Costco v Omega: Supreme Court to Address Gray Goods Market and First Sale Doctrine

On April 19, 2010, the Supreme Court granted certiorari to review the 9th Circuit's decision in Costco Wholesale Corp. v. Omega, S.A.  The grant has broad implications for companies who sell copyrightable goods at different price points in the U.S. and foreign markets, and retailers who exploit these pricing disparities by reselling the less-expensive foreign goods in the U.S. gray market (or "parallel import" market).  The question presented is whether, as the Ninth Circuit held, the first-sale doctrine does not apply to imported goods manufactured abroad.

The case originated when the Costco retail chain acquired genuine Swiss-produced Omega watches from foreign distributors and re-sold them in its US stores at below-market prices.  Based on a copyrighted logo on the watches, Omega sued Costco under Section 602(a) of the Copyright Act, which bars importation of copyrighted works without the copyright owner's permission.  Costco defended by relying on the first sale doctrine of Section 109(a) of the Copyright Act, which generally allows parties who have lawfully acquired ownership of copies of copyrighted goods to resell those copies to anyone they choose.  Under Costco's argument, copies lawfully bought abroad may be imported into the United States notwithstanding Section 602(a).

The district court granted summary judgment to Costco on the basis of the first sale doctrine, but the Ninth Circuit reversed, holding that the doctrine did not apply to copies manufactured outside the United States.  Attempting to reconcile Section 602(a) with Section 109(a), the court reasoned that the application of the first sale doctrine to foreign-manufactured goods would establish an unacceptable extraterritorial extension of American law. The Ninth Circuit distinguished Quality King Distributors v. L'Anza Research, 523 U.S. 135 (1998), on its facts, since that case ultimately upheld the first sale doctrine over Section 602(a) only with respect to copyrighted products that had been originally produced in the United States before being sold overseas and then imported again.

In their papers seeking and opposing certiorari, the parties argued whether Section 109(a)'s application of the first sale doctrine to all works "lawfully made under this title" included works made in foreign jurisdictions, and over the implications of Qualty King.  Costco drew support from the plain language of the statute.  Omega emphasized Justice Ginsberg's concurring opinion in Quality King and the legislative history of the statute.  Parties also disputed the policy implications of the case.  Costco and amici argued that the exclusion of foreign-produced works from the first sale doctrine would incentivize companies to shift production overseas, and would allow companies to exercise control over all resales in the US market (since retailers would be unable to differentiate between domestic and foreign-produced goods).  Omega argued that the inclusion of foreign-produced goods under the first sale doctrine would lead copyright owners to engage in complex licensing and corporate structuring arrangements to avoid the doctrine's ambit.  The Solicitor General filed an amicus brief opposing review, acknowledging some of the policy concerns raised by Costco but arguing that the Copyright Act reflected Congress's decision to prioritize copyright holders' interests in controlling imports ahead of retailers interests in exploiting the gray goods market.  The Court granted review over that opposition.

The Supreme Court's ultimate disposition of the case will affect how the gray goods and secondary markets evolve.  Two recent New York decisions, for example, rejected first sale defenses and held that the importation of textbooks sold inexpensively abroad is infringing.  A decision for Omega would ratify such decisions, allowing copyright holders to offer discounted pricing in international markets without fear that they will undercut their US distribution arms.  On the other hand, if Costco wins, retailers will likely be able to take advantage of international pricing discrepancies to offer consumers cheaper goods manufactured abroad, leading to growth of the gray market and the overall secondary market (and harming U.S. manufacturing).  The ruling may have particular importance for online retailers such as and Ebay, which conduct substantial business through the secondary market.

There is also a chance that the Supreme Court will address the propriety of using copyright law to control the distribution of non-copyrightable goods.  Several amici have questioned the practice of controlling non-copyrightable goods through their copyrighted labels, and the court's ruling may suggest that parallel import questions are better decided through a consumer confusion analysis under trademark law.

The case will be argued next fall and decided next year.


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