Costco v. Omega and the First Sale Doctrine

• Publication year: 2010

Lindsay R. Aldridge⁰

The first sale doctrine, simply put, is the principle that after the copyright owner has transferred a copy of the work, the new owner is free to do almost anything with the copy without the copyright owner's consent. The United States Court of Appeals for the Ninth Circuit held in Costco v. Omega that the first sale doctrine did not apply to imported goods manufactured abroad. The Supreme Court then granted certiorari, only to reach a 4-4 split decision. As a result of the Court's split, the decision of the Ninth Circuit was de facto affirmed; however, the decision fails to set a national standard. This Recent Development explores the implications of the decision, specifically, the impact on the gray market, consumers, and the manufacturing industry in the United States, as well as the implications for the utility of copyright as an import control.

I. Introduction

One of the exclusive rights conferred by the Copyright Act is the right for copyright owners to control the distribution of the copyrighted work.¹ This right of distribution, however, is limited by the first sale doctrine.²

In December 2010, the United States Supreme Court, in a 4-4 split, affirmed the decision of the United States Court of Appeals for the Ninth Circuit in Costco v. Omega,³ which held that the first sale doctrine did not apply to the unauthorized importation of goods manufactured abroad.⁴ However, since the Court split 4-4, the ruling does not set a nationwide precedent. This Recent Development examines the economic implications of the Ninth Circuit's holding. Part II of this Recent Development gives a general summary of the first sale doctrine. Part III provides an overview of Costco v. Omega, including the background of the case, the Supreme Court split, and the Ninth Circuit's analysis of the first sale doctrine. Part IV analyzes the economic implications of the case, specifically the impact the holding will have on the gray market,⁵ consumers, and the manufacturing industry in the United States, as well as the implications for the utility of copyright as an import control. Lastly, this Recent Development calls for clarification of the first sale doctrine in light of the continuing uncertainty after the Supreme Court's split decision.

II. Background: The First Sale Doctrine

Section 106(3) of the Copyright Act gives copyright owners the exclusive right to control the distribution of the copyrighted work.⁶ This right gives a copyright owner the power to decide when to introduce his work into the market, thereby creating an incentive to create additional works, which is an objective of copyright law.⁷ In addition, § 602(a) provides that importation of copyrighted works without the authorization of the copyright owner violates this exclusive right of distribution in § 106(3).⁸

The first sale doctrine, as codified in § 109(a), limits the scope of § 106(3)'s exclusive distribution right.⁹ Section 109(a) provides in relevant part that "[n]otwithstanding 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 . . . ."¹⁰ Under the first sale doctrine, the copyright owner exhausts the exclusive right of distribution after the owner has given up control of a copy of the work.¹¹ The new owner is free to do almost anything with the copy and can dispose of it without the copyright owner's consent.¹² Confusion occurs when determining the relationship between the first sale doctrine in § 109(a) and the importation right in § 602(a), specifically whether the first sale doctrine applies to copyrighted works that are made and first sold abroad, but later imported into the United States without the authorization of the copyright owner.

III. Overview of Costco v. Omega

A. Background on Costco v. Omega

Omega manufactures watches that contain a United States copyrighted symbol engraved on the underside of the watch face.¹³ Although the engraving is registered under United States copyright law, the watches themselves are manufactured in Switzerland and sold globally.¹⁴ Costco obtained a quantity of these Omega watches from the New York company, ENE Limited.¹⁵ ENE Limited imported the watches from unidentified third parties, who obtained the watches from authorized distributors abroad that had purchased the watches directly from Omega.¹⁶ Omega authorized only the initial sales to these distributors, but did not authorize the importation of the watches into the United States nor, by extension, the sales made by Costco.¹⁷

Omega initially brought an action against Costco for copyright infringement in the United States District Court for the Central District of California alleging that Costco's purchase and sale of Omega watches constituted copyright infringement under §§ 106(3) and 602(a).¹⁸ In its defense, Costco relied on § 109(a), which codifies the first sale doctrine.¹⁹ Costco asserted that under the first sale doctrine, Omega's authorized sale of the watches to the foreign distributors precluded its claim that Costco infringed its distribution and importation rights.²⁰ The district court ruled in Costco's favor on the basis of the first sale doctrine.²¹ Omega appealed this decision to the United States Court of Appeals for the Ninth Circuit where the decision of the district court was reversed.²² Costco then appealed to the United States Supreme Court.

