On April 19, 2010, the United States Supreme Court granted certiorari in Costco Wholesale Corp. v. Omega, S.A., No. 08-1423, to decide whether the Copyright Act's first-sale doctrine, codified in 17 U.S.C. 109(a), applies to goods manufactured abroad that have been imported and sold in the United States without authorization from the copyright owner. The Supreme Court's answer should provide some clarity to the Copyright Act's "lawfully made under this title" language, and will likely have a great impact on businesses such as eBay and Amazon.com, which thrive on gray- or secondary market goods, genuine goods purchased overseas and imported into the United States without right-owner's consent and frequently sold at discounted prices.
The case stems from sales by Costco of Omega watches back in 2004. Omega manufactures its watches, which bear a small engraved emblem protected by U.S. copyright, in Switzerland. The watches were sold by Omega to authorized foreign distributors under agreement to limit sales to certain territories outside the U.S., but were later re-sold via unidentified third parties to a gray-market importer who sold them to Costco. Costco then sold the watches in the United States, without authority from Omega, at prices which undercut Omega's U.S. retailers. Omega filed a lawsuit alleging the sales constituted copyright infringement and moved for summary judgment. Costco filed a cross-motion arguing that under the first-sale doctrine, Omega's initial foreign sale of the watches exhausted its right of distribution and precludes any claim of infringement with regard to subsequent sales. The District Court found in Costco's favor without explanation, and Omega appealed.
The Court of Appeals for the Ninth Circuit reversed the District Court's decision, holding that Section 109(a) serves as a defense only with regard to copies made and sold in the United States, and not to copies that were first made and sold abroad. Thus, the Court found the first-sale doctrine unavailable as a defense to Omega's claims. In doing so, the Court reconciled that relevant precedent does not invalidate such a finding. First, it found that such a ruling is still consistent with Quality King Distribs., Inc. v. L'anza Res. Int'l., Inc., 523 U.S. 135 (1998), which held that infringement cannot occur where the owner of a copy "lawfully made under this title" imports and sells that copy without the authority of the copyright owner, by finding that the copies of the design on the watches sold by Costco were not "lawfully made under this title" due to the fact that they were first made and sold abroad and not in the United States. This was something that Quality King did not have to touch on, as the copies at issue in that case were produced in the United States. The Court found that to find otherwise would be problematic because it would impermissibly extend the Copyright Act extraterritorially by characterizing the making of copies abroad—conduct occurring entirely outside of the United States. The Court also found that the exception to this rule created in BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991), which states that the first-sale doctrine can still apply to copies manufactured abroad, so long as an authorized first sale occurs in the United States, does not apply in this case, because the first sale in the United States was not authorized. Thus, the Ninth Circuit explained that to qualify as a "lawfully made copy" under Section 109(a), the copy must be made with the authorization of the copyright owner and be produced in the United States.
After the decision, Costco petitioned the Supreme Court for a writ of certiorari, and several amici curiae, including eBay, submitted briefs in support. The opponents argue that the Ninth Circuit decision is bad for commerce in general, and especially for domestic manufacturing because it provides an incentive for companies to manufacture their goods abroad, where they will find more generous copyright protection. Further, they argue that there is no support in the text or legislative history for limiting the first-sale doctrine to domestically-manufactured goods.
The Solicitor General, at the request of the Supreme Court, submitted a brief to represent the views of the United States, arguing that the writ should be denied. The brief recognized that there are indeed concerns that the decision could provide an incentive to produce abroad, but argued that there is no evidence of such severe consequences as of yet, and also that the BMG exception reduces this threat. Further, it found that the decision re-affirmed Ninth Circuit precedent, was consistent with the consensus view of the leading commentators on Copyright law, such as Melville Nimmer, and did not conflict with any other decision of any Court of Appeals.
Regardless of the outcome, the Supreme Court's decision will impact any retailer, importer, or distributor who deals in goods manufactured abroad and brought to the United States without copyright owner's authorization. It is certain that the Court will attempt to strike a balance between protecting the copyright owner while also keeping in line with the other concern behind Copyright law—ensuring the monopoly provided the author is properly limited so as not to conflict with overriding public interests.
Vol. 53, June 2010