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Retailers Should be Cautious Following Supreme Courtís Omega Decision

Wednesday, December 15, 2010

Copyright Law Can Keep Gray-Market Goods Out of US: Analysis from Wolf, Greenfield & Sacks, P.C.

An evenly divided U.S. Supreme Court issued a curt decision on Dec. 13 in a case that may have disappointed both manufacturers and retailers hoping to obtain legal clarity as to whether the importation of “gray-market” goods can be excluded under copyright law, according to Michael Albert, head of IP litigation at Wolf, Greenfield & Sacks, P.C., a Boston intellectual property law firm.

The split decision (4-4) has the effect of upholding–but without setting a precedent–the decision of the Ninth Circuit Court of Appeals in California, which ruled for the manufacturer seeking to keep foreign-made, copyrighted goods out of the United States, he said.

“At least in the nine Western states governed by the Ninth Circuit, the law now gives foreign manufacturers the full benefit of U.S. copyright laws when seeking to prevent domestic companies from selling their copyright-protected goods on the gray market,” Albert said. “Cautious retailers–particularly those with sales in Ninth Circuit states such as California–should assume that authorization may well be needed before importing and selling copyrighted foreign-made goods.”

On the other hand, manufacturers overseas should be aware that some risk remains in selling a foreign-made product to an overseas distributor. “If the Supreme Court ever revisits this issue, it might decide to allow U.S. retailers to import and sell those goods without the manufacturer's permission under the first-sale doctrine,” Albert said.

Manufacturers can still use U.S. trademark law to pursue gray-market retailers by asserting their right to maintain quality standards for trademarked goods - a right that persists after the first sale, he added.

The case, Omega v. Costco, arose when Swiss watchmaker Omega sued Costco under U.S. copyright laws for the unauthorized importation and subsequent sale of Omega’s foreign-made watches. Omega’s watches were protected by U.S. copyrights, but the big retailer raised the “first-sale” doctrine as a defense. That doctrine limits the ability of copyright owners to control the resale of their goods after the first authorized sale. Specifically, Costco argued that once Omega sold the watches to distributors overseas, the first-sale doctrine prevented any future sales from constituting copyright infringement, thereby allowing Costco to import and resell the watches in the U.S.

Prior to yesterday’s decision, it was unclear whether an earlier Supreme Court case, Quality King v. L’anza, extended the application of the first-sale doctrine to goods manufactured abroad. If it had, as Costco argued, then Omega’s foreign-made watches could be resold in the U.S. without authorization. Such a ruling would make it easier for U.S. companies to sell “gray-market” goods – goods that are not strictly counterfeit, but were not intended by the manufacturer to be sold in the U.S.

The federal court of appeals for the Ninth Circuit rejected Costco’s argument, because Quality King had involved goods that were manufactured in the U.S., exported and sold overseas, and then reimported and resold in the U.S. The first-sale doctrine applied in that case because of the “round-trip rule” – the fact that the goods made a “round trip” out of the U.S. and back did not change the underlying first-sale doctrine. (That doctrine still applies to goods manufactured in the U.S. and sold abroad under the round-trip rule.) But in Omega, the goods had first been made overseas, so importing them into the United States, without permission of the copyright owner, violated copyright law.

The Supreme Court agreed to hear the case, presumably to clarify its earlier decision in Quality King. But Justice Kagan removed herself from considering the case because she had been involved in it as a government lawyer before taking her seat on the Court. The remaining justices split 4-4, which has the effect of upholding the Ninth Circuit’s decision but without setting any binding precedent.

Manufacturers and retailers will need to await a future decision to learn definitively whether the first-sale doctrine applies to products made overseas, Albert said.

Wolf Greenfield, the largest law firm in New England devoted exclusively to intellectual property law, serves companies that make everything from pharmaceuticals to software to electronics to snowboards, as well as representing academic research centers. The firm counsels clients in the areas of patents, trademarks, copyrights, designs, trade secrets, and related licensing and litigation. Web:

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