B. U.S. Supreme Court

On appeal, the United States Supreme Court had the opportunity to resolve whether the first sale doctrine applies to copyrighted works that are made and sold abroad but later imported into the United States without the authorization of the copyright owner.²³ In a previous case, Quality King Distributors, Inc. v. L'Anza Research International, Inc.,²⁴ the Court ruled that the first sale doctrine does apply to copyrighted works that are made in the United States but later imported without authorization.²⁵ However, the Court split evenly 4-4 in the Costco appeal, affirming de facto the judgment of the Ninth Circuit.²⁶ Only eight of the nine justices voted because Justice Kagan was recused since she had worked on the case while serving as U.S. Solicitor General.²⁷

While the split does mean that the Ninth Circuit ruling stays in place, it is not an endorsement of the Ninth Circuit's interpretation of the first sale doctrine, nor does it set a nationwide precedent. Since courts in other circuits are not bound by this precedent it is unclear how these courts will apply the first sale doctrine to facts like those in Costco. Like the Ninth Circuit, federal district courts in the Second Circuit have not allowed the first sale doctrine as a defense to the unauthorized importation of copyrighted works made abroad; however, these courts have not utilized the same logic as the Ninth Circuit.²⁸ For example, in Pearson Education, Inc. v. Liu,²⁹ and John Wiley & Sons, Inc. v. Kirtsaeng,³⁰ both courts relied on dicta from Quality King to find that the first sale defense did not apply to copyrighted works manufactured abroad.³¹ The court in Pearson hinted that in the absence of such dicta it would not have restricted application of the first sale doctrine to goods manufactured in the United States.³² The court in Kirtsaeng acknowledged that relying on dicta was "an imperfect solution."³³ Courts do not agree on the application of the first sale doctrine in situations like the one presented in Costco, indicating that it is "a close jurisprudential question."³⁴ As a result, the split decision creates uncertainty in the application of the first sale doctrine to imported goods manufactured abroad.

C. Ninth Circuit's Analysis

Since the Supreme Court's split decision does not set a national precedent, this Recent Development focuses on the Ninth Circuit's analysis of the case. The Ninth Circuit reversed and remanded the decision of the district court.³⁵ The court held that the first sale doctrine was unavailable as a defense because Omega made the watches abroad and Costco sold them in the United States without authority from Omega.³⁶

In its ruling, the Ninth Circuit first set out the relationship between the three relevant sections of the Copyright Act.³⁷ The court acknowledged that infringement does not occur under § 106(3)³⁸ or § 602(a)³⁹ if the conduct is covered by § 109(a)⁴⁰ . The court reasoned that infringing importation under § 602(a) is a subcategory of the exclusive distribution right in § 106(3) and is not violated unless there is a violation of § 106(3).⁴¹ The exclusive distribution right in § 106(3) is limited by the first sale doctrine in § 109(a).⁴² Therefore, if actions fall within the § 109(a) limitation of the § 106(3) exclusive distribution right then there is no violation of either § 106(3) or § 602(a).⁴³

For purposes of determining whether the conduct in this case was covered by the § 109(a) limitation, the key phrase in § 109(a) was "lawfully made under this title."⁴⁴ The Ninth Circuit precedent interpreted the phrase "lawfully made under this title" to include only copies that were legally manufactured and sold in the United States and did not include copies made abroad.⁴⁵ In BMG Music v. Perez,⁴⁶ a case involving goods manufactured abroad and imported into the U.S. without the authorization of the copyright owner, the Ninth Circuit found that § 109(a) was not a defense to the § 602(a) claim because the goods were made and sold abroad and therefore were not "lawfully made under this title."⁴⁷ The court gave two explanations for its decision in that case: (1) to allow § 109(a) as a defense in cases involving goods made abroad would be to extend the Copyright Act extraterritorially, and (2) if § 109(a) included foreign sales, then § 602 would not be a useful device by which to prevent unauthorized importation of non-piratical copies.⁴⁸

In a later...