Costco Wholesale Corp. v. Omega, S.A.

Issues 

If a United States corporation resold foreign-manufactured goods obtained through a third party importer, may the reselling United States corporation defend on the grounds that the first sale doctrine applies and thus they are not liable for copyright infringement after the first sale of the goods?

Oral argument: 
November 8, 2010

Costco Wholesale Corporation sold watches manufactured in Switzerland by Omega S.A. without Omega’s prior authorization. Omega sued under the Copyright Act, claiming the sale of the watches was an infringement of their United States copyright. Costco defended on the grounds of the first sale doctrine, which currently provides a defense for reselling goods manufactured in the United States that are resold by retailers or distributors. Costco claims that the doctrine applies to foreign-manufactured goods as well. The district court granted Costco’s motion for summary judgment, but the Ninth Circuit reversed the ruling. The Supreme Court must now decide whether the  first sale  doctrine applies to goods manufactured abroad. The Court’s decision will influence copyright law, property rights, and the ability of retailers to resell goods.

Questions as Framed for the Court by the Parties 

Whether the Ninth Circuit correctly held that the first sale doctrine does not apply to imported goods manufactured abroad.

Facts 

Omega is a corporation that manufactures high-end watches in Switzerland.  The company sells its watches worldwide through an authorized network of distributors and retailers. Omega engraves a symbol on the underside of each watch. Known as the “Omega Globe Design,” the symbol has a United States copyright

Costco is a United States corporation that has offices in Europe and Asia.  The company is a warehouse-based retailer, selling wholesale brand-name goods at low retail prices.  For many years, Costco sold Omega watches that Costco legally obtained through third party distributors. 

Omega sold watches bearing the copyrighted Omega Globe Design to an authorized foreign distributor.  A third party bought the watches and sold them to a New York company called ENE Limited.  ENE Limited sold the watches to Costco, and Costco in turn sold the watches to its customers in California.  The watches intended for certain foreign markets are less expensive than those for the U.S. market; thus, this multi-step process allowed Costco to purchase and sell Omega watches at a lower cost than other U.S. distributors. Omega did not expressly permit Costco to sell the particular watches within the United States. 

Omega sued Costco for obtaining and selling the watches in California without Omega’s authorization.  Omega claimed that Costco’s actions amounted to infringement under the Copyright Act, which gives the authors of copyrighted works the exclusive right to reproduce, distribute, perform, display, license and prepare their work.  ;  Costco moved for summary judgment on the grounds that Omega’s initial foreign sale precluded claims based on subsequent sales. The United States District Court for the Central District of California ruled in favor of Costco’s motion for summary judgment and awarded Costco legal fees without issuing a published opinion. 

Omega appealed the District Court’s decision.  Omega based its argument on the fact that Section 109(a) of the Copyright Act, also known as the “first sale doctrine,” allows resale of copyrighted goods by the owner of a particular copy only when the copy was “lawfully made.”  Omega claimed that the products in question were not “lawfully made” because they were manufactured and first sold outside the United States. 

Costco, on the other hand, claimed that the “first sale doctrine” defense applied to goods manufactured both domestically and overseas.  Costco cited Quality King Dist. Inc. v. L’Anza Research International, Inc. for support, in which the Supreme Court reasoned that the first sale doctrine applied to goods that were manufactured in the United States, exported abroad, and then imported and resold without authorization back in the United States. 

The Ninth Circuit Court of Appeals reversed both the ruling for summary judgment and the award of legal fees. The court reasoned that BMG Music v. Perez was not overruled by Quality King and therefore controlled.   In BMG Music, the Ninth Circuit held that the first sale doctrine does not apply to foreign manufactured goods imported to the United States.  Costco appealed to the Supreme Court, arguing that the first sale doctrine should provide a defense to copyright infringement for goods manufactured overseas. 

Analysis 

A section of the Copyright Act, 17 U.S.C. § 106, grants copyright holders certain exclusive rights to distribute, or authorize others to distribute, copies of a copyrighted product. , Owners of a copy of a copyrighted product are allowed to distribute the copy without the copyright holder’s permission because of the “first sale doctrine.” This common law doctrine is codified in 17 U.S.C. § 109(a). The dispute in this case surrounds the statutory interpretation of the phrase “lawfully made under this title” from 17 U.S.C. § 109(a). Costco argues that “lawfully made under this title” includes any product made by the copyright holder, even if the place of manufacture is in a foreign country. Omega contends that “lawfully made under this title” means any product made under the authority of 17 U.S.C. § 109(a) and, because U.S. statutes only have effect in U.S. territory, foreign manufactured goods do not fall under the statute.

