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The Zenith of the Omega Case on the Future of the "First Sale Doctrine"

By Lisa Fantino

When is a "supreme" decision not a decision? When the court is split down the middle and the deciding judge recuses herself. Just what we need - more grey area over gray market goods and the First Sale Doctrine but that's exactly what happened this week in Omega S.A. v. Costco Wholsesale Corp., 541 F.3d 982 (9th Cir. 2008).

The Court ruled 4-4, with Justice Kagan sitting back because of her stint as U.S. Solicitor General, thereby upholding the 9th Circuit's decision allowing Omega to control the price of its watches in the aftermarket. The essence of the argument is whether U.S. Copyright protections extend to goods made outside the United States and then sold overseas for U.S. distribution and this "non-decision" states that it does.

In a nutshell, Omega manufactures watches in Switzerland and sells them both overseas and in the United States to authorized distributors and retailers. In the instant action, Omega made and sold the watches overseas to an authorized distributor. An unidentified third-party bought them overseas and sold them to ENE Ltd., a New York company, which in turn sold them to Costco for distribution in California. Although Omega authorized the foreign sale, it claimed it did not authorize the importation of those same watches into the U.S. and claimed copyright infringement of its logo under 17 U.S.C. §§106(3) and §602(a). Costco, on the other hand, cross-moved under 17 U.S.C. §109(a) arguing that it was protected under the first sale doctrine, which allows a purchaser to transfer a lawfully made copy of a copyrighted work without permission from the copyright holder.

This hits home for consumers who don't want to pay nearly $2,000 for an Omega watch when they can purchase it for nearly 35% cheaper at a big box chain like Costco. That is the advantage for buying anything at a store like Costco, because it buys in bulk and passes the savings onto consumers who don't need all the frills and luxury of shopping in high-end stores for the same merchandise.

Since the Court was divided down the middle with no opinion issued, it leaves many questions on the extra-territorial nature of the First Sale Doctrine, especially with this practitioner. The decision seems to fly in the face of the High Court's long-standing precedent in Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), where a publisher sold a novel with a statement on the first page indicating that no dealer could sell the book lower than $1.00. R.H. Macy & Co., ignored that and sold the book at a discount after buying it wholesale from an authorized distributor. The High Court sided with Macy's stating that the Copyright statute protected the rights holder's "right to vend" and multiply the work but it did not afford it greater protection than set forth in the statute by allowing the holder to limit future resales. This case of first impression set forth what was subsequently codified in 17 U.S.C. §109 as the First Sale Doctrine.

17 U.S.C. §109 states that "notwithstanding the provisions of §106(3), the owner of a particular copy or phonorecord 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 or phonorecord." It is pretty much a bright-line rule except in a gray market, where goods are sold legally but not necessarily in the manner or to the parties intended by the original manufacturer.

Again, nearly 100 years after Bobbs-Merrill, in Quality King Distributors, Inc. v. L'anza Res International, Inc., 523 U.S. 135 (1998) SCOTUS specifically noted an eagerness to preserve goodwill for the United States in the global marketplace and hesitated at the idea that the intent of the statute was limiting. Further, the Quality King decision made it clear that the Court did not appreciate the fact that the manufacturer was using backdoor allegations of copyright infringement to justify its discounted marketing and pricing outside of the United States rather than to look to the statute as a tool to prevent the making of unauthorized copies.

Distribution channels and territories are no longer clearly delineated. More and more licensing and distribution agreements are drafted to encompass the world. More and more cyberpreneurs are purchasing goods in one country and selling them within the United States and vice versa, not to mention U.S.-based dealers who sell to domestic customers but have the orders drop-shipped directly from foreign distributors.

Today's "gray market" has become THE market. This decision does nothing to clarify the vague area between practice and statute. In fact, in my opinion it leaves a gaping hole for manufacturers to dance through and control pricing. They can make good overseas at a considerably reduced cost; slap a U.S.-copyrighted logo onto them; and then and limit their resale anywhere in the world without their permission. This first major decision of the October term did nothing to advance clarity in a growing global grey marketplace.

Lisa Fantino is an award-winning journalist and solo practitioner. She has a general practice firm in Mamaroneck, New York, where she focuses on entertainment as well as general transactional and litigation matters. She can be found at http://www.LisaFantino.com or blogging as http://ladylitigator.wordpress.com.

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This page contains a single entry from the blog posted on December 15, 2010 11:58 AM.

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