Supreme Court 4-4 Split Decision Results in Affirmance on Limitation of First Sale Doctrine

Omega obtained a U.S. copyright registration for the work. All of its watches are manufactured in Switzerland. Omega's chain of distribution includes international and U.S. networks of authorized distributors and retailers. Costco is not a member of this authorized chain of distribution.

Omega was able to trace the origins of the Costco watches (through serial numbers) to distributors in foreign countries, including Paraguay, Egypt, and Israel. These distributors have distribution agreements with Omega that contain geographic restrictions which prohibit the import or resale of the watches outside of their respective geographic territories (i.e., no right to sell or import to the United States).

Omega filed a complaint against Costco for copyright infringement based on ' 602(a) (now codified as ' 602(a)(1)) of the Copyright Act, which prohibits the importation into the United States of copyrighted works acquired abroad without the authority of the copyright holder.

Costco filed a motion for summary judgment claiming that the Copyright Act's first sale defense codified in ' 109 was a complete defense to Omega's copyright infringement claim. Under ' 109, “the owner of a particular copy ' lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”

Procedural History

The district court, without opinion, granted Costco's motion for summary judgment. Omega appealed to the Ninth Circuit Court of Appeals.

Precedent

Prior Supreme Court Precedent

The issue regarding the confluence of ” 602 and 109 has been litigated before. In 1998, the Supreme Court issued a unanimous opinion in Quality King Distribs. v. L'Anza Research Int'l, 523 U.S. 135 (1998) (“Quality King“). In Quality King, L'Anza manufactured hair care products bearing a copyrighted label. L'Anza's product and its copyrighted work were manufactured domestically and then sold to a foreign distributor. From the foreign distributor, the goods bearing the copyrighted label ended up back in the United States and were sold to defendant Quality King. The issue before the Supreme Court was whether the first sale doctrine was a defense to infringement under ' 602. The United States filed an amicus brief supporting plaintiff's position that the first sale was not a defense to infringing importation. The Supreme Court reversed the Ninth Circuit's decision that the first sale was not a defense to ' 602. The Ninth Circuit surmised that if the first sale doctrine applied to infringement under ' 602, then ' 602 would be virtually meaningless.

The Court found that importation was part of the distribution right granted under copyright law in ' 106(3). Because ' 106 is specifically subject to the defenses listed in the Copyright Act ” 107-120 (which includes the first sale doctrine), the Supreme Court found that the first sale applied and thus, Quality King did not infringe L'Anza's copyright.

However, the Court did not stop its analysis there. Instead, the Court explained that there could be instances which implicate a violation of ' 602, where ' 109 would not be a defense.

The Quality King Court provided three examples where ' 602 was not superfluous, and where the first sale defense would not apply:

1. For a private right of action for the importation of piratical or counterfeit goods (which would not be subject to the first sale);
2. For copyrighted goods that were imported by a non-owner, such as a bailee or licensee; and
3. Most relevant to the Omega v. Costco analysis: Section 109 would only cover goods lawfully made under this title.

For the third example, the Court provided a specific hypothetical example, involving a British publisher. First, the Court explained that under a market allocation agreement, where there could be a foreign and domestic edition of a book, the importation ban on piratical copies would include the foreign works. Second, without a market allocation agreement, a U.S. publisher and a British publisher may each make lawful copies, “however, presumably only those made by the publisher of the U.S. edition would be 'lawfully made under this title' within the meaning of Section 109(a).” Id. at 148.

The Supreme Court recognized that the case had implications on policies regarding parallel importation or gray market goods, but the Court maintained that its job was to interpret the Copyright Act. Id. at 153.

Finally, the decision in Quality King had a short but important concurrence from Justice Ruth Bader Ginsburg. In her concurrence, Justice Ginsburg noted that the specific facts in the case ' that L'Anza's product was domestically manufactured, shipped internationally and then returned to the United States ' addressed a situation of U.S.-based goods which took a “round trip.” Justice Ginsburg's limiting concurrence recognized that the case before the Court did not resolve cases where the copyrighted goods were manufactured abroad. Her concurrence concludes with two citations to leading copyright treatises (Patry and Goldstein), which find that the Copyright Act only applies in the United States. Id. at 154.

