Haynes and Boone, LLP
  December 17, 2010 - United States of America

FLASH - Supreme Court Does Not Answer Copyright Exhaustion Question in Costco
  by Thomas Kelton, Jeffrey M. Becker, Purvi J. Patel, Lisa Garono, David A. Bell

Earlier this week, the U.S. Supreme Court issued a split decision and failed to resolve whether copyrighted materials legally made abroad can be imported into the U.S. and sold without the express permission of the copyright owner. See Costco Wholesale Corp. v. Omega S.A., 562 U.S. __ (2010). In other words, it is still up to the nation’s circuit courts to decide whether the first sale doctrine extinguishes the rights of a copyright holder when the goods are made outside of the U.S.

The case came to the Court from the 9th Circuit, which ruled that copyrighted materials made abroad cannot be imported into the U.S. and sold without the express permission of the copyright owner. See Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008). After the split decision at the Supreme Court, the 9th Circuit’s decision remains good law within the 9th Circuit’s jurisdiction, but no nationwide precedent is set. Other circuit courts have yet to weigh in on the issue. The 9th Circuit’s decision and the Supreme Court’s decision are referred to collectively herein as the “Costco cases.”

The Costco cases have important ramifications, not only within the 9th Circuit. “Grey market” importers may find themselves subject to successful infringement suits, especially when selling goods within the 9th Circuit. From the other vantage point, the Costco cases provide an important avenue for copyright holders, such as brand-name manufacturers, to keep grey market goods out of the country. Furthermore, because the 9th Circuit includes the entire west coast, the Costco cases deal a blow to much of the nation’s grey market activity. Copyright holders and grey market importers can expect the same question to come before other circuit courts in the coming years.

Interestingly, the Costco cases treat foreign-manufactured goods preferentially in comparison to domestically-manufactured goods. In other words, a lawful first sale does not extinguish a copyright holder’s rights when the goods are made abroad; however, the same is not true for goods produced domestically. Thus, copyright holders gain a slight advantage by manufacturing goods abroad.

History

The Supreme Court addressed a similar issue in 1998. See Quality King Distributors Inc., v. L'anza Research International Inc., 523 U.S. 135 (1998). In the Quality King decision, the goods in issue were made in the U.S., exported abroad by the copyright holder, and then re-imported into the U.S. by the defendant without the copyright holder’s permission. The Supreme Court held that the first sale doctrine extinguished the rights of the copyright holder. In Quality King, the Court specifically refused to consider a fact pattern including foreign-manufactured goods.

In the present case, Omega made and sold its watches in Switzerland legally. A third party acquired the watches and legally sold them to Costco, who imported them into the U.S. without the permission of Omega. Omega had no contractual relationship with Costco providing protection against grey market importation and sales and, thus, had to rely on copyright law. Specifically, the watches in question had a small design on their backs, garnering copyright protection and serving as Omega’s ticket into court. The first sale defense to copyright infringement arises from statute and applies to “a particular copy…lawfully made under this title,” where title refers to the U.S. copyright laws. 17 U.S.C. §109(a). The 9th Circuit underpinned much of its decision by cautiously avoiding applying U.S. law to foreign activities. In other words, the 9th Circuit says that “made under this title” means “made in the U.S.” Similar laws providing for trademark and patent exhaustion remain undisturbed.

If you have any questions, please feel free to contact one of the attorneys listed below.

Thomas Kelton
972.739.6923
[email protected]

Jeffrey M. Becker
214.651.5066
[email protected]

Purvi J. Patel
214.651.5917
[email protected]

Lisa Garono
408.660.4164
[email protected]

David A. Bell
214.651.5248
[email protected]



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