July 14, 2015 Top Story

Copyright Does Not Bar Resale of Gray Market Goods

Attempt to prevent domestic resale of foreign-made goods deemed "copyright misuse"

Lauren M. Gregory

A retailer’s lawful purchase of copies of a watchmaker’s products manufactured abroad prevented the watchmaker from claiming the retailer’s discounted resale of the watches in the United States constituted copyright infringement. According to the U.S. Court of Appeals for the Ninth Circuit’s decision in Omega S.A. v. Costco Wholesale Corp., the “first sale” doctrine provides that once a copyright owner consents to the sale of particular copies of a work, that same copyright owner cannot later claim infringement for distribution of those copies,

The Omega Dispute

Luxury watchmaker Omega S.A. (Omega) obtained copyright protection for a globe design in 2003 and engraved this design on the back of some of its Seamaster watches. Omega sold the Seamaster watches through authorized United States and foreign distributors. Giant discount retailer Costco Wholesale Corp. (Costco) obtained 117 of the globe-engraved watches in 2004 on the “gray market”—a market legally circumventing normal distribution channels—where goods are sold for less than the manufacturer’s suggested retail price. Omega originally sold the watches to authorized foreign distributors that, in turn, sold them to unidentified third parties. These parties sold the watches to a New York–based company that sold the watches to Costco, which sold 43 of the watches in California. Ultimately, Costco undercut authorized U.S. retailers’ prices because the watches originally retailed for less abroad.

Omega sued Costco for copyright infringement, alleging Costco infringed the U.S. Copyright Act by importing copyrighted works without the copyright holder’s permission. The district court granted Costco summary judgment based on the “first sale” doctrine. The Ninth Circuit reversed, citing precedent holding that the “first sale” doctrine did not apply to copies of copyrighted works produced abroad.

On remand, the district court again ruled for Costco, finding that Omega misused its copyright on the globe design to impermissibly expand its limited monopoly. The court also granted Costco nearly $400,000 in attorney fees.

During Omega’s second appeal to the Ninth Circuit, the United States Supreme Court decided Kirtsaeng v. John Wiley & Sons, Inc., holding that the “first sale” doctrine applies where a product lawfully manufactured and purchased abroad is brought to the United States for resale without the copyright owner’s permission. The Ninth Circuit adopted the Supreme Court’s interpretation in Omega, explaining that despite Ninth Circuit precedent, Kirtsaeng “conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market.” Therefore, “Omega’s right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement.” The court also upheld the district court’s fee award.

Copyright Misuse

Omega “delivers an important message regarding the bounds of intellectual property law,” says Naomi Jane Gray, San Francisco, CA, cochair of the Copyrights Subcommittee of the ABA Section of Litigation’s Intellectual Property Litigation Committee.

Although federal copyright protection is robust, the monopoly afforded to authors of creative works is limited. “Copyright law is supposed to achieve a balance between the rights of the author and the rights of the public in order to promote progress in science and the arts,” Gray explains. “You cannot just take it and shape it to meet your own needs.”

“Judge Wardlaw’s concurring opinion in Omega fleshes out jurisprudence surrounding ‘copyright misuse,’ a relatively obscure, rarely used doctrine,” according to Daniel D. Quick, Troy, MI, cochair of the Section of Litigation’s Intellectual Property Litigation Committee.

“The concurrence advanced the dialogue on the boundaries of copyright law,” Quick says. “We are seeing judicial pushback on the use of copyright law for a purpose completely different from what was intended.”

In her concurrence, Judge Wardlaw criticizes the majority for focusing solely on the first sale doctrine when the district court’s reasoning focused on copyright misuse, an equitable defense uniquely applicable to the facts of the case. Omega’s decision to engrave the copyrighted globe design on the back of some of its watches was purely strategic. The company admitted it intended to use the design’s copyright protection to prevent unauthorized retailers from selling Omega products—not to protect the design itself. “An owner’s attempt to impermissibly expand his lawful protection from competition contravenes not only the policy of the copyright laws, but also the central purpose of antitrust laws.”

Gray lauds Judge Wardlaw for raising awareness of the copyright misuse defense. “Copyright misuse is an obscure doctrine not often seen,” she notes. “It is important for content owners to know it is out there and that it can offer them protection. It is also for users to know it’s out there and that copyright law has limits.”

The Post-Omega Gray Market

“It is rare to see such a blatant and an admitted misuse of copyright,” Gray says. Quick believes that “manufacturers will continue to use this and other avenues to exploit intellectual property law to limit gray market competition.” He notes “businesses have successfully used trademark law to block imports of products differing in formulation or packaging from domestically produced versions of those same products.”

“The gray market issue is a pervasive and long-lasting problem” that will not be eliminated by Omega, Quick believes. “As long as it is easy to take advantage of that arbitrage by importing foreign goods at lower prices and making money, people will continue to push the bounds of intellectual property law,” he observes.

Lauren M. Gregory is a contributing editor for Litigation News.

Keywords: copyright, infringement, “first sale” doctrine, gray market, resale

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