On Second Thought: Copyright’s First Sale Doctrine

8.3.15

Ninth Circuit reverses course on the first sale doctrine

If you’ve ever shopped at Costco, you may have enjoyed a significant discount on a product subject to copyright protection. That’s good for you — but maybe not so good for the copyright holder.

Unfortunately for those copyright holders, a recent ruling by the U.S. Court of Appeals for the Ninth Circuit in Omega S.A. v. Costco Wholesale Corp. leaves them vulnerable to the “gray market” that makes some of these discounts possible. The court’s decision marked a change from its previously held position, following the U.S. Supreme Court’s ruling in Kirtsaeng v. John Wiley & Sons, Inc.

Winding up in court

Omega manufactures watches in Switzerland and sells them globally through authorized distributors and retailers. The watches themselves are neither copyrighted nor copyrightable, but the undersides of the watches are engraved with an “Omega Globe Design.” This design is copyrighted in the United States.

Costco obtained some Omega watches with the copyrighted design from the gray market. Omega first sold the watches to authorized distributors overseas. Unidentified third parties eventually bought the watches and sold them to a U.S. company, which then sold them to Costco. The watches were eventually sold by Costco to consumers in California. Thus, while the initial foreign sale was authorized, the importation and Costco’s sales were not.

Omega sued Costco for copyright infringement. Costco claimed that, under the first sale doctrine, Omega’s initial foreign sale of the watches precluded its claims in connection with the later unauthorized sales. Under the first sale doctrine, once a copyright holder authorizes the sale of particular copies of its work, it loses the exclusive right to sell or distribute those physical copies and cannot interfere with later sales or distributions by the new owner.

Running out of time

In 2008, the Ninth Circuit held in this case that the first sale doctrine provides no protection against an infringement claim involving foreign-made, nonpirated copies of a U.S. copyrighted work unless the copies have already been sold in the United States with the copyright holder’s authorization. The Supreme Court, in a 4-4 decision, affirmed that ruling and returned the case to the trial court.

The lower court dismissed the case on the basis of Costco’s “copyright misuse” defense, and the case was again appealed to the Ninth Circuit. While the appeal was pending, the Supreme Court issued its ruling in Kirtsaeng, holding that the first sale doctrine applies to copyrighted works lawfully made abroad.

Because the Supreme Court’s first ruling in this case was equally divided and therefore “nonprecedential,” the Kirtsaeng holding was fully retroactive and applied to the appeal pending before the Ninth Circuit. As a result, Omega had no case against Costco, and the appeals court affirmed the trial court’s decision in Costco’s favor.

Turning to the defense

The majority opinion here didn’t address the copyright misuse defense because the first sale doctrine clearly disposed of Omega’s case. The defense forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the U.S. Copyright Office. Omega conceded that it wielded the copyrighted Globe Design to restrict the unauthorized sale of Omega watches in the United States.

The trial court held that Omega had misused its copyright to control the importation and sale of the watches that bore the design. In a concurring opinion by the appellate court, one of the judges agreed — finding that Omega had misused its copyright to obtain a copyright-like monopoly over the watches where Omega didn’t possess any copyright protection.

Watching out

The Omega case demonstrates how copyright holders are now exposed to both the gray market and the copyright misuse defense. Although it may be impossible to fully reduce risks of the former, copyright holders should take care not to forfeit potential infringement claims by misusing their copyrights.