Split decision

Originally posted 2011-02-01 12:46:49. Republished by Blog Post Promoter

The threat from abroad?!

During my traditional end-of-December goof-off here I didn’t pay adequate attention to the important non-ruling in Costco v. Omega, which involves an issue I have had some involvement in.  That is the application of the First Sale Doctrine in copyright to what I think should be considered the specious category of “overseas only” copyright-protected material.  It’s another “diversion” play.  I think they’re all nonsense.  But unlike most diversion nonsense, this bit may have a statutory basis that has to be addressed.  Our Supreme Court … didn’t.  And neither did LIKELIHOOD OF CONFUSION®, but then again, I don’t get the big bucks to like those guys.

The other difference is I can just wing it, or, worse, crib from someone else.  So, as is so often the case when I miss one like that, however, I get the advantage of, well, copying from someone else.  Here’s some of what Richard Bergovoy has to say about it:

The United States Supreme Court deadlocked 4-4 on the question of whether the “first sale doctrine” permits copyrighted goods manufactured overseas but not authorized for sale in the United States to be sold here on the “gray market,” upholding a Ninth Circuit opinion which ruled in favor of the copyright owner that the doctrine does not apply.

The unsigned opinion in Costco Wholesale Corp. v. Omega S.A. was one of the shortest in the Court’s history: “The judgment is affirmed by an equally divided Court.” . . .

The case involved Omega Seamaster watches manufactured in Switzerland that were engraved on the underside with a US copyrighted “Omega Globe Design.” Omega sold the watches only for distribution in South America, but they found their way to the United States, where they were resold by Costco stores in California at a price of $1,299, compared to the $1,999 suggested retail price for authorized US resellers.

Omega sued Costco for copyright infringement on the grounds that Costco’s unauthorized sales of the Seamaster watches infringed Omega’s exclusive right under Section 106(3) of the Copyright Act of 1976 to distribute its work by sale, rental, lease, or lending.

Costco countered that Omega’s exclusive distribution right was preempted by the so-called first sale doctrine of Section 109(a) of the Copyright Act, which states that, “the owner of a particular copy…lawfully made” within the meaning of the Copyright Act is not subject to Section 106(3), so that once a copyright owner consents to the sale of its work, it loses its distribution right with respect to those copies, and the purchaser is free to transfer ownership in any way it wishes. . . .

Although the case was widely anticipated by both copyright owners (movie studios, record companies) and luxury goods manufacturers on the one hand, and retailers on the other hand, to bring clarity to the often tangled law of gray market goods, the Court’s split left in place the Ninth Circuit’s opinion for that circuit only, but set forth no single national standard and created no Supreme Court precedent. It is likely the Court will need to revisit the issue.

Similarly, in another widely anticipated IP case, delivered in June, the Court in Bilski v. Kappos fractured into three separate but overlapping opinions without setting forth a clarifying standard for what is patentable subject matter in the digital age.

Takeaway: For cases arising in the jurisdiction of the Ninth Circuit . . ., copyright owners will be able to pursue copyright infringement lawsuits against gray market sellers of their copyrighted goods that they manufactured overseas, and did not authorize for resale in the United States. Although not addressed in the Costco case, note that manufacturers may also have rights to sue gray market sellers under trademark law (the Lanham Act) to prevent US sales of their trademarked goods, if there is any material difference between the foreign version and the authorized US version, such as different product features or warranty coverage.

I don’t think I like it.

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Author:Ron Coleman

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3 Responses to “Split decision”

  1. February 2, 2011 at 9:09 am #

    Ron,

    I think the problem in Omega was that the Court got it totally wrong in L’anza 10 years ago when it held that the first sale doctrine applies to limit section 602. NO one every notes that section 602 by its very terms applies to works “acquired” outside the U.S. If a work is acquired, it is clear there was a first sale. Preventing the importation of that work does not limit the right of the owner to sell it again. But it does limit the distribution right to outside the U.S. If you take the position that the first sale doctrine applies but that sales outside the U.S. are not “first sales” then the law under the 1909 Act would also have prevented the importation of works. Clearly, section 602 was seen as providing a new right.

    Justice Ginsberg’s concurrence tracked a commonly held view popular among certain members of the Copyright bar that dates back to CBS Records v. Scorpio, a case where CBS Records first advanced the theory endorsed by Justice Ginsberg in L’anza. But that theory never had any legs; something that the Court recognized in oral argument in Omega.

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  2. February 2, 2011 at 12:57 pm #

    Great point, Steve — I appreciate your making it here. Only it comes out bad for me, I think. So I guess I have to work on that. Frankly, reading the statute, I also have seen it as problematic from the gray good importer’s point of view, and believed the fundamental objection had to be constitutional.

    On the other hand, man, I assume you read Judge Holwell’s opinion in Ganghua Liu? He really seemed to nail it for the defense side of this question — before, well, chickening out it seems (on a principled basis, you’d have to say).

Trackbacks/Pingbacks

  1. McDaniel Law Firm - February 1, 2011

    RT @RonColeman: Copyright-protected gray goods, Costco v. Omega and the Big Lie of "diversion." Phooey! http://bit.ly/fn1zIA | LIKELIHO …

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