Browsing the aisles of Costco, taking in the consumerism the Christmas has come to denote, my mind was drawn to its jewelry and watch section. As I was feasting my eyes upon baubles and trinkets I have no use for, I recalled the not so recent Ninth Circuit Costco v. Omega which in turn reminded me that Supreme Court is all set to hear the case. What better time to refresh our memory and ponder over the implications of the case ruling?

Costco Wholesale Corporation sold Swiss watches manufactured by Omega S.A. without prior permission from Omega. Omega brought a copyright infringement suit against Costco claiming that Costco’s act of selling watches manufactured by Omega was an infringement of Omega’s copyright protection as afforded by United States laws. Essentially Costco had purchased watches meant for international markets other than the United States (hence the lower price) and sold it in the U.S. at prices lower than offered by other U.S. distributors. Costco sought protection under the first sale doctrine.

The first sale doctrine was first propounded by the Supreme Court in 1908 in the case of Bobbs Merrill Co. v Straus and later included in the US Copyright Act as a limitation on copyright. Briefly the first sale doctrine allows the purchaser to transfer, sell or donate a copyrighted work without permission of the copyright holder once it has been obtained. This implies that the copyright holder relinquishes all rights related to that particular copy once sold so long as no further copies are made by the purchaser. Parallel importation refers to a good that has been produced and sold legally but illegally imported into a country, without the consent of the copyright owner. Thus parallel imported goods are often referred to as ‘grey goods’ because they are produced with the consent of the copyright owner unlike black market goods. This restriction provides that the same material does not compete with itself on price. Consequently geographical product monopolies are set up.

Costco claims that the first sale doctrine is not territorial. The Ninth Circuit held that the first sale doctrine is indeed territorial and does not apply to imported goods manufactured abroad. A similar argument was used in BMG v. Perez where the Ninth Circuit Court of Appeals held that the importation of phonorecords, which were lawfully purchased in Mexico, violated U.S. Copyright Law when they were imported into the United States. The Ninth Circuit pointed out that since copyrights are territorial, U.S. Copyright Law is not applicable outside of the United States and thus, first sale had not occurred in Mexico.

According to the Ninth Circuit §109(a) granted protection of first sale doctrine only to copies legally made and sold in the U.S. Granting protection of first sale doctrine to copies made and sold outside of the U.S. would render § 602 meaningless.

17 U.S.C. § 109(a): Notwithstanding the provisions of section 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.

17 U.S.C. § 602(a): Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501

In the Quality King case, the product was manufactured and sold in the United States and then re-imported. The manufacturers had already relinquished their rights as soon as the product was sold and shipped outside of the U.S. The Supreme Court reversed the Ninth Circuit Court’s decision and held that “[T]he whole point of the first sale doctrine is that once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.”

Returning to the case at hand, it seems odd that while Omega enjoys copyright protection for its “Omega Globe Design” in the U.S., still claims that a copy manufactured in a foreign country enjoys the foreign copyright law, not United States law. The Ninth Circuit decision is extremely narrow in perspective. It does not take into account the economic implications of its decision. It essentially means that copyright holders do not relinquish their rights upon copies sold or given away. There would be no downstream market. Also, manufacturing copies abroad under foreign copyright laws while still enjoying selectively United States copyright protection is what it seems Omega is doing. It seems counter-intuitive that even when using a logo protected by U.S. laws, Omega insists that the articles were manufactured abroad.

The Ninth Circuit gracefully agrees with prior Supreme Court decisions that the first-sale doctrine applies to works manufactured in the U.S. However, what are the factors that decide where an article was manufactured? Would manufacturers shift production units abroad and thus circumvent the first sale doctrine as well as control over the resales in the U.S? What does this portend for the already deteriorating U.S. job market?

In light of the current economic circumstances, the Supreme Court should allot a wider realm of meaning to the first sale doctrine. Players like Omega should be dissuaded from using U.S. protection for logos for articles manufactured abroad and simultaneously putting at a disadvantage the U.S. retailers.

Today’s post is by Guest Barista Shalini Menezes of D:ic.t:um.

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