When the First Sale is Not a First Sale

The U.S. Supreme Court Copyright Decision of Omega, S.A. v. Costco Wholesale Corporation

The Supreme Court of the United States recently decided a copyright case involving Swiss watchmaker Omega and retail giant Costco.

In a 4-4 split, with no reasons, the Supreme Court affirmed the Omega, S.A. v. Costco Wholesale Corporation decision of the Ninth Circuit Court (541 F. 3d 982 (9th Cir. 2008)).

Omega's Complaint

The facts of this copyright case were not in dispute. Omega manufactured watches in Switzerland and sold them globally through a network of authorized distributors and retailers. Costco was not one of them. However, the Omega watches managed to end up in Costco stores in California, selling for less than the suggested retail price for authorized resellers in the United States.

How did this happen? Omega first sold the watches to authorized distributors abroad. Unidentified third parties eventually purchased the watches and in turn sold them to a New York company (ENE Limited), which in turn sold them to Costco. Omega authorized the initial foreign sale of the watches. However, Omega did not authorize their importation into the United States or the subsequent sales made by Costco.

What was the copyrighted work in this case? The work subject to U.S. copyright protection in this case appeared on the underside of the Omega watches: an “Omega Globe Design”.

Based on these facts, Omega filed a lawsuit against Costco, alleging that Costco's acquisition and sale of the watches constituted copyright infringement. In particular, Omega alleged that Costco's activities infringed its exclusive right to distribute copies of the copyrighted work to the public by sale or other transfer of ownership (17 U.S.C. §106(3)). Omega also relied on another provision which provides that importation into the United States, without the authority of the owner of copyright, of copies of a work that has been acquired outside the United States is an infringement of the exclusive right to distribute copies (17 U.S.C. §602(a)).

After filing the lawsuit, Omega moved for summary judgment. Costco filed a cross-motion on the basis of the so-called first sale doctrine, codified in 17 U.S.C. §109(a) as follows:

Notwithstanding the provisions of section 106(3), the owner of a particular copy 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.

Under this doctrine, once a copyright owner consents to the sale of particular copies of his/her work (the first sale), he/she may not thereafter exercise the distribution right with respect to those copies. This allows libraries to lend books, video stores to rent DVDs and other grey market activity.

This defence, according to Costco, precluded Omega, who made the initial foreign sale of the watches, from claiming infringing distribution and importation in connection with the subsequent, unauthorized sales of authentic Omega watches. In other words, Costco argued that Omega's first sale abroad triggered the first sale doctrine.

The district court ruled in favour of Costco on both motions. Omega successfully appealed to the Ninth Circuit Court.

The Narrow Interpretation of the First Sale Doctrine (§§109(a))

The Ninth Circuit Court construed the first sale doctrine narrowly. It held that the first sale doctrine provides no defence to an infringement action (under §§106(3) and 602(a)) that involves foreign-made, authentic copies of a U.S. copyrighted work, unless those same copies have already been sold in the United States with the copyright owner's authority. In other words, the first sale doctrine did not apply to the sale of U.S. copyrighted works manufactured abroad and not authorized for resale in the United States.

Since there was no genuine dispute that Omega made the copies of the disputed design abroad (in Switzerland) and that Costco sold them in the United States without Omega's authority, the first sale doctrine was not available to Costco as a defence to Omega's claim.

What does this Mean?

The 4-4 split in the US Supreme Court means that the Ninth Circuit's ruling in favour of Omega will be upheld. That ruling, however, will only be binding in jurisdictions covered by the Ninth Circuit, which covers western United States. What does this mean for foreign manufacturers and brand owners? In obtaining U.S. copyright protection, a foreign manufacturer may, indirectly, prevent or control the unauthorized importation of authentic products (grey goods) manufactured abroad into the United States, or at least the states covered by the Ninth Circuit.

Technology Update edited by Robert Irani
Jeilah Y. Chan is an IP litigation associate in Bennett Jones' Toronto office. Ms. Chan's article was published in Carswell's Legal Alert.