Bensen on Costco Wholesale Corp. v. Omega S.A.: What Does a 4-4 Tie Say About the Future of the First Sale Doctrine?

Costco Wholesale Corp. v. Omega, S.A., 131 S. Ct. 565 (U.S. 2010) [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law] concerned U.S. sales of a U.S. copyrighted work that was manufactured and first sold abroad. The case ended in a 4-4 tie, avoiding how broadly the Court would construe the first sale doctrine. However, in light of the Court's unanimous decision in Quality King Distribs. v. L'Anza Research Int'l, 523 U.S. 135 (U.S. 1998) [enhanced version / unenhanced version], the Costco non-decision may foreshadow a shift in the Court toward a broader understanding, impacting not only copyright law, but, potentially, patent law. In this Commentary, Eric Bensen discusses the first sale doctrine and examines both Costco and Quality King. He writes:

The Grey Market and IP Exhaustion Doctrines

     The backdrop for the Costco decision, of course, is the "grey market." In some cases, it is cheaper to acquire a manufacturer's product abroad than it is to acquire it in the United States because the manufacturer follows a pricing strategy that calls for higher prices in the United States than in foreign markets for the same product. It is sometimes so much cheaper that it is potentially profitable to acquire the product in quantity abroad and re-sell it in the United States at a lower price than that at which "parallel" articles authorized for sale in the United States are sold. This is essentially what CWC [Costco Wholesale] did with Omega watches. Such re-selling is known as the "gray" market; "gray" because in the typical case, it is neither authorized by the manufacturer nor expressly prohibited by law. Because the gray market goods sell at a discount relative the parallel products authorized for sale in the United States, manufacturers will go to great lengths to prevent gray market sales.

     The gray market is possible from an intellectual property perspective because each of copyright law, patent law and trademark law to some extent allows the purchaser of an item to use or re-sell an item without incurring liability for infringement.

     Copyright. As noted above, the Copyright Act expressly provides that the owner of a copy can sell or otherwise dispose of the copy without infringing the copyright, although ownership of a copy does not entitle the owner to exercise the author's other exclusive rights provided the Copyright Act, such as the right to make additional copies. At the very least, copyrighted work manufactured in the United States and sold abroad can be imported to the United States and re-sold without infringing the copyright (whether a foreign-made copy is subject to the first doctrine, of course, is the issue in Costco).

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