Supreme Court affirms no first sale defence for foreign-made copies

On 13th December 2010 the Supreme Court affirmed the Ninth Circuit's decision in Omega SA v Costco Wholesale Corp, upholding the Ninth Circuit's interpretation of the first sale doctrine as inapplicable to foreign-made goods covered by US copyrights.

Background

Swiss luxury watch manufacturer Omega sold its products internationally through various authorised dealers in the United States and abroad. One such product, a watch that included a design protected by a US copyright, was made overseas and sold by Omega to one of its authorised foreign distributors. Following this sale, the copyrighted watches were imported into the United States by an unidentified third party without Omega's approval. The watches were then purchased by ENE Limited, a New York company, which in turn sold the watches to Costco, which began selling them in California.

Upon learning of Costco's sales, Omega filed a copyright infringement action in the Central District of California. In its defence Costco argued that the first sale doctrine under 17 USC § 109(a) barred Omega's ability to bring the action because the watches were the subject of an authorised sale to one of Omega's foreign distributors. Costco argued that this shielded it from liability despite the fact that the subsequent US sale was unauthorised. The district court agreed, ruling in favour of Costco on summary judgment. Omega appealed.

Appeal ruling

On appeal, Omega argued that Section 109(a) applies only to the sale of goods "lawfully made under [US copyright law]"; therefore, the first sale doctrine did not apply because the goods were made outside the United States. In response, Costco asserted that Omega's reliance on earlier Ninth Circuit case law (BMG Music v Perez 952 F 2d 318 (9th Cir 1991); Parfums Givenchy, Inc v Drug Emporium, Inc 38 F 3d 477 (9th Cir 1994); and Denbicare USA Inc v Toys R Us, Inc 84 F 3d 1143 (9th Cir 1996)) was misplaced because these cases had been overruled by the Supreme Court in Quality King Distribs, Inc v L'anza Res Int'l, Inc (523 US 135 (1998)).

In its opinion, the Ninth Circuit first restated that the owner of a copy "lawfully made under [Title 17]" who imports and sells that copy does not infringe under the first sale doctrine. After reviewing BMG Music, Drug Emporium and Denbicare, the court turned to the Supreme Court's Quality King decision. In Quality King the copyrighted goods had been 'round trip' imported: they were manufactured in the United States, exported through an authorised distributor, sold to an unidentified third party abroad and then shipped back to the United States, where they were sold without the copyright holder's permission. In Quality King the court ruled that the first sale doctrine provided a defence against copyright infringement in these circumstances. However, the court declined to address whether the same result would be warranted if the copyrighted products were first manufactured outside the United States.

Picking up where Quality King left off, the Ninth Circuit concluded that the first sale doctrine provides a defence against copyright infringement "only insofar as the claims involve domestically made copies of U.S.-copyrighted works" (emphasis added).(Omega SA v Costco Wholesale Corp, 541 F 3d 982, 985 (9th Cir 2008)). Thus, under this decision the first sale doctrine is available as a defence only if the copies were legally made in the United States. Accordingly, the Ninth Circuit rejected Costco's position and reversed the district court, finding no inconsistency between Quality King and the rule of law established by BMG, Drug Emporium and Denbicare.

Costco then sought certiorari to the Supreme Court.

Supreme Court decision

In a per curium opinion released on 13th December 2010, an equally divided Supreme Court affirmed the Ninth Circuit's decision.(Costco Wholesale Corp v Omega SA, 562 US __ (2010)). Justice Kagan recused herself and took no part in the decision, most likely due to her role as solicitor general in preparing an amicus brief on behalf of the United States. In the brief the United States supported Omega's assertion that "lawfully made under this title", as used in Section 109(a), means made in accordance with US copyright law, which does not apply extraterritorially.

On its face, the case appears to strike a blow to one of the remaining openings in the grey market and may provide a powerful tool for international manufacturers which maintain separate marketing and pricing structures in separate international markets. A foreign DVD, camera or electronics manufacturer, for example, would be able to charge less for its goods in the Asian market than it does in the United States, and could enforce that marketing decision provided that the goods themselves were manufactured outside the territory of the United States. The Ninth Circuit's holding that foreign-made goods are excluded from the first sale doctrine, combined with the increasing trend of manufacturing luxury goods abroad, may result in higher prices due to a reduced grey market.

However, this decision may be less of a victory for international vendors than it appears at first glance. After all, the four-four split merely earned Omega a win by default, not an express affirmation of its legal position. Indeed, the decision may also be viewed as a near miss on a Ninth Circuit reversal, rather than as an approval of that court's interpretation of Section 109(a). While one might assume that Kagan – in light of the position taken by her, as solicitor general, on behalf of the government – would have given Omega the final, precedent-setting vote it needed had she taken part, there is no guarantee of that. Nor can one assume that, had it come to a reasoned decision, the court would not have created its own, different interpretation of the disputed provision.

The decision leaves the Ninth Circuit in support of a narrow interpretation of the first sale doctrine and market division programmes based on control of copyrights in products.