By Lisa M. Tittemore, Chair of our Trademark and Copyright Practice Groups
Copyright law can have a
direct impact on the availability and pricing of the products we
purchase. This is true in many ways, one of which was recently
addressed by the United States Supreme Court in Costco v. Omega, a case involving Costco's sale of gray-market watches.
In Costco, the
court had the opportunity to address a persistent conundrum involving
the "first sale doctrine" and answer the question: May a distributor
-- without the authorization, and even against the will of the
copyright owner -- resell copyrighted products in the U.S. that were
made abroad, intended only for sale abroad, and purchased abroad? The
justices' 4-4 tie left the question unanswered, to the disappointment
of the many people watching the Court and hoping for a definitive
resolution.
It is well established that
the purchaser of a copyrighted work made within the U.S. may resell
or otherwise transfer it to another party without violating the
copyright owner's rights. The first sale doctrine, codified in the
Copyright Act at 17 U.S.C. § 109, explicitly permits this further
distribution after an authorized first sale of a "lawfully made" work,
and "exhausts" the copyright owner's exclusive right of distribution.
Only the distribution right may be exhausted, not the other exclusive rights of the copyright owner (e.g.,
the right to copy, the right to make derivative works). Thus, if you
buy a copyrighted book, you may resell the book or give it as a gift to
someone else, but you may not make additional copies of it to
distribute.
For many years, and especially since the Supreme Court's 1998 decision in Quality King Distributors, Inc. v. L'Anza Research International, Inc.,
copyright scholars have debated the legality of importing into the
U.S. for distribution copyrighted goods which were made abroad and
intended only to be sold abroad (so called "gray market goods"). The
question turns largely on what constitutes a "lawfully made" item in
this context.
In Costco v. Omega,
Omega sued over Costco's sale in the U.S. of authentic Omega watches
which were unauthorized gray market goods. Costco had obtained the
watches from a third party which had purchased them from authorized
Omega distributors overseas. On the back of the watches was a symbol
that Omega had registered with the U.S. Copyright Office, enabling
Omega to assert a claim under the Copyright Act.
According to Omega, Costco
had threatened to sell "indirect merchandise" if Omega did not agree to
Costco's terms for carrying Omega watches in its stores. After
failing to reach agreement, Costco proceeded to acquire the watches
from sources outside the U.S. even though it knew that Omega did not
authorize the imports.
The trial court initially
barred Costco from selling the watches. Later, the judge withdrew the
injunction, accepting Costco's argument that the first sale doctrine
prevented Omega's copyright infringement claim.
On appeal, the Court of
Appeals for the Ninth Circuit reversed the trial judge's ruling,
holding that the Supreme Court's ruling in Quality King did not
invalidate the Ninth Circuit's "general rule" that the first sale
doctrine provides a defense to infringement "only insofar as the claims
involve domestically made copies of U.S.-copyrighted works."
Because the goods involved in Costco v. Omega
were made overseas, the Ninth Circuit held that the first sale
doctrine did not apply to bar Omega's infringement claims, and remanded
the case to the district court.
In Quality King,
the Supreme Court had determined that products made in the United States
and sold abroad but subsequently re-imported into the United States
without the copyright owner's consent would be covered by the "first
sale doctrine" and thus would preclude a copyright claim. In Quality King,
the Supreme Court did not address whether the first sale bar would
also apply to works made abroad. However, Justice Ginsburg's
concurrence hints that the first sale bar would apply only to goods
made within the U.S.
The Ninth Circuit expressed
concern that applying the first sale doctrine "to foreign-made copies
would violate the presumption against the extraterritorial application
of U.S. law." That is, U.S. law is presumed to apply only to conduct
occurring within or having effect within the United States unless
explicitly provided otherwise by statute.
Copyright scholars had hoped that Costco v. Omega would answer the question long left open by Quality King.
Unfortunately, the newest justice, Elena Kagan, could not participate
in the decision because of her earlier involvement in the case as U.S.
Solicitor General. Without a ninth justice to break the tie, the
Supreme Court was deadlocked.
As a result, the Ninth
Circuit's decision--that the first sale doctrine does not bar an
infringement claim for foreign-bought items resold in the U.S.--stands
intact, but the ruling has no precedential effect outside the Ninth
Circuit. Thus, courts in other circuits may reach differing
conclusions, and in those circuits, the question remains an open one.
Should a similar case reach the Supreme Court in its current
composition, Justice Kagan's vote will likely be the tiebreaking vote.
In the meantime, companies
concerned about the sale of gray market goods in the U.S. will want to
find ways to affix copyrighted works onto their goods as a way to stop
the importation of products that were made abroad for foreign sale
only, in the hopes that the Ninth's Circuit's rule will be adopted
elsewhere and ultimately affirmed by a majority of the Supreme Court.
Because under U.S.
trademark law, where the goods are authorized for sale abroad and
legitimately bear the company's trademarks, companies are generally
unable to pursue claims for trademark infringement. Accordingly,
seeking protection under the copyright laws has now become a favored
alternative for such companies.
Critics of the Ninth Circuit's decision fear
that it encourages international price discrimination whereby brand
owners can charge different prices for the same goods in different
markets without competition from third party importers. Retailers
believe that they should be allowed to import as they see fit any
legitimate, non-pirated items that had already been sold once at a
price of the copyright owner's choosing.
Now, however, if the Ninth Circuit decision gains wide acceptance, the
implications could extend beyond the importation of large quantities of
gray market goods. In fact, individual resellers and libraries might
face the burden of having to research the origins of every copyrighted
article that they own before selling it or lending it out.
Critics also argue that
from an economic perspective, the court's opinion may create perverse
incentives for companies to move their manufacturing facilities abroad
in order to avoid application of the first sale doctrine and retain
control over the downstream distribution of all sold items.
Such opponents may seek to promote these policy
questions before Congress rather than leave the issue to the courts.
Lisa M. Tittemore is a partner at Sunstein. Lisa focuses her practice
on intellectual property litigation, including management of complex
patent litigation, trademark and trade dress litigation, and copyright
litigation. Lisa has extensive experience with the development and
management of client trademark portfolios, and is the Chair of the
firm's Trademark and Copyright Practice Groups, overseeing the firm's
trademark and copyright litigation and prosecution practice.