By Jeff Pietsch and Fabiola Larios

In a 4 to 4 split per curiam decision, the United States Supreme Court recently affirmed the judgment of the Ninth Circuit’s opinion in Omega S.A. v. Costco Wholesale Corp. which held that the first sale doctrine is not a defense to infringement claims on products imported in an unauthorized manner into the United States.

Omega S.A. (Omega) manufactured watches in Switzerland and sold the watches globally to consumers through authorized distributors and retailers. Omega first sold watches to authorized distributors overseas. Unidentified third parties eventually purchased the watches and sold them to ENE Limited, a New York Company, which in turn sold them to Costco Wholesale Corp (Costco). Costco then sold the watches to consumers in California. Omega originally authorized the foreign sale of the watches, but did not authorize their sale into the United States. Omega claims that by purchasing the watches bearing the copyrighted design which had been imported into the United Stated by third parties, Costco bypassed the authorized U.S. distribution channels thereby obtaining “gray market” goods. 

Omega claimed that Costco purchased the watches through the gray market because the Omega watches were not obtained through Omega’s selected and authorized distributors. Omega argued that, since the watches had a U.S. copyright, Costco was required to lawfully purchase the watches through one of its authorized distributors within the United States.   Omega sued Costco alleging the manner in which Costco acquired and sold the products constituted copyright infringement because Omega had the exclusive rights to distribute copies of the copyrighted watches under 17 U.S.C. § 106(3) which provides exclusive rights to distribute copyrighted works to the public by sale or other transfer of ownership. Omega also claimed exclusive rights of distributorship under 17 U.S.C. § 602(a) which provides that importation into the United States, without the authority of the copyright owner of a work that has been acquired outside the United States is an infringement of the exclusive right to distribute copies under section 106.

Costco  disagreed arguing that the first sale doctrine provides limitations on exclusive rights under 17 U.S.C. § 109(a) which allows the owner of a particular copy “lawfully made” , or any person authorized by such owner, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy. Costco contended that because the first sale doctrine, when codified, was intended to limit distributorship rights, the first sale doctrine superseded the exclusive distributorship rights Omega claimed to have. Thus, Costco claimed it was within its right to purchase products from a distributor based outside of the United States. Costco’s claim that the first sale doctrine supersedes the exclusive distribution rights followed from the reasoning in the Supreme Court’s decision in Quality King Distributors, Inc. v. L’anza Research International, Inc.

Costco explained the original distributor lawfully purchased Omega watches through authorized Omega watch distributors. Costco argued it lawfully acquired the Omega watches because the original authorized Omega distributor was free to sell these products without the authority of Omega, a right granted to the original authorized distributor under the first sale doctrine. Costco further contended that Omega’s distribution rights with respect to those lawfully sold copies ended upon the first lawful sale of the products.

The Ninth Circuit disagreed with Costco’s arguments. In previous cases, the Ninth Circuit held that the first sale doctrine is not a defense to actions under 17 U.S.C. § § 106(3) and 602(a) which authorize the rights of exclusive distributorship when the products are foreign made, non-piratical copies of a U.S. copyrighted work, unless those same copies have already been sold within the United States with the copyright owner’s authority. The Ninth Circuit’s decision in this case turned on the definition of the terms “lawfully made” as defined in the first sale doctrine. The Ninth Circuit explained Quality King is consistent with the interpretation that “lawfully made” means “legally made in the United States.” The Ninth Circuit explained that the first sale doctrine provided no defense against a claim under 17 U.S.C. § § 106(3) and 602(a) in the circumstances because the phrase "lawfully made”  grants first sale protection only to copies legally made and sold in the United States,  and the copies at issue were made and first sold abroad.

Even though Omega conceded the first sale doctrine generally limits exclusive distributorship rights, Omega proceeded to argue the first sale doctrine provides no defense to infringement claims. Omega contended that the copies of the design were not “lawfully made.” Meanwhile, Costco failed to dispute facts which helped Omega’s case. Greatly detrimental to Costco was the fact that the watches were manufactured and sold overseas. 

Based upon the above analysis the Ninth Circuit concluded the first sale doctrine was unavailable as a defense to the claims made under 17 U.S.C. § 602(a) and § 106(3) which provide authority for exclusive distribution  rights.  The Ninth Circuit further established that the first sale doctrine only applies to copies which have been in the United States by the authority of the copyright owner.