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Special Feature -- U.S. Supreme Court to Consider First-Sale Doctrine

Tuesday, April 27, 2010

By Daniel C. Glazer and Michael R. Jones of Patterson Belknap Webb & Tyler LLP

Daniel C. Glazer is Counsel in the Intellectual Property Transactions Group at Patterson Belknap Webb & Tyler LLP. His practice focuses on intellectual property licensing, software and technology development, transfer and services arrangements, and the intellectual property and technology aspects of mergers, acquisitions, joint ventures, secured transactions, and other corporate transactions.

Michael R. Jones is an Associate in the Intellectual Property Transactions Group at Patterson Belknap Webb & Tyler LLP. His practice focuses on intellectual property transactions and counseling, particularly in the areas of technology, advanced and emerging media, privacy, and data security.

On April 19, the U.S. Supreme Court granted the petition for certiorari submitted by Costco Wholesale Corporation in its ongoing dispute with Omega, S.A., a case that may resolve the issue of whether the so-called “first-sale” doctrine in copyright law applies to goods manufactured outside, and then imported into, the United States.

Background of the Case

The action results from watches Omega manufactured in Switzerland and sold outside the United States. Costco purchased these watches from third-party importers and sold them in the United States at a substantial discount from Omega’s suggested U.S. retail price. Although Omega authorized the initial foreign sale of the watches, it did not authorize their importation into the United States or Costco’s U.S. sales. As a result, Omega sued Costco for copyright infringement, alleging that Costco’s unauthorized importation and distribution of Omega watches infringed Omega’s U.S. copyright covering the “Omega Globe Design” engraved on the watches.

Costco moved for summary judgment on the grounds that Omega’s initial foreign sale of the watches barred Omega’s claims of infringing importation and distribution, in accordance with the U.S. Copyright Act’s “first-sale” principles. The U.S. District Court for the Central District of California granted Costco’s motion in an unreported decision and without explanation. On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded, holding that the first-sale doctrine does not apply to goods manufactured and first sold outside the United States. Omega S.A v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008). Accordingly, Costco’s U.S. sale of Omega watches constituted the “first sale” for purposes of the first-sale doctrine and Omega’s infringement claims. Costco’s motion for rehearing was denied, and its petition for certiorari followed.

The First-Sale Doctrine

Costco highlights the potential tension between the Copyright Act’s “first-sale doctrine” (17 U.S.C. § 109(a)) and the Act’s prohibition on importation into the United States of copies of copyrighted works (17 U.S.C. § 602(a)).

Section 109(a) allows the owner of any copy “lawfully made under this title” to sell that copy without the copyright holder’s authority. Section 109(a) effectively permits resale following an initial sale of a work and is an exception to the copyright holder’s exclusive right to distribute copies of its copyrighted work under Section 106(3) of the Copyright Act. However, Section 602(a) of the Act states that the unauthorized importation into the United States of copies acquired outside the United States infringes the copyright holder’s exclusive rights of distribution. The Court thus appears poised to decide in Costcowhether Section 109(a) requires a copy of a copyrighted work to be “lawfully made” in the United States for the first-sale doctrine to apply.

Costco will be an opportunity for the Court to address an issue left unresolved in its most recent ruling on the first-sale doctrine, Quality King Distributors., Inc. v. L’Anza Research International, Inc., 523 U.S. 135, 138 (1998). In Quality King, the Court unanimously held that the first-sale doctrine applies to goods manufactured in the United States, sold abroad, and then re-imported into the United States; in other words, so-called “round-trip” reimportation does not infringe a copyright holder’s exclusive rights of distribution. In her concurrence, Justice Ginsburg noted the Court did not reach the question of whether the first-sale doctrine applies to goods manufactured outside the United States.

In its Costco opinion, the Ninth Circuit limited Quality King to its facts and held that “lawfully made under this title” effectively means “made in the United States.” Costco urges a more expansive reading of Section 109(a), arguing in its petition for certiorari that the phrase “lawfully made under this title” means made anywhere in accordance with U.S. copyright law. According to Costco, because Omega was both a U.S. copyright holder and the manufacturer of the allegedly infringing watches, the watches were “lawfully made under this title” although the initial sale occurred outside the United States.

Costco claims the Ninth Circuit’s analysis would result in “nonsensical” outcomes such as libraries no longer being able to lend foreign-language books made abroad, car rental companies no longer being able to rent cars manufactured abroad but equipped with software covered by a U.S. copyright registration, and movie rental businesses like Netflix and Blockbuster being forced to shut down if DVD manufacturers shift their disc duplication operations to Mexico or Canada.

In its brief in opposition to certiorari, Omega argued that the language of the Copyright Act is plain and unambiguous, there is no split on the issue among lower courts, and the Ninth Circuit’s ruling was consistent with Quality King. At the Supreme Court’s invitation, the Solicitor General filed a brief that, while acknowledging some discomfort with the Ninth Circuit’s decision, also opposed Costco’s petition. Several amici submitted briefs in support of Costco, including retailers such as eBay,, and Target, and trade associations representing retailers.

Potential Impact

The Supreme Court’s ruling in Costco could have significant commercial implications. Both Costco and its amici warn of grave consequences for the U.S. economy should the Court affirm the Ninth Circuit’s opinion (e.g., U.S. copyright owners would be more likely to move their manufacturing operations outside the United States). On the other hand, the expansion of the first-sale doctrine could result in an increase of “gray market” (or “secondary market”) goods entering the United States. Ultimately, however the Court decides Costco, Congress may consider amending the Copyright Act to clarify the scope of the first-sale doctrine and the interaction between Sections 109(a) and 602(a) of the Copyright Act.

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