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Costco v. Omega – The Gray Market versus the First Sale Doctrine (November 8, 2010)

A major copyright case that bears watching, Costco v. Omega (docket number 08-1423) was argued before the Supreme Court.  Specifically at issue in the Costco v. Omega case is whether Costco sold watches which bore Omega's copyrighted globe emblem, in violation of Omega's copyright.  More generally, the Court will have to determine whether the first sale doctrine applies to goods made and sold abroad.

The first sale doctrine, codified under 17 USC 109(a), provides that once a copyright owner sells a copy of his work made under the copyright laws, the copyright owner relinquishes all further rights to sell or otherwise dispose of that copy.  Thus, a defendant in a copyright infringement action can claim "first sale doctrine" of 17 USC 109(a) as a defense where the disputed copies of a copyrighted work were made and previously sold in the United States with the authority of the copyright owner.  It is unclear, however, whether such a defense is available where the product was made and sold abroad.  17 USC 602(a) states that importation into the US, without the permission of the copyright owner, "of copies or phonorecords of a work that have been acquired outside the United States" constitutes copyright infringement.

Omega manufactured the watches in question abroad and sold them to authorized overseas distributers.  Ultimately, the watches were sold to a New York company, which, in turn, sold them to Costco.  Costco then sold the watches to consumers in California at a discounted price.  Although Omega authorized the initial foreign sale of the watches, it did not authorize their importation into the US or the sales made by Costco.

Omega sued Costco alleging that Costco’s acquisition and sale of the watches constitute copyright infringement.  Costco maintains that its sale of the goods is protected under the first sale doctrine.  Omega maintains that the first sale doctrine does not apply where the goods are manufactured and sold abroad.  In deciding the case, the Court will have to decide whether goods lawfully made under the copyright laws refers only to goods made in the US, or, also, to goods made abroad.

If a work must be made in the US in order to qualify under the first sale doctrine, then Costco's resale of the Omega watches would not be protected by the first sale doctrine because the watches were made and sold abroad by Omega before being purchased by Costco.  Costco would thus be infringing under the provisions of 17 USC 602(a).

If on the other hand, there is no requirement that the goods be made domestically in order to qualify for the first sale doctrine, then Costco would be protected under the first sale doctrine.

The Ninth Circuit Court of Appeals, overturning a District Court decision, decided in Omega's favor, holding that in order to qualify for the first sale doctrine, the product had to be manufactured in the US, 541 F.3d 982 (9th Cir. 2008).

The case has major implications for manufacturers.  If the Court rules in favor of Omega, manufacturers would have an incentive to move production abroad as a means of thwarting gray market sales.  Gray market sales, although legal, are sales of goods subject to a trademark or copyright which occur outside the intended distribution channels of the manufacturer.  In this scenario, goods which are manufactured abroad and subject to a US copyright would not be subject to the first sale doctrine.  Thus, gray market importers of imported goods covered by a US copyright would not be protected by the safe harbor of the first sale doctrine.  Goods manufactured abroad would, in fact, have an advantage over domestically manufactured goods, to which the first sale doctrine would apply.

If, on the other hand, the Court rules for Costco, manufacturers will lose an important tool in their battle against gray market importers.  Applying a copyrighted element to a product and manufacturing it abroad would not trump the first sale doctrine.  Thus, gray marketers would be free to purchase abroad and import and sell domestically products subject to a US copyright, assuming the goods are not counterfeit. Of interest would be how the Court would reconcile an expanded first sale doctrine with 17 USC 602(a).

The case has attracted the attention of legal heavyweights. The Electronic Frontier Foundation and other organizations have weighed in in favor of Costco.  The US and the Business Software Alliance, among others, have weighed in on the side of Omega.

One thing is certain: the clock is ticking on this important case.

Jonathan Grad is an intellectual property lawyer and partner at the Eden Prairie law firm of Vidas, Arrett & Steinkraus, PA.

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