On December 13, 2010, the Supreme Court issued a split decision (due to Justice Kagan’s recusal) in Omega S.A. v. Costco Wholesale Corp., 562 U.S. ___ (2010), thereby affirming the 9th Circuit ruling that the “first sale doctrine” does not serve as a defense to copyright infringement where one imports into the United States genuine, foreign-made copies of a copyrighted work without the authorization of the copyright owner. As it was a split decision, however, it does not serve as nationwide precedent. Nevertheless, in the 9th Circuit, the “first sale” defense can be used only in situations where the disputed copies of a copyrighted work are either made or previously sold in the United States with the authority of the copyright owner. As such, copyright owners of foreign-made copies are afforded significant protection in the 9th Circuit against the importation of “grey market” goods, allowing them greater control over the distribution and price of their products.

The relevant facts of the case were not in dispute and, to a large degree, reflect the business operations of many companies. Omega manufactures watches in Switzerland and sells them around the world through a network of authorized distributors and retailers. The underside of each Omega watch bears a laser-engraved globe design, which is the subject of a U.S. copyright. Costco obtained Omega watches bearing the copyrighted globe design from the “grey market” at reduced prices and sold them at its retail locations in California. More specifically, Omega first sold its Swiss-made watches to authorized distributors outside the United States under agreements that restricted resale to specific territories outside the United States. Those watches were eventually purchased by unidentified third-parties and sold to a New York company, which in turn sold them to Costco. Costco subsequently sold the watches to consumers in California at a significant discount to the price offered by authorized Omega retailers. As the watches were made abroad and Omega did not authorize distribution of the watches into the United States, Omega filed suit against Costco for copyright infringement pursuant to 17 U.S.C. §§ 106(3) and 602(a).1

Costco argued that its sale of genuine Omega watches was permitted under the “first sale doctrine” of the Copyright Act, which provides that “the owner of a particular copy … lawfully made under this title ... is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy ….” 17 U.S.C. § 109(a).

The answer of whether the “first sale doctrine” could serve as a valid defense hinged on the court’s interpretation of the language “lawfully made under this title.” The 9th Circuit held that, pursuant to circuit precedent, copies manufactured abroad did not qualify as copies lawfully made under the Copyright Act. The rationale being that application of the “first sale doctrine” to such copies would: 1) impermissibly extend the Copyright Act extraterritorially, and 2) would render the importation right in Section 602 “‘virtually meaningless’ as a tool against the unauthorized importation of nonpiratical copies because importation is almost always preceded by at least one lawful foreign sale that will have exhausted the distribution right on which § 602(a) is premised.” Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 986 (9th Cir. 2008). In essence, the court found it would be inappropriate to “ascribe legality under the Copyright Act to conduct that occurs entirely outside the United States.” Id. at 988. Maintaining circuit precedent, the court held that § 109(a) grants first sale protection only to copies made in the United States or sold in the United States with the copyright owner’s authority.2

In limiting the application of the “first sale” defense, Costco can no longer sell the “grey market” Omega watches within the 9th Circuit at the significantly reduced prices it once was. Accordingly, this is a significant victory for Omega and other companies experiencing problems with “grey market” goods. Of course, since the decision does not serve as precedent, the question of whether the “first sale” defense applies to imported copies manufactured abroad continues to be of extreme interest to many industries. Indeed, the answer to that question has a direct impact on the ability of copyright owners to prevent the sale within the United States of “grey market” goods and, therefore, to better control the distribution and pricing of their goods.

Placing copies made abroad beyond the scope of the “first sale” defense makes it much easier for companies that own U.S. copyrights to combat secondary markets for their goods. Since the threshold of creativity needed to obtain copyright protection in the United States is rather low, and the cost to obtain U.S. copyright registrations is generally insignificant, companies should give consideration to adding or incorporating copyrighted logos, labels, printed materials, packaging and other copyrighted works to their goods as part of their legal strategy to combat “grey market” resellers. The strategy worked for Omega and with some creativity may be utilized successfully by companies in many different industries.

1Section 602(a) reads: “Importation into the United States, without the authority of the owner of copyright under this title, of copies … of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies … under section 106, actionable under section 501.”

Section 106(3) reads: “Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights … to distribute copies … of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.”

2In reaching its decision, the 9th Circuit distinguished the Supreme Court’s holding in Quality King Distribs., Inc. v. L’anza Res. Int’l, Inc., 523 U.S. 135 (1998), which held the “first sale doctrine” can serve as a defense to an action under section 602(a).  As the circuit court noted, unlike the Omega watches which were manufactured outside the United States, Quality King involved the sale of copyrighted products that originated from within the United States, which were later sold to a third-party overseas and subsequently shipped back into the United States.