Posted by: maroonmaurader | December 13, 2010

Costco v. Omega

A very interesting non-decision by the SC.

In short: Omega, a Swiss watch company, was selling their watches both in and out of the US. The price outside the US was substantially lower than that in the US. Costco started buying the watches outside the US, shipping them into the US, then re-selling them for $700 less than Omega’s suggested retail price in the US.

Costco figured they were on safe grounds due to first-sale doctrine – they legally bought the watches, and historically it was accepted that once you had bought something you were free to resell it. Omega challenged this, arguing that first-sale did not apply because the Copyright Act of 1976 (17 U.S.C. § 109) always phrases it’s permissions (which form the legal basis for first-sale doctrine) as referring to copies “lawfully made under this title.” Omega argued that foreign-made watches clearly were not made under that title, lawfully or unlawfully, as they were not made under US jurisdiction.

The district court ruled against Omega; the 9th circuit overturned that and decided first-sale did not apply to copies made in foreign territory. The Supreme Court accepted it, but with Kagan recused there were only 8 judges; they ultimately issued a divided 4-4 judgment, meaning that the 9th circuit ruling stands but it does not set precedent for other circuits.

This isn’t the first case where this issue has come up, but it’s the first (that I know of) on which the SC has addressed it.

If first-sale were to be limited in the way the 9th court ruling suggests, it would have some fairly drastic consequences. For example, every used book store would have to eliminate all foreign books from their collections, you could be sued if you were to give a friend a CD you bought while overseas, etc. etc.

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Responses

  1. (1) Does giving a friend a CD amount to selling it to him? (2) The law ordinarily makes a distinction between goods purchased by retailers for resale and used goods (the Copyright Act provision at issue’s use of “importation” suggests that’s what it’s about), so I expect used book dealers are still safe. (If not, though, it would be deserved punishment for the odious class of people who buy secondhand foreign books.) (3) Generally, the facts suggest to me that the Ninth Circuit’s concern was with Costco doing an end-run around Omega’s business plan; I expect they limited their holding to address that specific issue, accordingly.

  2. (1) I don’t know. However, the Copyright Act reserves to the copyright owner the exclusive right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending”. Giving a CD away sounds like a transfer of ownership to me. But again, I don’t know – I was simply going based on internet rumor plus intuitive reading of the statute, which is not necessarily correct. The first-sale clause grants and exception “to sell or otherwise dispose of the possession of that copy or phonorecord.”

    (2) Here’s an older article talking about the case from Joe Mullin, described as “Corporate Counsel” in the header: http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202471934530
    He specifically mentions that it could affect used bookstores.

    (3) Here’s the 9th-circuit decision: http://www.ca9.uscourts.gov/datastore/opinions/2008/09/03/0755368.pdf
    Read it for yourself if you want, but selected quote:
    “This circuit has construed 17 U.S.C. § 109(a) to provide no
    defense to an infringement action under §§ 106(3) and 602(a)
    that involves (1) foreign-made, nonpiratical copies of a U.S.-
    copyrighted work, (2) unless those same copies have already
    OMEGA v. COSTCO 12111
    been sold in the United States with the copyright owner’s
    authority. We hold that the first portion of this construction is
    not “clearly irreconcilable” with Quality King, and that it
    remains the law of this circuit.”
    109(a) is the first-sale exemption; 106(3) is the rights granted to copyright holders. Pretty cut and dried. (Quality King is a 1998 SCOTUS decision which stated that if a US-made copyrighted work was sold abroad, then a US distributor did not need the copyright holder’s permission to re-import it and re-sell it in the US.) So this issue only applies to foreign-made, foreign-sold, domestically re-sold copies (as opposed to domestically made, foreign-sold, domestically re-sold).

  3. (1) I should rephrase my elliptical assertion: giving a CD to a friend does not count as selling it to him. Nor as a transfer of ownership in the relevant sense. Look at the words surrounding “transfer of ownership” – they are all pretty clearly concerned with bargained for exchanges of title (“lending” included). Thus, noscitur a sociis, as well as common sense, limits the meaning of “transfer of ownership” to the bargain context.

    (2) “[P]arties can raise § 109(a) as a defense in cases involving foreign-made copies so long as a lawful domestic sale has occurred. See Drug Emporium, 38 F.3d at 481; Denbicare, 84 F.3d at 1150.” Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 989 (9th Cir. 2008).

    Dicta, so not dispositive, but pretty close to it. I read it as confirming that the used goods market, even in California, is basically unaffected by this decision. (Admittedly, a book that was purchased by somebody during his foreign travels and later resold in the US is not covered by this codicil, but the evidentiary problems of tracing a used book through the stream of commerce make that theoretical nicety practically moot.)

    I also read it as confirming (3) that this case’s practical effect – also the effect the 9th Circuit intended – is to limit importers from disrupting foreign companies’ marketing strategies.

  4. The evidentiary problems actually are not that overwhelming. Many foreign books were never legally sold in the US – especially ones not in English. And most books have different printings (and even different publishers) for domestic US release and foreign releases. If a particular edition of a particular book (or other copyrighted material) had no licensed US distributors, than any copies being sold in the US obviously cannot have originated from a legal domestic sale.


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