A recent decision by a California federal district court could make it more difficult for copyright owners to prevent the unauthorized importation of gray market goods into the United States. On November 14, 2011, the US District Court for the Central District of California held that watchmaker Omega S.A. could not lawfully rely on its copyrighted design, affixed to the back of its watches, to prevent the unauthorized importation of those goods into the United States. The court held that although Omega S.A. owned a valid US copyright registration, Omega’s “offensive” assertion of that copyright against Costco was an improper exercise of its “limited monopoly,” and thus barred its copyright claim. The court therefore granted Costco’s motion for summary judgment.

To the Supreme Court and Back Again

The court’s decision is the latest chapter in Omega S.A.’s seven-year fight against Costco. The case involves watches that were manufactured by Omega S.A. in Switzerland. Most fashion accessories, including watches, are considered “useful articles,” and are therefore ineligible for copyright protection. Thus, Omega S.A. found it difficult to prevent the unauthorized importation of gray market OMEGA watches into the United States. To address this issue, in 2003, Omega S.A. began engraving a small, copyrighted globe design on the back of each watch, and obtained a US copyright registration for the design.

Omega first sold these watches to distributors overseas, and unidentified third parties purchased the watches and sold them to a New York-based company, which in turn sold them to Costco. Costco then sold the watches to consumers in California. Although Omega authorized the initial foreign sale of the watches, it did not authorize their importation into the United States or the sales made by Costco. Costco offered the OMEGA watches for much lower prices than Omega’s authorized dealers--Omega’s suggested retail price for its watches was $1,995, but Costco was selling the watches for $1,299.

In 2004, Omega filed a lawsuit against Costco in the US District Court for the Central District of California, alleging that Costco’s importation and sale of the watches constituted copyright infringement because all the watches featured Omega’s copyrighted globe design. Omega relied on Section 602 of the Copyright Act, which prohibits the unauthorized importation of copies of a copyrighted work acquired outside the United States. Costco countered that its importation and sale of the watches was protected by the first-sale doctrine, arguing that Omega could not prohibit the re-sale of the watches in the United States after those watches were initially sold to foreign distributors. The district court granted summary judgment to Costco without issuing an opinion in the matter.

On appeal, the US Court of Appeals for the Ninth Circuit sided with Omega, holding that the first-sale doctrine only applies to US-copyrighted goods that are manufactured in the United States. In December 2010, the US Supreme Court deadlocked 4-4 (with Justice Elena Kagan recusing herself), and the case was remanded to the district court for further proceedings.

Court: Omega Abused Its “Limited Monopoly” Under Copyright Law

After remand, Costco filed a motion for summary judgment, and the court granted it. Costco’s motion for summary judgment was based on the doctrine of “copyright misuse,” which the court described as being designed to “prevent copyright holders from leveraging their limited monopoly to allow them to control areas outside of their monopoly.” The court acknowledged that previously, the doctrine of copyright misuse had traditionally been applied to “situations involving antitrust tying agreements and restrictive licensing agreements.” However, “this is not to say that copyright misuse could not exist in other situations.”

The court held that this was one such situation, and ruled that Omega misused its copyright by relying on it to prevent Costco from importing Omega’s gray market watches into the United States. Omega had argued that it obtained its copyright for multiple reasons, including its desire to promote creativity and enhance the aesthetics of the Omega Globe Design, itself, and to increase the value that the design gives to a watch. But the court rejected that argument, noting Omega’s admission that the primary reason it obtained its copyright registration was to prevent the importation and sale of gray market watches in the United States. Thus, the court held that Omega improperly used “the defensive shield of copyright law as an offensive sword.”

Notably, the court’s decision is not binding on other courts in the Ninth Circuit or elsewhere, and on December 9, Omega filed a Notice of Appeal. If the Ninth Circuit endorses the district court’s interpretation of the copyright misuse doctrine, or if the district court’s interpretation is adopted by other courts, this could make it significantly more difficult for companies to rely on copyright law to prevent the unauthorized importation of gray market goods into the United States.

Companies are advised to seek counsel when planning to manufacture, import, acquire, and/or sell foreign-made goods that are subject to US copyrights. To learn more about the copyright misuse doctrine, or this litigation, please contact Ross Panko.