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Costco v. Omega

The latest copyright case to reach the Supreme Court pitted warehouse membership club and retail powerhouse Costco against Swiss luxury watch maker Omega. An equally divided Court affirmed a decision by the Ninth Circuit (Justice Kagan took no part in the consideration or decision of the case). Until similar fact again make their way to the Court, the Ninth Circuit’s reasoning holds, and the first sale doctrine of copyright law applies only to domestic sales, allowing a copyright holder to control the initial importation and distribution of copyrighted articles in the United States.

Legal Significance

This case brought into question the applicability of the first sale doctrine of copyright law to goods first sold in foreign markets, and later imported into the U.S.. Does the copyright owner, who did not authorize the distribution of copyrighted goods into the U.S., have the right to prevent, or otherwise control, their sale in the U.S. pursuant to copyright law?

Copyright Generally

Copyright law grants a “bundle” of rights to the owner of a U.S. copyright, including the exclusive right to reproduce the work, prepare derivative works, publically display or perform the work, etc. 17 U.S.C. § 106 (2010). One of these exclusive rights is the right to distribute copies of the work “to the public by sale or other transfer of ownership, or by rental, lease, or lending.” 17 U.S.C. § 106(3) (2010). Other provisions of the Copyright Act extend the exclusive right of distribution by making it an infringement to import copies of a copyrighted work into the U.S. without the authority of the copyright owner. 17 U.S.C. § 601 (2010). The exclusive right to import and distribute copies is fundamental to the framework of copyright law – it is what allows publishers to prevent the sale of unauthorized, “counterfeit,” or “knock-off” copies of a work.

First Sale Doctrine

A significant limitation on a copyright owner’s exclusive right to import or distribute copies of a work is the “first sale doctrine,” codified at 17 U.S.C. 109(a) (2010), which allows the owner of a particular copy of a work to sell or otherwise dispose of the possession of that copy without the authority of the copyright owner. In other words, the exclusive distribution/importation right of a copyright owner is extinguished, as to a particular copy, when that copy is first sold. The first sale doctrine allows for the operation of libraries, used book stores, and art auctions. Once a copyright owner has been compensated by sale of a particular copy of a book, painting, or other copyrighted work, the buyer is free to sell, loan, or give the copy away, as he or she sees fit, without seeking permission from the copyright owner.

17 U.S.C. § 109 states, in pertinent part, “[T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” The dispute in this case centered on the meaning of the phrase “lawfully made under this title.”

Facts

Costco Wholesale Corporation operates an international chain of membership warehouse clubs, and is the largest such chain in the United States. Omega SA is a luxury watchmaker in Switzerland.

Omega sells watches to both U.S. and foreign distributors, but not at the same price. In many cases, non-U.S. distributors pay significantly less for some watch models than U.S. distributors. For many years, Costco purchased Omega watches from third-party distributors, who had purchased the watches abroad and imported them into the U.S.. This allowed Costco to sell the watches to consumers at a significantly lower retail price than retailers who purchased the watches from U.S. distributors. For example, Costco sold the Omega “Seamaster” model watch for under $1,300; Omega’s U.S. suggested retail price for the Seamaster was nearly $2,000.

In 2003, after receiving complaints of Costco’s pricing from other U.S. retailers, Omega began engraving a small graphic symbol on the back of Seamaster watches. The “Omega Globe” symbol, consisting of three Greek omega symbols inside a circle, was approximately 1/8 inch across, and was barely perceptible. Omega registered copyrights in the Omega Globe design with the U.S. Copyright Office. The sole purpose of the marking was to track the sales of Seamaster watches through international commerce.

omega

In 2004, Costco purchased 117 (marked) Seamaster watches from ENE Limited, a New York importer who had obtained them, through third parties, from an authorized Omega distributor in Paraguay. After Costco sold 43 of the Seamaster watches to customers in California, Omega filed suit claiming copyright infringement for unauthorized distribution of the Omega Globe symbol engraved on the watch backs.

Proceedings Below

At the district court, Costco asserted that Omega’s right to control the distribution of the copyrighted design was extinguished upon its sale of the watches to the Portuguese distributor, invoking the first sale doctrine of 17 U.S.C. § 109(a). The district court agreed, granting Costco summary judgment (and legal fees) without issuing any written opinion. Omega appealed.

The Court of Appeals for the Ninth Circuit reversed, citing BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991). That case involved U.S.-copyrighted, foreign-manufactured sound recordings, imported into the U.S. without the copyright owner’s authorization, and then sold to the public. The Ninth Circuit in BMG held that § 109(a) was no defense to infringement under these circumstances, since “the phrase ‘lawfully made under this title’ in § 109(a) ‘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.” Omega v. Costco Wholesale Corp. 541 F.3d 982, 986 (9th Cir. 2008). The BMG court cited two policy reasons for this interpretation. First, a different interpretation would extend the Copyright Act extraterritorially. Second, the application of the first sale doctrine to foreign sales would “render § 602 virtually meaningless” as a tool for combating the unauthorized importation of non-pirated copies, since they almost always involve at least one foreign sale. BMG, 952 F.2d at 319-320.

