On December 13, 2010, the Supreme Court affirmed the Ninth Circuit’s decision in Omega S.A. v. Costco Wholesale Corp., upholding the Ninth Circuit’s interpretation of the first sale doctrine as inapplicable to foreign-made goods covered by U.S. copyrights.
Omega, a Swiss luxury watch manufacturer, sold its products internationally through various authorized dealers in the U.S. and abroad. One such product, a watch that included a design protected by a U.S. copyright, was made overseas and sold by Omega to one of its authorized foreign distributors. Following this sale, these copyrighted watches were imported into the U.S. without Omega’s approval by an unidentified third party. The watches were then purchased by ENE Limited, a NY company, which in turn sold the watches to Costco, which then began selling them in California.
Upon learning of Costco’s sales, Omega filed a copyright infringement action in the Central District of California. In its defense, Costco argued that the first sale doctrine under 17 U.S.C. § 109(a) barred Omega’s ability to bring the action, because the watches were the subject of an authorized sale to one of Omega’s foreign distributors. This, Costco argued, shielded it from liability despite the fact that its subsequent U.S. sale was unauthorized. The district court agreed, ruling in favor of Costco on summary judgment. Omega promptly appealed.
On appeal, Omega argued that § 109(a) applies only to the sale of goods “lawfully made under [U.S. copyright law]” and, therefore, the first sale doctrine did not apply because the goods were made outside the U.S. In response, Costco asserted that Omega’s reliance on earlier Ninth Circuit case law, specifically BMG Music v. Perez1, Parfums Givenchy, Inc. v. Drug Emporium, Inc.,2 and Denbicare U.S.A. Inc. v. Toys “R” Us, Inc.,3was misplaced because these cases had been overruled by the Supreme Court in Quality King Distribs., Inc. v. L’anza Res. Int’l, Inc.4
In its opinion, the Ninth Circuit first restated that an owner of a copy “lawfully made under [Title 17]” who imports and sells that copy does not infringe under the first sale doctrine. After reviewing BMG Music, Drug Emporium, and Denbicare, the court turned to the Supreme Court’s Quality King decision. In Quality King, the copyrighted goods had been “round trip” imported: they were first manufactured in the U.S., exported through an authorized distributor, sold to an unidentified third party abroad, and then shipped back to the U.S. where they were sold without the copyright holder’s permission. The Court in Quality King ruled that the first sale doctrine provided a defense against copyright infringement under these facts. However, the Court declined to address whether the same result would be warranted if the copyrighted products were first manufactured outside the U.S.5
Picking up where Quality King left off, the Ninth Circuit concluded that the first sale doctrine provides a defense against copyright infringement “only insofar as the claims involve domestically made copies of U.S.-copyrighted works” (emphasis added).6 Thus, under this decision, the first sale doctrine is available as a defense only if the copies were legally made in the U.S. Accordingly, the Ninth Circuit rejected Costco’s position and reversed the district court, finding no inconsistency between Quality King and the rule of law established by BMG, Drug Emporium, and Denbicare. Costco then sought certiorari to the Supreme Court.
In a per curium opinion released December 13, 2010, an equally-divided Supreme Court affirmed the Ninth Circuit’s decision.7 Justice Kagan recused herself and took no part in the decision, most likely due to her role as Solicitor General in preparing an amicus brief on behalf of the U.S. In this brief, the U.S. supported Omega’s assertion that “lawfully made under this title” as used in § 109(a) means made in accordance with U.S. copyright law, which does not apply extraterritorially.
On its face, the case appears to strike a blow to one of the remaining openings in the gray market, and may provide a powerful tool for international manufacturers who maintain separate marketing and pricing structures in separate international markets. A foreign DVD, camera, or electronics manufacturer, for example, would be able to charge less for its goods in the Asian market than it does in the U.S., and could enforce that marketing decision so long as the goods themselves are manufactured outside the territory of the United States. The Ninth Circuit’s holding that foreign-made goods are excluded from the first sale doctrine, combined with the increasing trend of manufacturing luxury goods abroad, may result in higher prices due to a reduced gray market.8
But this decision may be less a “victory” for international venders than it appears at first glance. After all, the 4-4 split merely earns Omega a win by default, not an express affirmation of its legal position. Indeed, the decision may also be viewed as a near miss on a Ninth Circuit reversal, rather than as an approval of that court’s interpretation of § 109(a). While one might assume that Justice Kagan—in light of the position taken by her, as Solicitor General, on behalf of the government—would have given Omega the final, precedent-setting vote it needed had she taken part, there is no guarantee of that. Nor can one assume that, had it come to a reasoned decision, the Court would not have created its own, different interpretation of the disputed provision.
The outcome of last week’s decision leaves the Ninth Circuit at least9 in support of a narrow interpretation of the “first sale” doctrine and market division programs based on control of copyrights in products.