Westchester attorney looks forward to SCOTUS copyright decision on first sale doctrine

Despite recent news out of the U.S. Supreme Court on just who will or will not don a robe, the high court will be hearing some pretty interesting cases this October, including a copyright action that could impact the way ma and pa do business on Ebay. It has to do with renowned watchmaker Omega and wholesale giant Costco. The essence of the argument is whether Omega, once it has lawfully sold goods overseas, has a right to prevent those same goods from being resold here in the United States.

In a nutshell, Omega manufactures watches in Switzerland and sells them both overseas and in the United States to authorized distributors and retailers.  In the case  before the high court, Omega made and sold the watches overseas to an authorized distributor. An unidentified third-party bought them overseas and sold them to ENE Ltd., a New York company, which in turn sold them to Costco for distribution in California. Although Omega authorized the foreign sale, it claimed it did not authorize the importation of those same watches into the U.S. and claimed copyright infringement of its logo under 17 U.S.C. §§106(3) and §602(a). Costco, on the other hand, cross-moved under 17 U.S.C. §109(a) arguing they are protected under the “first sale doctrine,” which allows a purchaser to transfer a lawfully made copy of a copyrighted work without permission from the copyright holder.

The watch giant sued Costco and prevailed in the 9th Circuit Court of Appeals, Omega S.A. v. Costco Wholsesale Corp., 541 F.3d 982 (9th Cir. 2008)  and Costco is appealing.  To the laymen it would appear this is one giant corporation battling another.  However, the implications of a decision are  far-reaching.  Imagine if an online cybrepreneur, someone who regularly sells on Ebay and the like, ,buys lawfully discounted goods from an overseas distributor and sells them to U.S. customers.   We’re not talking here about pirated goods but goods from the gray market where they are discounted so low by the manufacturer and wholesalers then go overseas and buy them in giant lots.  Under the 9th Circuit’s decision, those mom and pop cybrepreneurs could be liable for copyright infringement, totally changing the landscape of online sales, not to mention what many think is reinterpreting a long-standing statute.

The “first sale doctrine” was first set forth by the Supreme Court  over 100 years ago in its landmark case Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908) and it was later codified in the U.S. Copyright Act, 17 U.S.C. §109.   The statute clearly  states that “notwithstanding the provisions of §106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” It is pretty much a bright-line rule except in a gray market, where goods are sold legally but not necessarily in the manner or to the parties intended by the original manufacturer.  In the case before us, Omega watches typically sell for about $2,000 while COSTCO was able to offer them for $1,300 because of their wholesale discount.

The 9th Circuit looked to an early Supreme Court decision on a similar point and determined that  to extend such protections to goods made outside the U.S., under §109(a), unless those same goods have previously been sold by the owner inside the U.S., would be to impermissibly stretch the Copyright Act extraterritorially.  In my opinion it would not and I look forward to SCOTUS clarifying the issue once and for all.

A review of the SCOTUS decision in Quality King Distributors, Inc. v. L’anza Res International, Inc., 523 U.S. 135, 153 (1998) makes it clear that the court is eager to preserve goodwill for the United States in the global marketplace and hesitated at the idea that the intent of the statute was limiting.  Further, in writing the opinion for the Court, Justice Stevens made it clear that while discriminatory pricing had no relevance on the court’s decision, it was pertinent enough to note that this was a self-made dilemma by the manufacturer.

Further, I find it puzzling that Omega chose not to pursue a claim against the New York-based importer which sold the watches to Costco.  Even the 9th Circuit found that issue troubling and more so since Costco did not raise the issue as a defense.

Distribution channels and territories are no longer clearly delineated. More and more licensing and distribution agreements are drafted to encompass the world. More and more cyberpreneurs are purchasing goods in one country and selling them within the United States and vice versa, not to mention U.S.-based dealers who sell to domestic customers but have the orders drop-shipped directly from foreign distributors. Today’s “gray market” has become THE market and as long as manufacturers can still be protected from loss to pirated goods which steal the logo and make knock-off copies, I believe SCOTUS will be forced to interpret the statute in favor of Costco. Maybe that is one way to keep Granny in Kansas who sells a D & G necklace she carried over from the old country from being slammed with a copyright infringement suit when she tries to auction it on Ebay.