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Thursday, September 23, 2010

Applicability of the Copyright Law’s First Sale Doctrine to Imported Goods Manufactured Abroad: Costco Wholesale Corp. v. Omega S.A.

Brian T. Yeh
Legislative Attorney

Section 106(3) of the Copyright Act grants a copyright holder the exclusive right to distribute copies of a copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending. In addition, § 602(a) of the Copyright Act generally prohibits the importation into the United States, without the authority of the copyright holder, of copies of a work that have been acquired outside the United States; such importation is considered an infringement of the exclusive right to distribute copies of the work under § 106. However, the Copyright Act’s “firstsale” doctrine, codified at § 109(a), provides a limitation to the copyright holder’s distribution rights—it entitles the owner of a particular copy of a copyrighted work that has been “lawfully made under” title 17 of the U.S. Code (where the Copyright Act is codified) to sell or otherwise dispose of the possession of that copy, without the prior permission of the copyright holder. In other words, once a copyright holder agrees to sell particular copies of his work to others (constituting the “first sale” of such copies), the copyright holder may not thereafter further control subsequent transfers of ownership of those copies.

On November 8, 2010, the U.S. Supreme Court will hear oral arguments in Costco Wholesale Corp. v. Omega S.A., in which it will have an opportunity to examine the scope of the first sale doctrine with respect to so-called “gray-market” goods—products that have been manufactured and purchased abroad and thereafter imported into the United States for resale at often discounted prices to U.S. customers. The case involves the sale by Costco in its California warehouse stores of authentic Omega watches made in Switzerland. Costco had purchased these watches (which bear a copyrighted design on their underside) from third parties that had purchased the watches from authorized Omega distributors located abroad. While Omega had permitted the initial foreign sale of its watches, it did not authorize their importation into the United States or Costco’s domestic sale of the watches. Omega sued Costco for infringing its distribution and importation rights under §§ 106(3) and 602(a) of the Copyright Act; Costco defended itself by arguing that the first sale doctrine, § 109(a), precludes Omega’s infringement claims. In September 2008, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment to Costco, holding that the first sale doctrine does not apply to imported goods that had been manufactured and first sold abroad. The appellate court reached this determination by asserting that copies of copyrighted works made and sold outside the United States are not considered “lawfully made” within the meaning of § 109(a); thus, these copies are not subject to the first sale doctrine, and Costco is precluded from raising such defense to Omega’s infringement claims.

Some observers have been critical of the Ninth Circuit’s interpretation of the first sale doctrine, concerned about its potential implications. Specifically, some have asserted that the appellate court’s decision creates incentives for outsourcing, as manufacturers would desire to move production abroad of goods containing copyrighted aspects (thus avoiding the first sale doctrine’s effect and providing the manufacturer with greater control over distribution of the goods). In addition, they believe the appellate court’s decision, if upheld by the Supreme Court, negatively impacts domestic retailers and importers of goods made abroad because these entities would have to undertake the difficult task of tracing the origins of any copyrighted component of imported goods (or risk being sued for copyright infringement). Finally, they worry that U.S. consumers would be harmed by being denied the opportunity to purchase gray-market goods at discounted prices. However, others argue that notwithstanding these possible implications of the Ninth Circuit’s ruling, Congress had granted copyright holders the right to control importation of copies in such a way as to segment domestic and foreign markets, and it is up to Congress to amend the Copyright Act to change that policy choice. 

Date of Report: September 21, 2010
Number of Pages: 10
Order Number: R41422
Price: $29.95

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