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U.S. Supreme Court Hears Copyright "First Sale" Case Today

by Professor Ryan Vacca on November 8, 2010

in Copyright Law,Intellectual Property Law,Ryan Vacca,SCOTUS,Uncategorized

Today, the U.S. Supreme Court is hearing oral arguments in Costco Wholesale Corporation v. Omega, S.A., an important copyright case involving the first sale doctrine and whether this doctrine applies to copyrighted works that are produced abroad.

The facts are fairly straightforward.  Omega is a watch company that manufactures watches in Switzerland.  Omega owns a copyright in a small visual image that is laser-engraved onto each Swiss-manufactured watch.  Costco, a U.S. warehouse retailer, acquired genuine Omega watches from a third party, who had purchased them from an authorized Omega distributor abroad.  Costco subsequently sold these watches in the United States.  Omega alleges that Costco's sale of these watches infringes its exclusive right to distribute copies of its copyrighted work under § 106(3) of the Copyright Act.

But two other provisions of the Copyright Act also play a role in resolution of this case.  The first is § 602(a)(1), which provides:

Importation into the United States, without the authority of the owner of the copyright under this title, of copies … of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies … under section 106.

The second relevant provision is § 109 which embodies the first sale doctrine and provides:

Notwithstanding the provisions of section 106(3), the owner of a particular copy … 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.

The key language of § 109 is "lawfully made under this title."  Costco argues that goods manufactured abroad can still fall within this phrase whereas Omega argues that goods manufactured abroad are not "made under this title."  Much of this case turns on a previous Supreme Court case, Quality King Distributors v. L'anza Research International.  In Quality King, the Court held that the first sale doctrine applied to copyrighted works made in the US, subsequently exported to another country, and then re-imported into the US.  Justice Ginsburg, writing a concurring opinion in Quality King, wrote:

This case involves a "round tripâ journey, travel of the copies in question from the United States to places abroad, then back again.  I join the Courtâs opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad.

This unresolved question is now before the Court in Costco.

After the oral argument transcripts and audio is released, I will post some commentary on the exchange between the Justices and the parties.

The oral argument transcripts have been published.  Click below for my commentary.

In general, the Justices seemed to be struggling with where to draw the line between which products would be subject to the first sale doctrine and which would not and how contractual limitations or permissions between the copyright owner and foreign distributors would or could impact that result.

During Costco's argument, there was a large focus on the legislative history of §§ 602 and 109 in an effort to determine what "lawfully made under this title" means and whether a foreign copyright owner's territorial division of rights would stop the first sale doctrine from applying.  Counsel for Costco struggled in articulating why the first sale doctrine would not apply in a territorial division scenario, but seemed to be making the argument to give meaning to the legislative history of § 602 and dicta in Quality King.  Counsel for Costco mentioned several times that ignoring the dicta and legislative history and simply applying the first sale doctrine to such a situation would add further support to Costco's position that the first sale doctrine applies.

A humorous discussion of the limits of legislative history did make it into the argument:

MR. ENGLERT: And Justice Breyer, to be fair about what the legislative history says, it is statements by witnesses. It is not statements by committee, so it's a little bit hard to tell where they're drawing the line.

JUSTICE BREYER: Oh. In other words, somebody wanted that. I understand the industry wanted it. But — but I — is there anything in there that suggests that this is what Congress wanted to do, members of Congress? Even I draw the line somewhere.

(Laughter.)

MR. ENGLERT: Yes. Yes.

JUSTICE SCALIA: Let me write that down.

(Laughter.)

Counsel for Omega argued that § 109 applies when the product is produced in the US, but also when the product is produced in a foreign country pursuant to a license that the product can be distributed in the United States.  Justice Scalia skeptically remarked that such permission actually makes the importing lawful rather than the making of the product lawful (i.e. this is a § 106 or § 602 issue rather than a § 109 issue).

A concern that seemed to be on the minds of at least some of the Justices was the effect that a rule equating "lawfully made under this title" with "produced in the US" would encourage copyright owners to produce their goods abroad rather than domestically.  The thought is that if the goods are manufactured abroad and are then sold to distributors abroad, the copyright owner retains the exclusive right to have those goods distributed in the United States.  The likely effect would be that the copyright owner could successfully segment the market by using copyright law rather than relying on contract law and bringing a breach of contract claim against the distributor who exported the goods to the US (i.e. increase the number of potential defendants beyond those with contractual privity with the copyright owner).

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