that Quality King did not require the same result because the watches were made in Switzerland. The hair care products at issue in Quality King, on the other hand, were manufactured in the United States, then sold to a foreign distributor at drastically reduced prices, and then sold by that foreign distributor to a party that brought them back into the U.S. The key difference was the location of manufacture.
The Ninth Circuit carefully explained its application of the First Sale Doctrine. First, Section 602(a) of Title 17 of the United States Code states that importation of copyrighted works obtained outside the United States without the authorization of the US copyright holder is infringement under section 106. Section 106 provides the copyright owner the exclusive right to distribute copies of his copyrighted work, subject to exceptions found in Sections 107-122. Section 109(a), which codifies the First Sale Doctrine, states that “the owner of a particular copy … lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” Thus, although importing a copyrighted good could be infringement under Section 602(a), if the copyrighted good was purchased in an authorized “first sale,” then there would be no infringement under Section 109(a) if the good was “lawfully made under this title.” The Ninth Circuit held that this means “made in the U.S.A.” Because the Omega watches were not “lawfully made under this title,” i.e., not “made in the U.S.A.,” the First Sale Doctrine did not apply, and Omega still had the exclusive right to control distribution in the United States.
The court did say that the first sale doctrine would apply to foreign-made products if there was a sale in the United States authorized by the copyright owner. The court said this was necessary to prevent the anomalous result of a foreign manufacturer gaining more protection from the U.S. copyright laws than a U.S. manufacturer. For example, a foreign-made product would never be subject to the First Sale Doctrine, thus the foreign manufacturer would always keep its exclusive U.S. distribution rights, while a manufacturer of U.S.-made goods would lose its distribution rights after the first authorized sale. So the current state of the First Sale Doctrine in the Ninth Circuit provides no distribution rights to a copyright owner after it has authorized a sale of its product if the product was made in the USA or the authorized sale occurred here.
The increased frequency of U.S. companies manufacturing their goods in other countries, i.e., China, Mexico, the Philippines, can lead to unexpected results with regard to the application of the First Sale Doctrine. Consider Company XYZ, an American company that manufactures widgets and stamps the widgets with its copyrighted logo. XYZ has two manufacturing plants, one in Tennessee and one in Malaysia, and it sells widgets manufactured in both plants throughout the world. It commonly sells its widgets to distributor A, in London, for about 40% less than it sells to its U.S. distributors. Distributor A, seeking to make a larger profit, sells the widgets in London to a wholesaler who promptly brings them into the United States. XYZ sues for copyright infringement because it has not authorized the sale of its copyrighted goods in the U.S. Under Omega v. Costco, however, XYZ will be surprised to learn that it has no rights as to one-half of the imported widgets because they were manufactured in Tennessee. XYZ does have rights to prevent the sale of the widgets that originated in China, however, because even though the widgets were manufactured by XYZ and XYZ authorized the first sale, they were not made or sold in the United States.
On the other hand, if XYZ is savvy it will move all of its manufacturing overseas and ensure that its first sale of widgets is always made to a foreign distributor. XYZ could still tailor its pricing to charge substantially more for goods earmarked for U.S. distribution. Since the widgets were not made in the United States and XYZ never authorized a sale in the U.S., it would still control U.S. distribution rights. That can’t be the result the Ninth Circuit envisioned by its ruling in Omega v. Costco. And while a manufacturer is not likely to relocate its manufacturing operation based on the First Sale Doctrine, with costs already drastically favoring foreign manufacturing plants, do we really need to give them another push out of the country?