Prior Ninth Circuit Precedent

The Ninth Circuit had grappled before with the issue in a series of three other cases ' BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991) (“BMG“) (CDs); Parfums Givenchy v. Drug Emporium, 38 F.3d 477 (9th Cir. 1994) (“Drug Emporium“) (box enclosing perfume); and Denbicare U.S.A. v. Toys “R” Us, 84 F.3d 1143 (9th Cir. 1996) (“Denbicare“) (packaging for diapers).

All three cases involved foreign-made goods bearing copyrighted designs. In BMG and Drug Emporium, the court found that plaintiff's copyrights were infringed through unauthorized importation, and that the first sale did not apply to goods manufactured abroad where there was no authorized U.S. sale by the copyright holder. BMG, 952 F.2d at 319. Drug Emporium, 38 F.3d at 482. In Denbicare, the court upheld the previous rulings in BMG and Drug Emporium, but found in that particular case that there was an authorized U.S. sale of the goods bearing the copyrighted design when there was a sale (in bankruptcy) from a foreign trade zone. Denbicare, 84 F.3d at 1150.

Ninth Circuit's Decision

In Omega v. Costco, the Ninth Circuit was required to decide whether Quality King had overruled the previous Ninth Circuit precedent in the BMG, Drug Emporium, and Denbicare line of cases. 541 F.3d 982 (9th Cir. 2008). The Circuit Court held for Omega and reversed the decision of the District Court, finding that the first sale doctrine does not apply to foreign manufactured, lawfully made goods, unless those copies have been sold in the United States with the copyright holder's authority. Id. at 983.

The Ninth Circuit found that the Supreme Court's holding in Quality King was distinguishable from the Ninth Circuit line of cases because Quality King was based on “round-trip” goods. The court rejected Costco's argument that Quality King undercut prior Ninth Circuit precedents regarding territorial limitations of the U.S. Copyright Act. The court found specific textual support for its ruling from Quality King including the British publisher hypothetical. Id. at 988-989, citing Quality King, 523 U.S. at 147-148. The Ninth Circuit found further that Quality King did not overturn its previous precedents based on Justice Ginsburg's concurrence. Id. at 989.

Because the copies at issue were manufactured by Omega in Switzerland and Costco sold copies in the United States without Omega's authority, the Ninth Circuit held that the first sale exceptions did not apply. As a result, Omega maintained the right to exclude goods that violated its rights.

Appeal to the Supreme Court

Costco appealed the Ninth Circuit's ruling, seeking certiorari. In October 2009, the U.S. Supreme Court sought the views of the U.S. Solicitor General regarding whether to grant certiorari. In March 2010, the Solicitor General, in a brief signed by the now-Justice Elena Kagan, who at that time was U.S. Solicitor General, recommended to the Court that certiorari be denied. On April 19, 2010, the Supreme Court granted certiorari.

Amicus briefs were filed on behalf of both parties. Groups including the American Library Association, Intel, the Retailer Industry Leaders Association, and Public Knowledge filed briefs in favor of petitioner Costco. The American Bar Association, the Motion Picture Association of America, Business Software Alliance and the U.S. government, among others, all filed briefs in favor of respondent Omega.

The oral hearing took place on Nov. 8, 2010 before eight of the nine Supreme Court justices. The newest justice, Kagan, recused herself and did not take part because of her prior participation in the case as the Solicitor General advocating that Costco's Petition for Certiorari be denied. At oral argument, Omega argued that goods manufactured and sold outside of the United States are not governed by the U.S. Copyright Act. The hearing quickly turned to the spirited questions of the justices. There was particular emphasis on the meaning of the phrase “lawfully made” under the Copyright Act, as well as the interplay between ” 109 and 602. Justice Stephen Breyer questioned the bounds of the “first use” defense and Justice Antonin Scalia remained focused on the actual text of the statute. On Dec. 13, 2010, the Supreme Court issued an opinion affirming the Ninth Circuit's decision, holding that the judgment is affirmed by an equally divided court.

It is believed to be the first time the Court has affirmed a copyright, or any IP case, by an equally divided court since Lotus Dev. Corp. v. Borland, 516 U.S. 233 (1996). The case will be remanded back to the District Court for further proceedings on other issues still pending in that action.

Jess M. Collen and Tom Gulick practice with Collen IP. Collen IP represents plaintiff OMEGA SA in this matter.

On Dec. 13, 2010, the U.S. Supreme Court affirmed a Ninth Circuit decision limiting the first sale doctrine to copyrighted works manufactured in the United States or sold with the copyright holder's authority.

