Cheaper Watches and Copyright Law: Navigating "gray Markets" After the Supreme Court's Split in Costco v. Omega, S.a

• Citation: Vol. 7 No. 3
• Publication year: 2012

Washington Journal of Law, Technology Arts Law, Technology and ArtsVolume 7, Issue 3 Winter 2012

Cheaper Watches and Copyright Law: Navigating "Gray Markets" After the Supreme Court's Split in Costco v. Omega, S.A.

Parker A. Howell(fn*)

Abstract

Some manufacturers seek to prevent unauthorized importation and sale of their foreign-made products, called "gray market" goods or "parallel imports," through copyright law. U.S. copyright law prohibits importation of copyrighted works without the copyright owner's permission. At least one manufacturer, Omega, sought to extend this protection to its watches, a useful product, by affixing copyrighted logos. In Costco v. Omega, S.A., Omega claimed Costco violated its distribution right by selling the watches in the U.S., while Costco contended that a first sale abroad had extinguished Omega's rights. The case reached the U.S. Supreme Court, which affirmed by an evenly divided court the Ninth Circuit's holding that the first-sale doctrine does not apply when products are initially made and sold abroad. The Court's decision suggested that copyright law might offer businesses a potent method to fight parallel importation. However, on remand the district court granted summary judgment to Costco on the rationale that applying a copyrighted logo to an otherwise useful product constituted copyright "misuse." While Omega has appealed, the district court's decision suggests a critical limitation on producers' use of copyright to protect utilitarian goods from unauthorized importation and sale.

Table of Contents

Introduction .............................................................................. 239

I. Background on Gray Market Products ................................ 241

II. Legal Regimes for Control of Parallel Importation ............. 243

A.Traditional Lines of Defense: Tariff and Trademark Law ......................................................................... 244

B.Attempts to Use Copyright Law as a Means to Prevent Parallel Importation ................................ 245

C.Courts Reach Different Conclusions about the Contours of the First-Sale Doctrine as Applied to Parallel Imports ................................................... 246

III. Implications of the Costco Court's Split Affirmance for the Scope of the First-Sale Defense ............................... 252

A.The Second Circuit Follows Costco by Limiting the First-Sale Defense .............................................. 254

B.Congressional Revision of Federal Intellectual Property Law Would Alleviate Doctrinal Uncertainty .............................................................. 255

IV. How Far Will Courts Extend Protection to Copyrighted Logos on Utilitarian Articles? ............................................ 256

A.Extension of Copyright Protection to Otherwise Utilitarian Articles Implicates Antitrust Concerns .... 257

B.On Remand, the District Court Grants Summary Judgment for Costco Based on Omega's Copyright "Misuse" .................................................................. 260

C.The Copyright Misuse Doctrine Offers a Remedy to Overbroad Use of Copyright in the Parallel Importation Context ................................................. 261

Conclusion ................................................................................ 262

Practice Pointers ....................................................................... 263

Introduction

Authentic, name-brand goods acquired abroad and sold domestically at a discount have found their way into (oronto) the hands of U.S. consumers for decades-undercutting companies' attempts to maintain separate pricing structures for their products in domestic and foreign markets. Globalization and the historical strength of the U.S. dollar have fueled the trend of retailers relying on these "parallel imports," also known as "gray market" goods, as a cost-effective way to source products.(fn1)

Although federal tariff and trademark laws prohibit certain parallel imports, these doctrines offer limited remedies. For example, trademark law only forbids unauthorized importation of products that bear material differences from their domestic counterparts. Some companies have turned to copyright law in an attempt to stop parallel imports.

In one high-profile case, Swiss watch maker Omega S.A. probed the boundaries of the statutory copyright distribution right by attempting to create a backdoor trademark.(fn2) Omega affixed copyrighted logos to its foreign-made wristwatches and claimed copyright infringement when wholesaler Costco, an unauthorized Omega retailer, sold the watches in the U.S. In the ensuing litigation in federal court, Costco claimed two defenses: the first-sale doctrine and copyright "misuse." Although Costco lost on the first argument before the U.S. Supreme Court in Costco Wholesale Corp. v. Omega S.A.,(fn3) it prevailed on the latter upon remand.(fn4)

First, the Supreme Court voted 4-4 to affirm without explanation that the first-sale defense does not apply when goods are made and sold abroad and then imported into the U.S.(fn5) The first-sale doctrine generally prevents a copyright owner from restricting later resale or distribution by a purchaser or recipient of a lawful copy of a work.(fn6) Prior to the Omega case, it was unsettled whether the U.S. first-sale doctrine provided a defense to claims of infringement arising from importation of foreign-made goods without the copyright holder's permission. At least one federal appeals court had suggested that the statutory defense generally limits producers' rights,(fn7) while other federal courts ruled that an initial, lawful sale abroad did not exculpate a later seller.(fn8) Most of these cases involved "traditional" copyrighted works-products that fixed creative expression in a tangible form, such as textbooks.(fn9)

Many commentators expected the United States Supreme Court to resolve this issue when it granted certiorari to the Ninth Circuit.(fn10) However, the Court did not provide an explanation of its decision. The Second Circuit in John Wiley and Sons, Inc. v. Kirtsaeng, an analogous case, subsequently reached the same conclusion, construing the first-sale defense as limited to U.S.-made products or those goods lawfully sold once within the U.S.(fn11) These decisions suggested that importers and retailers should not rely on a first-sale defense to allegations of copyright infringement stemming from parallel imports.

Second, Costco later prevailed with a different argument- copyright misuse-revealing a key potential limit on the extent of copyright protection against parallel importation for certain useful goods. On remand, the district court granted summary judgment based on Omega's "misuse" of copyright doctrine.(fn12) Today, it remains unclear to what extent, if any, U.S. copyright law forbids unauthorized importation and sale of useful goods bearing such copyrighted designs.

This Article discusses the background of parallel importation and the legality of parallel importation under both trademark and copyright regimes. It examines how courts have analyzed whether the first-sale defense applies to unauthorized importation of foreign-made products, culminating with the Costco and John Wiley and Sons decisions. This Article also explores the implications of the Omega district court's grant of summary judgment against Omega based on the doctrine of copyright misuse. This Article suggests that trademark law, not copyright, is the proper analytical paradigm for addressing gray market goods. Further, this Article argues that goods merely adorned with a copyrighted logo, such as the watches at issue in Omega, are improper subjects for copyright import restrictions; applying copyright law to these products raises antitrust concerns and creates an undesirable form of backdoor trademark that may be remedied by application of the copyright misuse doctrine.(fn13)

I. Background on Gray Market Products

The propriety of gray market products has become the subject of both legal and economic debate over the last three decades. The Supreme Court defines a gray market product as a "foreign-manufactured good, bearing a valid United States trademark that is imported without the consent of the United States trademark holder."(fn14) The term also applies to genuine copyrighted goods imported without authorization.(fn15) At least three situations may create incentives to import gray market goods: currency fluctuations, production and cost differences between nations, and price discrimination in different markets and territories.(fn16) The ease of international Internet commerce further aids such transactions.(fn17) Parallel imports today may represent billions of dollars' worth of trade in the U.S. economy.(fn18) One industry estimate pegged the value of gray market information technology products sold in 2007 at $58 billion or more.(fn19)

The prevalence of parallel importation springs from producers' natural inclination toward price discrimination.(fn20) By selling products at different prices in different geographic markets, a business can attempt to maximize profits by charging a higher price in wealthier nations. This strategy may backfire, however, when third parties take advantage of price discrepancies by buying products cheaply in a poorer market and reselling them in a richer area-a process known as...