First sale doctrine in the US: a closer look at Costco

In  last Thursday's round-up, Annsley the AmeriKat brought news of Omega v Costco, a US Court of Appeals for the Ninth Circuit ruling on that most fascinating of legal beasts, first sale doctrine.  Well, the IPKat has just received an analysis of that decision fresh from our recent guest Kat Marie-Andrée Weiss, which he is delighted to host.  Writes Marie-Andrée:

First Sale Doctrine lets retailer sell in U.S. grey market watches bought abroad 

On 20 January a three-judge panel from the 9th Circuit affirmed a Central District of California decision which had granted summary judgment to the defendant, U.S. discount retailer Costco. The discounter had been sued for copyright infringement by Swiss luxury watch manufacturer Omega. This case is Omega S.A. v Costco Wholesale Corp., No. 11-57137 (9th Circ.).

A grey market of genuine luxury goods

Costco sold Omega “Seamaster” watches in its stores. It had purchased them abroad in 2004 in the “grey market,”after Omega had sold the watches to authorized foreign distributors (instead of buying goods directly from an official supplier, some companies buy genuine goods in the secondary market, after they have been first sold by an authorized distributor).

Choosing where your products will be sold, or “placement”, is an important part of the marketing mix. The watches were sold by Costco for 35% less than Omega’s suggested retail price (p.19) and “price” is also a component of the marketing mix. It is therefore not surprising that many luxury companies are less than happy to see their products sold by discount retailers, for fear of losing the aura of prestige which is one of the reasons customers may buy a luxury product.

Omega did not want its watches to be sold by Costco, and sued the discount retailer for copyright infringement, arguing that it had breached §602 of the Copyright Act, which forbids importing protected works into the United States “without the authority of the owner of copyright.” As watches cannot usually be protected by copyright in the U.S., because they are useful articles, Omega had each of the Seamaster watches engraved on its underside with a tiny copyrighted Omega design, the “Globe Design,” in order to be able to assert a copyright in them. Costco did not have permission to use this design.

Omega watches: pile 'em high, buy 'em cheap?

Costco asserted a first sale doctrine defence. The Central District of California granted summary judgment to Costco, noting that Omega had engraved the Globe Design on its watches at least in part to control importation of the watches, and thus had misused its copyright. But the 9th Circuit reversed the decision in 2008 and remanded, holding that the first sale doctrine does not apply to copies of works produced abroad. The Supreme Court affirmed per curiam in 2010. On remand, the district court granted again summary judgment to Costco. Omega appealed and the 9th Circuit affirmed this time, because the Supreme Court held in 2013 in Kirtsaeng v John Wiley & Sons that the first sale doctrine applies to goods manufactured abroad.

First sale doctrine

§109(a) of the Copyright Act authorises the owner of a lawfully made copy of a protected work to sell or dispose of that copy without having to ask permission of the copyright owner. Therefore, once a copy of a protected work has been lawfully sold, the owner of that copy, and the subsequent owners as well, may dispose of it as they wish, because the first sale of the work has "exhausted" the copyright owner's exclusive distribution right under § 106(3).

Another Omega
luxury brand ... 

In Quality King Distributors, Inc. v L'anza Research Int'l, Inc., the Supreme Court held in 1998 that §602(a)(1), which refers to §106(3)'s exclusive distribution right, incorporates the "first sale" doctrine limitation. That means that §602(a)(1) allows the importation into the United States of a copy of a protected work purchased abroad. In Quality King, however, the copy, while purchased abroad, had been manufactured in the U.S.A., and thus the case could be distinguished from Costco. But while the Costco suit was under way, the Supreme Court held in 2013, in Kirtsaeng v John Wiley & Sons, that the first sale doctrine also applies to copies of protected works lawfully manufactured abroad. Since the Kirtsaeng judgment retroactively applied in Costco, the Ninth Circuit found that Omega had no copyright infringement cause of action against Costco:

“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” (p.7).

This decision is a big victory for Costco and similar retailers alike. As noted by Judge Wardlaw in her concurring opinion, Costco sells “a wide range of luxury goods, including Dom Pérignon Champagne, Waterford crystal, Dolce & Gabbana handbags”(p. 9). We may soon see more luxury goods in discounter’s aisles, alongside gallons of laundry detergent and giant cans of tomato soup".