Costco v. Omega: Supreme Court Punts On Another Big IP Case

Photo Courtesy University of Wisconsin Digital Archive under the cc 2.0 license

The United States Supreme Court deadlocked 4-4 on the question of whether the “first sale doctrine” permits copyrighted goods manufactured overseas but not authorized for sale in the United States to be sold here on the “gray market,” upholding a Ninth Circuit opinion which ruled in favor of the copyright owner that the doctrine does not apply.

The unsigned opinion in Costco Wholesale Corp. v. Omega S.A. was one of the shortest in the Court’s history: “The judgment is affirmed by an equally divided Court.”

Recently appointed Justice Elena Kagan recused herself from the decision, because she participated on the case while serving as US Solicitor General.

The case involved Omega Seamaster watches manufactured in Switzerland that were engraved on the underside with a US copyrighted “Omega Globe Design.” Omega sold the watches only for distribution in South America, but they found their way to the United States, where they were resold by Costco stores in California at a price of $1,299, compared to the $1,999 suggested retail price for authorized US resellers.

Omega sued Costco for copyright infringement on the grounds that Costco’s unauthorized sales of the Seamaster watches infringed Omega’s exclusive right under Section 106(3) of the Copyright Act of 1976 to distribute its work by sale, rental, lease, or lending.

Costco countered that Omega’s exclusive distribution right was preempted by the so-called first sale doctrine of Section 109(a) of the Copyright Act, which states that, “the owner of a particular copy…lawfully made” within the meaning of the Copyright Act is not subject to Section 106(3), so that once a copyright owner consents to the sale of its work, it loses its distribution right with respect to those copies, and the purchaser is free to transfer ownership in any way it wishes. The federal district court ruled in Costco’s favor, on the grounds that Omega’s sale to the South American distributors had triggered the first sale doctrine. (The existence of the first sale doctrine is one reason that copyright owners are increasingly trying to recast their transactions as licenses not subject to the doctrine, rather than sales.)

The Ninth Circuit Court of Appeals reversed, ruling in Omega’s favor on the grounds that prior cases in the circuit had held that the first sale doctrine does not apply to copies manufactured overseas and not authorized for sale in the United States. Key to that opinion was the Ninth Circuit’s holding that copies manufactured outside the United States were not “lawfully made” for purposes of Section 109, and therefore did not trigger the first sale doctrine, so that they continued to be subject to the copyright owner’s exclusive distribution right even after the first sale.

Before the Supreme Court, Costco urged reversal on the grounds that the appellate opinion: was based on precedents not supported by the Copyright Act; was at odds with the Supreme Court’s 1998 opinion in Quality King Distributors, Inc. v. Lanza Research International, Inc.; and was bad policy, because it would encourage manufacturers of copyrighted goods to relocate their factories overseas to maintain resale prices.

Although the case was widely anticipated by both copyright owners (movie studios, record companies) and luxury goods manufacturers on the one hand, and retailers on the other hand, to bring clarity to the often tangled law of gray market goods, the Court’s split left in place the Ninth Circuit’s opinion for that circuit only, but set forth no single national standard and created no Supreme Court precedent. It is likely the Court will need to revisit the issue.

Similarly, in another widely anticipated IP case, delivered in June, the Court in Bilski v. Kappos fractured into three separate but overlapping opinions without setting forth a clarifying standard for what is patentable subject matter in the digital age.

Takeaway: For cases arising in the jurisdiction of the Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam), copyright owners will be able to pursue copyright infringement lawsuits against gray market sellers of their copyrighted goods that they manufactured overseas, and did not authorize for resale in the United States. Although not addressed in the Costco case, note that manufacturers may also have rights to sue gray market sellers under trademark law (the Lanham Act) to prevent US sales of their trademarked goods, if there is any material difference between the foreign version and the authorized US version, such as different product features or warranty coverage.

© 2010 – 2011, Richard R. Bergovoy. All rights reserved.

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One Response to “Costco v. Omega: Supreme Court Punts On Another Big IP Case”

  1. […] issue was first raised in 2010, in a case involving Omega and Costco. Omega was selling watches only for distribution in South America, yet Costco was managing to sell […]

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