Case Facts

The controversy arose when Omega, a Swiss luxury watch manufacturer, discovered OMEGA 007 James Bond Seamaster watches at Costco Wholesale locations in California. These watches bear a copyrighted design that is laser engraved into the watch case referred to as the Omega Globe Design.

Omega obtained a U.S. copyright registration for the work. All of its watches are manufactured in Switzerland. Omega's chain of distribution includes international and U.S. networks of authorized distributors and retailers. Costco is not a member of this authorized chain of distribution.

Omega was able to trace the origins of the Costco watches (through serial numbers) to distributors in foreign countries, including Paraguay, Egypt, and Israel. These distributors have distribution agreements with Omega that contain geographic restrictions which prohibit the import or resale of the watches outside of their respective geographic territories (i.e., no right to sell or import to the United States).

Omega filed a complaint against Costco for copyright infringement based on ' 602(a) (now codified as ' 602(a)(1)) of the Copyright Act, which prohibits the importation into the United States of copyrighted works acquired abroad without the authority of the copyright holder.

Costco filed a motion for summary judgment claiming that the Copyright Act's first sale defense codified in ' 109 was a complete defense to Omega's copyright infringement claim. Under ' 109, “the owner of a particular copy ' lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.”

Procedural History

The district court, without opinion, granted Costco's motion for summary judgment. Omega appealed to the Ninth Circuit Court of Appeals.

Precedent

Prior Supreme Court Precedent

The issue regarding the confluence of ” 602 and 109 has been litigated before. In 1998, the Supreme Court issued a unanimous opinion in Quality King Distribs. v. L'Anza Research Int'l , 523 U.S. 135 (1998) (“ Quality King “). In Quality King, L'Anza manufactured hair care products bearing a copyrighted label. L'Anza's product and its copyrighted work were manufactured domestically and then sold to a foreign distributor. From the foreign distributor, the goods bearing the copyrighted label ended up back in the United States and were sold to defendant Quality King. The issue before the Supreme Court was whether the first sale doctrine was a defense to infringement under ' 602. The United States filed an amicus brief supporting plaintiff's position that the first sale was not a defense to infringing importation. The Supreme Court reversed the Ninth Circuit's decision that the first sale was not a defense to ' 602. The Ninth Circuit surmised that if the first sale doctrine applied to infringement under ' 602, then ' 602 would be virtually meaningless.

The Court found that importation was part of the distribution right granted under copyright law in ' 106(3). Because ' 106 is specifically subject to the defenses listed in the Copyright Act ” 107-120 (which includes the first sale doctrine), the Supreme Court found that the first sale applied and thus, Quality King did not infringe L'Anza's copyright.

However, the Court did not stop its analysis there. Instead, the Court explained that there could be instances which implicate a violation of ' 602, where ' 109 would not be a defense.

The Quality King Court provided three examples where ' 602 was not superfluous, and where the first sale defense would not apply:

1. For a private right of action for the importation of piratical or counterfeit goods (which would not be subject to the first sale);
2. For copyrighted goods that were imported by a non-owner, such as a bailee or licensee; and
3. Most relevant to the Omega v. Costco analysis: Section 109 would only cover goods lawfully made under this title.

For the third example, the Court provided a specific hypothetical example, involving a British publisher. First, the Court explained that under a market allocation agreement, where there could be a foreign and domestic edition of a book, the importation ban on piratical copies would include the foreign works. Second, without a market allocation agreement, a U.S. publisher and a British publisher may each make lawful copies, “however, presumably only those made by the publisher of the U.S. edition would be 'lawfully made under this title' within the meaning of Section 109(a).” Id. at 148.

The Supreme Court recognized that the case had implications on policies regarding parallel importation or gray market goods, but the Court maintained that its job was to interpret the Copyright Act. Id. at 153.

Finally, the decision in Quality King had a short but important concurrence from Justice Ruth Bader Ginsburg. In her concurrence, Justice Ginsburg noted that the specific facts in the case ' that L'Anza's product was domestically manufactured, shipped internationally and then returned to the United States ' addressed a situation of U.S.-based goods which took a “round trip.” Justice Ginsburg's limiting concurrence recognized that the case before the Court did not resolve cases where the copyrighted goods were manufactured abroad. Her concurrence concludes with two citations to leading copyright treatises (Patry and Goldstein), which find that the Copyright Act only applies in the United States. Id. at 154.

