In a rare 4–4 decision that disappointed many copyright practitioners who were hoping for a resolution of the tension between section 109 (first sale exhaustion) and section 602 (importation) of the Copyright Law, the Supreme Court of the United States punted the issue, effectively upholding a decision by the U.S. Court of Appeals for the Ninth Circuit that the “first sale doctrine” does not apply to the importation of copyrighted works that are manufactured abroad. Costco v. Omega, Case No. 08-1423, U.S. Supreme Court (December 13, 2010). The Ninth Circuit’s decision was first reported in McDermott Will & Emery’s IP Update (see Imports of Foreign-Made, Genuine Copies Not Protected by First Sale Doctrine, Vol. 11, No. 10, October 2008).
Omega makes its watches in Switzerland, incorporating a design protected by a U.S. copyright registration. The copyrighted work in question is a small design on the back of the watch. The underlying dispute arose when Costco legitimately acquired Omega brand watches through a New York company that bought and imported the watches from overseas at much lower prices than Costco would have paid. Omega had authorized the initial foreign sale of the watches, but did not authorize their importation into the United States or their resale by Costco. Ordinarily, under the first sale doctrine a domestic (United States) sale of a copyrighted work exhausts the copyright owner’s copyright and the purchaser can freely resell its copy.
Omega sued Costco for copyright infringement for the unauthorized importation of copyrighted works. At the trial court level, Costco successfully defended on the basis of the first sale doctrine. The Ninth Circuit reversed, however, reiterating its general rule that the first sale doctrine provides no defense where unauthorized imports were genuine copies that were foreign-made and not previously sold in the United States with the authority of the copyright owner. In effect, the Ninth Circuit held that because of the territorial nature of a copyright, the first sale doctrine does not apply to sales overseas, such that Costco’s resale of Omega watches was the first sale of the copyrighted items in the United States—thus requiring Omega’s authorization.
The split resulted from the recusal of Justice Elena Kagan, who filed an amicus brief in the case in her previous position as Solicitor General. While the Supreme Court’s decision upholds the Ninth Circuit’s decision, the ruling is only binding on the Ninth Circuit. Nonetheless, the Supreme Court’s decision is significant in that at least within the Ninth Circuit, the unauthorized resale of genuine copyrighted items acquired overseas may lead to copyright infringement liability if the items were not made or first sold in the United States with the authority of the copyright owner.
The case now returns to the district court to be tried on Costco’s other defenses and counter-claims.