The Supreme Court's Affirmance of the Ninth Circuit's Decision in Costco Wholesale Corp. v. Omega, S.A. Still Leaves Some Open Issues

Businesses affected by the sale of gray market goods were anticipating the December 13, 2010 Supreme Court decision on international copyright exhaustion in Costco Wholesale Corp. v. Omega, S.A. The case was on appeal from the Ninth Circuit’s decision finding that the first sale doctrine did not apply to goods manufactured outside of the United States and imported into the United States, and that therefore a copyright owner could prevent importation and sale of its own products, manufactured outside the United States, by unauthorized parties. See Foley’s prior Legal News Alert at http://tinyurl.com/2wo9v6j. The anti-climactic result was a one-sentence per curiam decision affirming the Ninth Circuit decision because of a 4-4 split among the eight participating justices. (Justice Kagan, who had participated in the case while Solicitor General, recused herself.)

The Supreme Court was confronted with the question of whether Section 602(a) of the Copyright Act (which grants an unqualified right to prevent importation of copyrighted works without the authorization of the copyright owner) trumps Section 109(a) of the Copyright Act (the first sale doctrine) even in the face of a lawful first sale outside of the United States. Yesterday’s decision affirms the Ninth Circuit’s answer of “yes” to this question.

Exhaustion has previously extended to goods that were manufactured in the United States, sold to foreign distributors, and then reimported into the United States, thus making a “round trip.” See Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998). This is consistent with domestic patent exhaustion. See Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (S.Ct. 2008). However, the open question for both copyright law and patent law was whether international exhaustion applied to goods that are manufactured abroad and then imported into the United States. The Supreme Court’s split opinion upholds the Ninth Circuit’s decision as the law in that circuit but does not create a precedent for the rest of the country. The door therefore remains open for conflicting decisions in other circuits regarding international copyright exhaustion, as well an independent decision by the Federal Circuit in the patent context.

Affirmance of the Ninth Circuit

The case was appealed from the Ninth Circuit Court of Appeal’s decision, Omega S.A. v. Costco Wholesale Corp. 541 F.3d 982 (9th Cir. 2008), wherein the court held that the first sale doctrine did not apply because Omega, the copyright holder, had neither made nor authorized the sale of the copyrighted goods in the United States. Costco was thus held liable for copyright infringement and appealed.

Costco imported and sold a batch of 117 Omega Seamaster watches imprinted with a U.S.-copyrighted “Omega Globe Design.” The watches were manufactured in Switzerland and sold to authorized, foreign distributors in Egypt and Paraguay. Costco imported and sold the watches in its California stores for about $700 less than Omega’s suggested price. Omega sued Costco for copyright infringement alleging that Costco had violated the Copyright Act’s prohibitions on unauthorized importation and distribution of copyrighted works under 17 U.S.C. § 602(a) and 17 U.S.C. § 106(3). Costco countered that its acts were shielded by the first sale doctrine. The Ninth Circuit held that the first sale doctrine was not a defense because Omega had neither made nor authorized the sale of the watches in the United States. To hold otherwise, the Ninth Circuit reasoned, would violate the general presumption against the extraterritorial application of U.S. law.

Potential Implications in the Patent Context

Many commentators thought the Costco decision would provide the Federal Circuit with guidance in the area of international patent exhaustion. Despite more than a century of dealing with patent exhaustion, the Supreme Court has not issued an opinion squarely ruling on the applicability of international patent exhaustion for goods manufactured abroad.

Given that many U.S. entities have copyright and patent rights all over the world, a decision adopting international exhaustion would have implications for enforcement efforts and licensing arrangements, as well as potentially affect the strength or value of particular IP rights abroad. On the flip side, a decision rejecting international exhaustion may have encouraged U.S. manufacturers to move some manufacturing operations overseas to prevent entities from selling authentic used goods manufactured abroad. This topic continues to be a source of debate as other countries (including in the European Union (as to member states) and Japan) have adopted some form of international exhaustion.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Jason Keener
Chicago, Illinois
312.832.5109
[email protected]

Andrew Baum
New York, New York
212.338.3527
[email protected]

Jeanne Gills
Chicago, Illiniois
312.832.4583
[email protected]