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Friday, January 14, 2011

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.

At issue in Costco Wholesale Corp. v. Omega S.A. was 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 involved the sale by Costco 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 had not authorized 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), precluded 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. In reaction to this decision, some observers expressed concern that the Ninth Circuit’s interpretation of the first sale doctrine 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).

On December 13, 2010, in a one sentence per curiam decision, the U.S. Supreme Court affirmed the Ninth Circuit’s judgment due to a 4-4 tie vote among the participating justices (Justice Elena Kagan had recused herself because of her involvement in the case as U.S. Solicitor General prior to becoming a member of the Court). The Court’s action in Costco Wholesale Corp. upholds the Ninth Circuit’s ruling but does not establish controlling precedent for other federal circuits on the question of whether the copyright law’s first sale doctrine applies to goods manufactured abroad and then imported into the United States. Therefore, those federal circuits are free to issue opinions that agree or conflict with the Ninth Circuit’s judgment on this matter, and the Supreme Court could revisit the legal question in a future case. Also, Congress could consider legislation to clarify the relationship between the Copyright Act’s § 109(a) first sale provision and the § 602(a)(2) importation right.

Date of Report: January 6, 2011
Number of Pages: 10
Order Number: R41422
Price: $29.95

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