Competing Interpretations of “Lawfully Made Under This Title”

Costco argues for a “normal meaning” interpretation of “lawfully made under this title.” Costco states that the phrase “lawfully made under this title,” in normal usage by Congress, means “‘lawfully made’ according to, or as defined by, this title… [the Copyright Act].” Thus, Costco concludes that because Omega is the U.S. copyright holder, any copies that it makes, regardless of the place of manufacture, are lawful according to 17 U.S.C. § 106 and subject to the first sale doctrine codified in 17 U.S.C. § 109(a).

Omega wants to use the “plain meaning” interpretation of 17 U.S.C. § 109(a). Omega interprets “lawfully made under this title” to mean that a copy is lawfully made under this title if the making is both “governed by and consistent with the Copyright Act.” Omega then argues that 17 U.S.C. § 106 governs a copyright holder’s exclusive rights to distribute a good, but those exclusive rights do not apply to manufacturing that takes place outside of the United States. Omega contends that copies made in a foreign country are governed by the foreign country’s copyright law and not U.S. law. Finally, Omega concludes that when a copy is made outside of the U.S. and intended for distribution outside of the U.S., the copy is not governed by either 17 U.S.C. § 106 or 17 U.S.C. § 109(a).

Purpose of the First Sale Doctrine

Costco argues that the purpose of the first sale doctrine is to limit the amount of control exercised by the copyright holder. Costco argues that 17 U.S.C. § 106 grants a copyright holder the exclusive right to control the first public distribution of the copyrighted product. According to Costco, the first sale doctrine allows a copyright holder to control the initial distribution of his product, but prevents the copyright holder from controlling a copy’s distribution once it has entered the stream of commerce.

Omega argues that the purpose for the first sale doctrine is to allow a copyright holder to generally realize the full value of the copyrighted product in the initial authorized sale. Assuming the copyright holder realizes his full value in the initial sale, Omega contends that there is less justification for granting the copyright holder further control over the product’s distribution. Omega then argues that when a copy intended for foreign distribution is unexpectedly distributed in the U.S., the copyright holder has not bargained for full value because he didn’t intend for the copy to be distributed in the United States. Omega contends that the copyright holder would have bargained for compensation for the value of U.S. rights.

Statutory Interaction between 17 U.S.C. § 109(a) and 17 U.S.C. § 602(a)

Omega states Costco’s interpretation of “lawfully made under this title” would make the majority of 17 U.S.C. § 602 “superfluous.” Omega asserts that17 U.S.C. § 602 prevents the importation of both unauthorized and authorized copies of work acquired outside the United States. Omega argues that Section 602(a)(2) and Section 602(b) specifically deal with unauthorized copies. Omega then states that Costco’s interpretation of “lawfully made under this title” would apply 17 U.S.C. § 109(a) to all authorized titles, limiting Section 602(a)(1) to unauthorized copies. at Thus, Omega argues that Costco’s interpretation cannot be valid because the copies covered by Section 602(a)(2) and Section 602(b), unauthorized copies, would be the same as copies covered under Section 602(a)(1).

Costco responds to Omega by arguing that Congress was merely trying to close a loophole when it created the separate categories for 17 U.S.C. § 602(a)(2) and 17 U.S.C. § 602(b). Costco argues that Section 602(b) was designed to prevent importation of goods considered counterfeit under U.S. law, though lawful under foreign law. Finally, Costco argues that all three sections are overlapping, but cover different goods and have different remedies.

Which Interpretation of 17 U.S.C. § 109(a) Controls Under Quality King?

Omega argues that Quality Kingbars Costco’s interpretation of 17 U.S.C. § 109(a) because granting distribution rights can be separated between foreign and domestic markets. Omega contends that Quality Kingallows a copyright owner to grant distribution rights under U.S. copyright law to a U.S. distributor and distribution rights under foreign copyright law to a foreign distributor.

Costco argues that Quality Kingdoes not bar its interpretation of “lawfully made under this title.” Costco concedes that 17 U.S.C. § 602(a) applies to a category of copies that are made under a foreign country’s copyright laws. Costco argues that Omega misconstrues this discussion to mean that all copies necessarily are produced under a foreign country’s copyright laws. Furthermore, Costco states that even if a product is made under a foreign country’s copyright law, that product may still also conform to U.S. copyright law.

