In Omega S.A. v. Costco Wholesale Corp., a global luxury watch company sued an American discount warehouse club based on the defendant’s importation into the United States of a line of the plaintiff’s luxury watches without the permission of the plaintiff copyright holder. Applying the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., the Ninth Circuit held that the first sale doctrine barred the watch company’s copyright infringement claim because of an authorized first sale of the watches in a foreign jurisdiction.
The first sale doctrine, codified at 17 U.S.C. § 109(a), means that once a copyright owner consents to the sale of particular copies of a work, that same copyright owner cannot later claim infringement for distribution of those copies. As Kirtsaeng explained, the purchaser of the copyrighted work can bring that copy into the United States and distribute it without obtaining permission to do so from the copyright owner. The copyright owner’s distribution and importation rights expire after the first sale, regardless of where the item was manufactured or first sold.
Specifically, in Omega, the Ninth Circuit found that that first sale doctrine was triggered when plaintiff “Omega sold the watches to authorized foreign distributors.” The watches were then sold to “unidentified third parties,” who then sold them to a New York company from whom defendant Costco purchased the watches on the “gray market” before selling them to its club members in California for less than Omega’s suggested retail price. In light of the authorized first sale to the foreign distributors, the Ninth Circuit held that Omega has no copyright infringement claim and affirmed summary judgment in Costco’s favor.
The Omega decision marks a complete change in position by the Ninth Circuit in this case, which has a complicated history and has been going on for more than a decade. In 2008, prior to the Supreme Court’s Kirtsaeng decision, the Ninth Circuit had held that the first sale doctrine was unavailable to Costco as a defense to Omega’s claims because the watches were not manufactured in the United States. The Ninth Circuit’s 2008 holding was then affirmed in 2010 by an equally divided Supreme Court. Therefore, the first sale doctrine was not in play in 2011 when the district court issued the summary judgment from which the Omega decision arises.
The Omega decision also is important, as the Ninth Circuit now recognizes, because it “conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market.” Thus, following Omega, it is expected that unauthorized U.S. retailers, like Costco, will continue to use the “gray market” to circumvent distribution models, like that of Omega, in order to sell genuine brand-name products at a discount and undercut the prices of the authorized U.S. retailers. In addition, the Omega decision is noteworthy because of the lengthy concurrence of Judge Wardlaw to affirm summary judgment for Costco based on the defense of copyright misuse. That equitable doctrine, which has been discussed “in only a handful of published opinions” and applied “sparingly,” “forbids the use of [a] copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office and which is contrary to public policy to grant.”
In particular, Judge Wardlaw agreed with the district court’s 2011 finding that “Omega impermissibly used the defensive shield of copyright as a sword.” In the view of the concurrence, Omega misused its copyright by engraving Omega’s copyrighted globe design on the underside its watches (that, otherwise, were useful articles that were not entitled to copyright protection) in order to control the importation and sale of the watches in the United States by unauthorized discount retailers, like Costco. Notably, the district court was constrained to applying the misuse defense because the first sale doctrine was not available to it in 2011, prior to the Supreme Court’s 2013 Kirtsaeng decision.
The concurrence indicates that Omega’s acts directly controverted the aims of copyright law, which not only seeks to encourage and reward creative work, but to promote broad public availability of the arts. The concurrence, therefore, serves as a shot across the bow to copyright holders against attempting to leverage copyrights to control areas outside their limited statutory monopolies.
