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August 2010
Retail Industry Service Group
Alert
Retailers Line Up Behind Costco at the Supreme Court
In its 2008 decision in Omega v. Costco, the NinthCircuit held that the “first-sale” doctrine of copy-right law does not apply to goods manufacturedand first sold abroad. In Omega, Costco had pur-chased authentic Omega watches at discount pricesfrom a foreign distributor and imported them forresale in the United States. Omega alleged, and theNinth Circuit agreed, that such an unauthorizedimportation and sale of its goods amounted tocopyright infringement. This holding could have asignificant impact on domestic retailers andimporters of goods, particularly where the origin ofsuch goods cannot be traced without difficulty orexpense.
On April 19, 2010, the United States SupremeCourt granted certiorari to hear Costco’s appealduring the next term, which begins in October2010.
I. The Right of Distribution and First-SaleDoctrine
Copyright is often characterized as a “bundle” ofrights, codified at sections 106(1) through (6) ofTitle 17 of the United States Code. Section 106(3)grants to a copyright holder the exclusive right todistribute copies of a copyrighted work to the pub-lic, by sale or by other transfer of ownership. Anyunauthorized importation of copies of copyrightedworks, in violation of a copyright holder’s section106(3) rights, is an actionable infringement undersections 602(a) and 501(a).
The first-sale doctrine operates as an exception tothis rule, and holds that the authorized sale of asingle copy of a copyrighted work extinguishes thecopyright holder’s section 106(3) rights in that par-ticular copy. The purchaser may thereafter resell,lend or otherwise dispose of the copy withoutinfringing any of the holder’s rights.
The watches in Omega were emblazoned with atiny copyrighted “globe” logo; these watches, logosand all, were manufactured abroad. Codified atsection 109(a), the first-sale doctrine by its termsapplies to any copy “lawfully made under” title 17.The Ninth Circuit held that copies of copyrightedgoods manufactured and sold outside the UnitedStates 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 CopyrightAct extraterritorially.” As a result, because Omega’ssection 106(3) rights were intact prior to theirimportation, such unauthorized importationamounted to actionable copyright infringement.
The Ninth Circuit distinguished Quality KingDistributors, Inc. v. L’Anza Research International,Inc. In Quality King, the Supreme Court held thatthe importation of goods bearing copyrightedlabels did not infringe the copyright holder’s distri-bution rights in the labels. In contrast to Omega,the copyrighted labels in Quality King, althoughaffixed to foreign-manufactured goods, had firstbeen manufactured in the United States, and were
BY WILLIAM R. POYNTER AND NEIL MAGNUSON
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Retail IndustryService Group Team
subject to the Copyright Act. In other words, andas the Ninth Circuit explains, unlike the Omega“globe” logos, the Quality King labels had complet-ed a “round trip” that began with their manufac-ture within the United States.
II. The Impact of Omega on Retailers andConsumers
By permitting copyright holders to exercise distri-bution rights in foreign-made copies of copyright-ed works, Omega arguably compels retailers to tracethe origins of any copyrighted aspects of importedgoods, or otherwise risk exposure to accusations ofcopyright infringement. In an amicus brief, theRetailer Industry Leaders Association and variousretailer entities supporting Costco argue that suchan undertaking may be impracticable in manycases. Many retailers, the amici claim, “cannot rea-sonably know the full provenance of each of thethousands of lawfully-produced goods they sell,”because such goods may pass through several dis-tributors before they ultimately reach the retailers.
The amici further assert that Omega harms con-sumers insofar as retailers accustomed to dealing onthe “gray market” – obtaining goods sold in foreignmarkets at discounted prices and importing thesegoods for resale in the United States – may be dis-suaded from doing so for fear of allegations ofinfringement. As a result, copyright holders will befree to price-discriminate in different markets with-out the threat of such arbitrage, and domesticprices may be inflated as a consequence, becauseretailers will be unable to pass these previously-real-ized savings on to consumers.
As noted by the amici, and as acknowledged by theNinth Circuit in its opinion, Omega also providescopyright holders with greater control over goodsthat have been manufactured and sold abroad thanover goods manufactured and/or sold in the UnitedStates. Such a dichotomy, the amici claim, “createsperverse incentives” for copyright owners to relo-cate their U.S. manufacturing to Canada orMexico. Such a trend could have myriad “unfore-seen consequences” for both retailers and con-sumers. The amici suggest, by way of example, thata copy of a book or DVD, if made and sold justoutside the United States, may not be legally dis-
posable in the United States as a “previouslyowned” copy, as a loaner by a library, or as a gift.
While the Ninth Circuit contends that othercaselaw has “resolved this problem” by applyingfirst sale doctrine to foreign-made copies “so longas a lawful domestic sale has occurred,” it also con-cedes that, “in the absence of a lawful domesticsale,” the copyright holder retains its rights over thegoods.
III. What to Watch For
All eyes will be on the Supreme Court during theupcoming terms and the issue of extraterritorialitywill likely be critical. In Omega, the Ninth Circuitrelied in part on its own precedent in BMG Musicv. Perez (1991) and CBS v. Scorpio MusicDistributors (1983) in declining to “ascribe legalityunder the Copyright Act to conduct that occursentirely outside the United States.” The amici, onthe other hand, maintain that such a characteriza-tion is inaccurate insofar as an authorization tomake copies has been given by a U.S. copyrightowner. Whether the Supreme Court sides withCostco, and agrees with the amici, on this issuecould have a significant impact on the Court’sholding.
Another issue potentially on the horizon is that ofOmega’s impact, if any, on the analogous, althoughwholly non-statutory, doctrine of internationalpatent exhaustion. The Federal Circuit has held, asrecently as May 2010, that the foreign manufactureand sale of goods covered by one or more U.S.patents does not exhaust a patent holder’s rights insuch goods, but the Supreme Court has not direct-ly addressed this issue. The Supreme Court’s han-dling of Omega may prove instructive.
Either way it comes down, Omega is certain to havea lasting impact on the domestic retail industry.
For more information about this topic, please contactthe authors or any member of the Retail IndustryService Group Team.
August 2010 • Retail Industry Service Group Alert 2
This information is provided as an educational service and is not meant to be and should not be construed as legal advice. Readers with particular needs on specificissues should retain the services of competent counsel. Williams Mullen Retail Industry Service Group Alert. © 2010 Williams Mullen.Editorial inquiries should be directed to William A. Old, 757.629.0613 or [email protected]
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