Details of Supreme Court Decision that Returned Costco "Gray Market" Case to District Court
The Supreme Court’s 4-4 split vote1 in “Costco Wholesale Corporation v. Omega,” on December 13, 2010 effectively affirmed the appeals court’s reversal and remand of the district court’s favorable ruling for Costco on copyright infringement of “gray market” Omega watches.
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As a result, the district court must now reconsider Omega’s original copyright infringement suit in light of the appeals court decision.
(Gray market or parallel market goods are genuine products with a trademark or copyright, imported into the U.S. by third parties without the manufacturer’s authorization, generally to take advantage of lower prices in different countries.)
District Court Ruled “First Sale” Defense Applied to Costco, Dismissed Omega’s Claims
Omega alleged that Costco’s sales of its watches infringed the copyrighted brand symbol imprinted on the watch backs. In district court, Costco raised the “first sale” defense, according to which copyright holders have protection for only the first sale of an item, not subsequent re-sales. The district court agreed with Costco and dismissed Omega’s legal claims of infringement.
(Costco had acquired Omega watches that Omega had originally sold to distributors in countries with lower suggested retail prices than in the U.S. The actual “first sale” of the product was outside the U.S., from Omega to a distributor.)
Appeals Court Found No Matching Precedent
The appeals court considered whether a defendant in a copyright infringement action, Costco in this case, can use the “first sale” defense where the copyrighted item was both made and sold abroad before being imported. The court examined its own precedents, which date from before 1998, and the Supreme Court’s 1998 ruling in Quality Kings2, a case which addressed only the unauthorized re-importation of U.S.-made goods. None of the precedent cases exactly matched the facts in Omega v. Costco, which involves unauthorized re-sales in the U.S. of products made and sold earlier abroad. As a result, the court’s ruling on Costco’s first sale defense brings a new precedent.
Appeals Court Defined “First Sale” as First Sale Within the U.S.
The appeals court concluded that to recognize Omega’s earlier sales abroad as “first sales” would amount to making an extraterritorial extension of U.S. copyright law. The court therefore ruled that the “first sale” defense is not available to Costco’s unauthorized re-sales of Omega watches, and reversed the district court. Under the court’s ruling, the “first sale” would be the first sale within the United States, and if it is made without the copyright holder’s authorization, it is subject to infringement actions.
(According to legal sources, the appeals court ruling means that copyright holders in the 9th Circuit would now have protection against unauthorized sales of goods, like Omega’s watches, which are made abroad and originally sold abroad, then later sold in the U.S. without the copyright holder’s authorization, since under the ruling, the “first sale” means not the original sale or sales abroad but the first sale made within the U.S. By the same token, resellers or importers selling foreign-made copyrighted goods in the U.S. for the first time would have liability in infringement actions like Omega’s.)
Supreme Court Vote Carries no Weight
The Supreme Court’s unsigned tie vote results in the 9th Circuit’s decision being upheld within that jurisdiction3, but fails to give a binding precedent nationally. Another Supreme Court decision addressing the same issues, and ruled on by the full bench, would be required to set a national precedent ruling, according to attorneys.
Suit Remanded to District Court
The U.S. District Court for the Central District Court of California now gets the case back on remand to consider Omega’s infringement suit and damages claims in full. (It had previously granted summary judgment to Costco based on the first sale defense that was the target of the appeals court’s reversal).
1Supreme Court Justice Elena Kagan recused herself from the case because as Solicitor General she had recently argued in favor of rejecting Costco’s appeal.
2In 1998 the Supreme Court ruled in Quality King Distributors v. L’anza Research International, Inc., that the first-sale doctrine applies to goods made in the U.S. but sold abroad before re-importation, meaning that subsequent sales made in the U.S. were not protected, i.e., could not be found to be infringements.
3The 9th Circuit comprises: Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam and the Northern Mariana Islands.
(See ITT’s Online Archives or 12/15/10 news, 10121529, for BP summary announcing the Supreme Court’s decision. See ITT’s Online Archives or 06/14/2010 news, 10061426, for BP summary of a different appeals court decision affecting the rights of copyright holders and gray market importers.)
Supreme Court’s one-sentence Per Curiam, dated 12/13/10 available here.
Ninth Circuit decision in favor of Omega S.A., filed 09/03/08, available here.