Prior Ninth Circuit Precedent

The Ninth Circuit had grappled before with the issue in a series of three other cases ' BMG Music v. Perez , 952 F.2d 318 (9th Cir. 1991) (“ BMG “) (CDs); Parfums Givenchy v. Drug Emporium , 38 F.3d 477 (9th Cir. 1994) (“ Drug Emporium “) (box enclosing perfume); and Denbicare U.S.A. v. Toys “R” Us, 84 F.3d 1143 (9th Cir. 1996) (“Denbicare“) (packaging for diapers).

All three cases involved foreign-made goods bearing copyrighted designs. In BMG and Drug Emporium, the court found that plaintiff's copyrights were infringed through unauthorized importation, and that the first sale did not apply to goods manufactured abroad where there was no authorized U.S. sale by the copyright holder. BMG, 952 F.2d at 319. Drug Emporium, 38 F.3d at 482. In Denbicare, the court upheld the previous rulings in BMG and Drug Emporium, but found in that particular case that there was an authorized U.S. sale of the goods bearing the copyrighted design when there was a sale (in bankruptcy) from a foreign trade zone. Denbicare, 84 F.3d at 1150.

Ninth Circuit's Decision

In Omega v. Costco, the Ninth Circuit was required to decide whether Quality King had overruled the previous Ninth Circuit precedent in the BMG, Drug Emporium, and Denbicare line of cases. 541 F.3d 982 (9th Cir. 2008). The Circuit Court held for Omega and reversed the decision of the District Court, finding that the first sale doctrine does not apply to foreign manufactured, lawfully made goods, unless those copies have been sold in the United States with the copyright holder's authority. Id. at 983.

The Ninth Circuit found that the Supreme Court's holding in Quality King was distinguishable from the Ninth Circuit line of cases because Quality King was based on “round-trip” goods. The court rejected Costco's argument that Quality King undercut prior Ninth Circuit precedents regarding territorial limitations of the U.S. Copyright Act. The court found specific textual support for its ruling from Quality King including the British publisher hypothetical. Id. at 988-989, citing Quality King, 523 U.S. at 147-148. The Ninth Circuit found further that Quality King did not overturn its previous precedents based on Justice Ginsburg's concurrence. Id. at 989.

Because the copies at issue were manufactured by Omega in Switzerland and Costco sold copies in the United States without Omega's authority, the Ninth Circuit held that the first sale exceptions did not apply. As a result, Omega maintained the right to exclude goods that violated its rights.

Appeal to the Supreme Court

Costco appealed the Ninth Circuit's ruling, seeking certiorari. In October 2009, the U.S. Supreme Court sought the views of the U.S. Solicitor General regarding whether to grant certiorari. In March 2010, the Solicitor General, in a brief signed by the now-Justice Elena Kagan, who at that time was U.S. Solicitor General, recommended to the Court that certiorari be denied. On April 19, 2010, the Supreme Court granted certiorari.

Amicus briefs were filed on behalf of both parties. Groups including the American Library Association, Intel, the Retailer Industry Leaders Association, and Public Knowledge filed briefs in favor of petitioner Costco. The American Bar Association, the Motion Picture Association of America, Business Software Alliance and the U.S. government, among others, all filed briefs in favor of respondent Omega.

The oral hearing took place on Nov. 8, 2010 before eight of the nine Supreme Court justices. The newest justice, Kagan, recused herself and did not take part because of her prior participation in the case as the Solicitor General advocating that Costco's Petition for Certiorari be denied. At oral argument, Omega argued that goods manufactured and sold outside of the United States are not governed by the U.S. Copyright Act. The hearing quickly turned to the spirited questions of the justices. There was particular emphasis on the meaning of the phrase “lawfully made” under the Copyright Act, as well as the interplay between ” 109 and 602. Justice Stephen Breyer questioned the bounds of the “first use” defense and Justice Antonin Scalia remained focused on the actual text of the statute. On Dec. 13, 2010, the Supreme Court issued an opinion affirming the Ninth Circuit's decision, holding that the judgment is affirmed by an equally divided court.

It is believed to be the first time the Court has affirmed a copyright, or any IP case, by an equally divided court since Lotus Dev. Corp. v. Borland , 516 U.S. 233 (1996). The case will be remanded back to the District Court for further proceedings on other issues still pending in that action.

Jess M. Collen and Tom Gulick practice with Collen IP. Collen IP represents plaintiff OMEGA SA in this matter.