On April 19, 2010, the United States Supreme Court granted certiorari in Costco v. Omega, in which the Ninth Circuit found that the first sale doctrine in copyright law only applied to goods manufactured or sold in the United States with the copyright owner’s authority. The Supreme Court will decide whether the first sale doctrine also applies to the “one-way” gray market sale of goods –goods that are manufactured and first sold abroad and then imported to the United States without the authorization of the copyright owner.
Omega makes watches in Switzerland and sells them abroad at prices much lower than the watches sell for in the United States. Some of the watches originally sold abroad, were re-sold to Costco. Costco then sold them at a price that was less than authorized Omega watch dealers sold them for in the United States. Because the watches were genuine Omega watches, opposed to knock-offs, they are considered “gray market” goods. However, Omega did not want Costco to sell them for less, so it obtained a copyright in an “omega globe design,” which it engraved on the back of the watches. Omega then filed a lawsuit against Costco claiming that Costco’s acquisition and sale of the watches with the tiny omega globe design engraving constitute copyright infringement.
Omega claimed that although it authorized the sale of the watches abroad, it did not authorize their importation into the United States or the sales made by Costco. Therefore, Omega claimed that Costco infringed Omega’s exclusive right to control the importation and sale of the watches within the United States. In its defense, Costco asserted that the importation and sale of the watches did not infringe Omega’s copyright because of the first sale doctrine. Under the first sale doctrine, once a copyright owner sells a copy of a protected work, subsequent owners are free to sell it, rent it, lend it out or do anything else they want with it. In other words, if I buy a book from you that you have copyrighted, I am free to sell it to another party without infringing your copyright.
In Quality King Distributors, Inc. v. L’anza Research International (“Quality King”), the Supreme Court found that the first sale doctrine did apply to goods that are first sold abroad and then imported without the authorization of the copyright holder. However, the Ninth Circuit found that Quality King only applied when there was a “round trip” importation – i.e., the copyrighted good is manufactured in the United States, exported by the copyright holder to an authorized foreign distributor, sold abroad and then shipped back to the United States without the copyright owner’s permission. The Ninth Circuit found that the first sale doctrine was not a defense to Costco’s sale of the watches because that involved a “one-way” importation – i.e., the watches were manufactured abroad, sold abroad and then shipped to the United States without Omega’s permission.
The implications of whether the Supreme Court decides that the first sale doctrine applies to the one-way importation and sale of goods are potentially great. Under the Ninth Circuit ruling, manufacturers have an incentive to manufacture their products abroad. Companies that want to stop the gray market importation of their products are likely to close their United States’ manufacturing operations and move them abroad. Meanwhile, the next time you go to Costco, or any other discount retailer, there may no longer be any deals to be had on items like Omega watches. The ruling also will impact anyone who purchases something abroad with a United States copyright and sells it in the United States. Under the Ninth Circuit’s ruling, that person will be guilty of copyright infringement. With the broader economic pressures facing the United States and stubbornly high unemployment rates, it will be interesting to see whether the United States Supreme Court sides with Costco or Omega when deciding this economically important copyright law issue.