Finding that Omega would clearly prevail under BMG, the Ninth Circuit then considered whether that result still held in light of the Supreme Court’s decision in Quality King Distribs., Inc. v. L’anza Res. Int’l, Inc., 523 U.S. 135 (1998). In that case, the Court held that the first sale doctrine was a defense to copyright infringement, in the case of “round-trip importation” of U.S.-produced goods. In Quality King, a product with a U.S.-copyrighted label was manufactured inside the United States, exported to an authorized foreign distributor, sold to unidentified third parties overseas, shipped back into the United States without the copyright owner’s permission, and then sold in California by unauthorized retailers. The Ninth Circuit distinguished Quality King from BMG, and hence the dispute between Costco and Omega, since the goods in Quality King were domestically produced. Indeed, the Ninth Circuit cited the Supreme Court explicitly sidestepping the issue. “[W]e do not today resolve cases in which the allegedly infringing imports were manufactured abroad.” Quality King, 523 U.S. at 154 (Ginsburg, J., concurring). The Ninth Circuit found the reasoning in Quality King was not clearly incompatible with BMG, and reversed both the summary judgment and award of legal fees below. Costco appealed, and the Supreme Court granted certiorari. Costco Wholesale Corp. v. Omega, S.A. (08-1423).

Oral Arguments

Oral Arguments before the Supreme Court, on November 8, 2010, centered on the phrase in § 109, “lawfully made under this title.”

Costco argued that restricting this phrase to mean goods manufactured in the U.S. would give a preference to foreign manufactured goods (by not allowing a copyright owner to restrict their distribution in the U.S.), contrary to any likely intent of Congress. Costco suggested an interpretation that “lawfully made under this title” means retention of U.S. copyrights by the copyright owner, regardless of the place of manufacture. Thus, for example, goods sold to a foreign distributor under an exclusive license or assignment of the copyright, would take the goods out of “under this title,” and § 109 would not apply. However, if the copyright owner retained any U.S. copyrights, then § 109 would apply fully, and its exclusive distribution rights would be extinguished upon the first sale to the foreign distributor. Costco relied heavily on dicta in Quality King and testimony made part of the legislative history of the 1976 Copyright Act in support of this argument.

Omega argued that “lawfully made under this title” means simply that the making of the copies was subject to or governed by U.S. copyright law. This implies that the “lawful[ness] . . . under this title” arises, not at the time (or place) or manufacture, but at the point of the first sale subject to the reach of U.S. copyright law. At that point, lawfulness is determined by whether the sale is authorized by the copyright holder.

The Deputy Solicitor General of the U.S. presented arguments on behalf of Omega, asserting that “lawfully made under this title” means made subject to and in accordance with the Copyright Act. Thus, since the Act has no application abroad, the phrase effectively means “made in the United States.” Accordingly, the first sale doctrine of § 109 would not apply to copies of works lawfully made under the laws of a foreign country, and the copyright owner could bar their importation pursuant to § 602. The policy argument offered in support of this interpretation was that it allows manufacturers to “carve up” markets territorially, granting a distributor a license to sell the goods in one country, but not another. In this case, applying the first sale doctrine to foreign sales would limit the copyright owner’s ability to enforce these licenses, at least in the U.S., through U.S. copyright law. Under this argument, even those goods manufactured abroad and specifically authorized by the copyright owner for distribution in the U.S., are not subject to the first sale doctrine.

The Supreme Court

An evenly divided Supreme Court (Kagan taking no part) affirmed the Ninth Circuit.

Conclusion

The Ninth Circuit held “that [the first sale doctrine] can provide a defense against [a copyright owner’s exclusive right to importation and distribution] claims only insofar as the claims involve domestically made copies of U.S.-copyrighted works . . .” Omega, 541 F.3d at 985. Accordingly, Omega has a valid copyright infringement claim against Costco, which is not extinguished by the prior sale of the items at issue to a foreign distributor.

This ruling may severely curtail activity in the grey market, as it allows manufacturers of virtually any type of goods to add some copyrightable design – however trivial – to the goods, register the design, and bring an action for copyright infringement against retailers who purchased the goods from foreign distributors. As the facts of this case demonstrate, copyright law provides powerful enforcement mechanisms, including injunctive relief, and shifting legal fees to a defendant.

The ultimate interpretation of “lawfully made under this title” in § 109 must await another legal challenge (presumably, the Supreme Court would again grant certiorari, since it felt the issue important enough to hear), or clarification by Congress.