Key Implications

Costco argues that the Ninth Circuit’s decision, which adopted Omega’s interpretation of 17 U.S.C. § 109(a), has a litany of troubling implications. Costco argues that copyright holders would be able to eliminate both secondary markets for copyrighted products and the market for used goods. According to Costco, copyright holders would also be able to restrict rental-, lease-, and other lending-based markets. Costco also contends that the Ninth Circuit’s decision gives copyright holders an incentive to manufacture copyrighted goods abroad, thus eliminating U.S. jobs, because copyright holders have more protection if the goods were manufactured abroad. Finally, Costco asserts that downstream retailers would be unsure of the copyright status of their goods, creating risks, such as litigation expenses and seizure and loss of inventory that would be damaging for both the retailer and consumer.

Omega counters that the implications listed by Costco are empirically false. Omega asserts that there are no other cases where a copyright owner tried to enforce restrictions on resale of a copy that was intended for the United States. Additionally, Omega argues that the Ninth Circuit did not create new law, but merely reaffirmed a quarter century of established law. Finally, Omega concludes that the policy implications Costco fears would have happened already.

Discussion 

This case will address whether the first sale doctrine applies to goods manufactured abroad and imported to the United States. Under current law, the first sale doctrine provides a defense against copyright infringement if goods are manufactured in the United States; if a purchaser of a “lawfully made” copyrighted work wishes to transfer that good, he does not need the authorization of the copyright owner prior to the sale. The Supreme Court must decide whether the first sale doctrine applies to goods manufactured abroad, rather than in the United States, and whether Costco will have a defense based on the prior authorization of sale abroad. The decision could affect the market for the resale of copyrighted goods, and the policy surrounding copyright law. In addition, property rights of purchasers of copyrighted goods and the property rights of copyright owners could be affected by the Supreme Court’s decision.

Effect on Commerce

The Retail Industry Leaders Association (“RILA”) argues that the first sale doctrine protects openness in commerce because retailers and distributors can sell their goods on the market without fear of copyright liability. RILA contends that the first sale doctrine protects aftermarkets, which are markets for the resale of goods, because purchasers are assured that they can resell their goods. The group also argues that loss of first sale rights “likely will reduce purchasing in primary market sectors, both by reducing the initial incentive to purchase, and by denying consumers the proceeds from sales of used goods.”

The United States responds that Congress determined that the benefits of keeping the law of international market copyrights separate from domestic copyright law outweighs the potential impact on the aftermarket. The United States says that Congress wanted to restrict foreign goods from coming into the United States via third parties, who brought in goods that would otherwise be saleable.

Copyright Policy

The American Watch Association (“AWA”) argues that the decision will affect copyright policy and that copyright policy requires design originality, strengthens brand identity, and increases customer satisfaction. AWA asserts that the policy protects copyright owners against the creation of forgeries and counterfeits, which are sold on the black market. AWA contends that counterfeit goods decrease the value of the copyright owner’s good, and thus copyright policy protects the interest of the copyright holder.

Public Knowledge responds that the decision in this case will affect copyright policy if the Court rules in favor of Omega, because the copyright owner’s distribution rights would essentially exist in perpetuity for a good manufactured abroad. This means that each time a new owner sought to sell the good, he would have to get authorization from the copyright owner, and that process would continue indefinitely. Public Knowledge also argues that policy would also be affected by expanding the first sale doctrine to goods manufactured overseas because manufacturers could choose to work overseas and thus foreclose the secondary market altogether.

Property Rights

Public Citizen argues that the rights of property owners could be affected. It argues this is because owners of property should be able to resell their copyrighted goods, just as they can resell any property they own. Public Knowledge asserts that owners of books or other copyrighted materials manufactured abroad will not be able to dispose of their goods without prior authorization. Therefore, Public Knowledge argues that a ruling for Omega would chill the aftermarket and harm companies that sell used goods.

The Association of American Publishers (“AAP”) responds that the rights of copyright owners are of paramount importanceAAP argues that a core incentive of the Copyright Act is the right to exclusive distribution, which protects the copyright owner against unauthorized sale of the works. AAP also maintains that the right to control the distribution of imports allows copyright owners to control the content, packaging and timing of the distribution of their goods. Therefore, the group argues that a ruling in favor of Costco would infringe on a copyright owner’s ability to control the distribution of his work.

Conclusion 

This case will determine whether a retailer that resells goods imported to the United States through a third party may invoke the first sale doctrine and defend on the grounds that sales subsequent to the first sale of the good do not require the copyright holder’s prior authorization. Costco argues that any copy made by the U.S. copyright holder, even if the copy is manufactured abroad, is made under U.S. copyright law. On the other hand, Omega argues that a copy manufactured in a foreign country is made under the foreign copyright law, not United States law. The outcome of the case will affect copyright policy, property rights and the ability of retailers to re-sell imported goods.

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