On December 13, the US Supreme Court deadlocked 4-4 on the question of whether the first-sale doctrine of copyright law applies to genuine goods that are manufactured and sold overseas, but later imported into the United States without the authorization of the copyright owner. Costco Wholesale Corp. v. Omega S.A., US No. 08-1423. Such an even split among the Justices has the effect of upholding the US Court of Appeals for the Ninth Circuit’s decision in favor of Omega S.A., without setting a nationwide precedent. Thus, in the Ninth Circuit, courts must now follow the precedent set by Omega S.A.—namely, that the first-sale doctrine of copyright law is not available as a defense to a copyright infringement claim where the genuine copyrighted goods were manufactured overseas. Instead, that defense is available only where the goods were manufactured in the United States. However, because the Ninth Circuit’s decision is binding only on courts in that Circuit, copyright owners and manufacturers are left with considerable uncertainty as to how courts in other circuits are likely to resolve this issue going forward.

The case involved Omega S.A., a Swiss watch manufacturer, and its attempt to hold Costco liable for the unauthorized importation and sale of genuine, Omega-branded watches in the United States. Omega manufactured a batch of watches in Switzerland, for sale overseas. The watches were engraved with a small, copyrighted globe design on the back of each watch. Omega first sold these watches to distributors overseas. Unidentified third parties eventually 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.

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. Omega S.A. v. Costco Wholesale Corp., No. 04-5443 (CD Cal., Feb. 6, 2007) (order granting summary judgment in favor of Costco Wholesale Corp.).

On appeal, 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. Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 990 (9th Cir. 2008). Because the Omega watches were made in Switzerland, the Ninth Circuit held that the first-sale doctrine did not apply.

Costco appealed to the US Supreme Court, which granted Costco’s Petition for Writ of Certiorari. Justice Elena Kagan, however, recused herself, thus leaving only eight Justices to decide the case. Four of the remaining Justices voted to affirm the Ninth Circuit’s decision, with four voting to reverse. The 4-4 deadlock means that the Ninth Circuit’s decision stands, but that no nationwide precedent is established. Thus, federal courts in the Ninth Circuit are now required to follow the Omega S.A. holding, but courts in other circuits are not.

The immediate impact of the Supreme Court’s decision is that courts in the Ninth Circuit are likely to become popular venues for copyright owners seeking to prevent the unauthorized importation of genuine, foreign-manufactured goods into the United States. Other judicial circuits, however, may not reach the same conclusion as the Ninth Circuit. Ultimately, many expect that the US Supreme Court will take up the issue again, at some point down the road.

Copyright owners and industry associations had urged the Supreme Court to affirm the Ninth Circuit’s ruling. For example, the Motion Picture Association of America (MPAA) and the Recording Industry Association of America (RIAA) argued in their amicus brief that applying the first-sale defense to copies made outside of the US (and resold within the US by entities other than the copyright owners) would diminish the value of US copyrights.

In their brief, the MPAA and RIAA noted that “when unauthorized importers purchase CDs, DVDs, or Blu-Ray discs in other markets and resell them in the United States, the importer effectively undercuts the economic benefit Congress intended to provide to the copyright owner to stimulate artistic activity.” In addition, the MPAA and RIAA argued that the ability to treat different markets differently (e.g., by timing movie releases differently in different markets and editing content to better suit local tastes) is important to the success of their respective industries.

By contrast, eBay and other retailers filed an amicus brief arguing that limiting the first-sale defense as done by the Ninth Circuit would infringe on the rights of consumers to redistribute goods, stifle secondary markets, and hinder e-commerce. In addition, eBay argued that upholding the Ninth Circuit’s decision would hurt the US job market by creating negative incentives for companies to manufacture copyrighted works overseas.

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

Anthony V. Lupo
lupo.anthony@arentfox.com
202.857.6353

Ross Q. Panko
panko.ross@arentfox.com
202.857.6090