Is Time Ticking for Discounters? Supreme Court Considers Scope of First-Sale Doctrine
The Supreme Court recently issued a decision in an important case involving the future of lucrative gray markets in the United States. [1] The case, Costco Wholesale Corp. v. Omega, S.A., examined whether a copyright owner could prevent the sale of goods that had been imported into the country without the copyright holder’s permission. The first-sale doctrine of Section 109(a) of the U.S. Copyright Act generally allows parties who have lawfully obtained ownership of copies of copyrighted goods to resell those copies to anyone they choose. But in a 4-4 decision,[2] the Court, affirming a Ninth Circuit ruling, held that the first-sale doctrine does not extend to imported goods manufactured abroad.
In Costco v. Omega, watchmaker Omega first sold its Swiss-made products to foreign distributors. U.S. retail chain Costco later acquired the watches through other intermediaries and resold them at below-market prices. Based on a copyrighted logo on the watches, Omega filed suit against Costco under Section 602(a) of the Copyright Act, which prohibits importation of copyrighted works without the copyright owner’s permission. Costco argued that under the first-sale doctrine, Omega’s initial foreign sale of the watches prevented infringement claims over subsequent sales. The Ninth Circuit Court of Appeals sided with Omega and held that the doctrine does not apply to copies manufactured in a foreign country.
Although the Supreme Court allowed the lower court ruling to stand, the split decision means that it has no precedential value outside the Ninth Circuit. Elsewhere, manufacturers are left wondering whether copyright law will bar sales of gray market imports where they compete with goods sold through the manufacturer’s authorized channels. Is the end of splurging on discounted consumer goods drawing near? Companies from Costco to Netflix and eBay are sure to be sitting tight until the Court returns to the question.
[1] “Gray market” generally refers to trading of goods through unofficial distribution channels not approved by an original manufacturer. The list of items sold on the gray market is endless, but besides watches, popular items include electronics, computer games, cosmetics and DVDs. Gray market goods are usually legitimate and initially put onto the market with the approval of the copyright owners, but eventually resold outside the rights owners’ official distribution channels. Most often this occurs when the price of an item is higher in one country than another, allowing retailers to sell the imported gray market item at a below-market price in the destination country.
[2] Justice Kagan took no part in the decision.
