The article entitled “Costco Wholesale Corporation v. Omega, S.A.: Extraterritorial applicability of the first sale doctrine” was published in the Berkeley Technology Law Journal on December 24, 2010, by Margaret Grazzini. The article introduced the lawsuit between Costco Whole Sale Corporation (hereafter “Costco”) and Omega S.A. (hereafter “Omega”). The plaintiff, Omega, is a luxury watchmaker based in Switzerland that distributes its watches through authorized retailers. The Omega watches feature a copyrighted globe design on the back side of the watches. Defendant Costco obtained some of the Omega watches through the grey market and sold them in Costco’s stores at almost 50% less than the price that they are sold n the US. Omega sued for copyright infringement under 17 U.S.C § 106(a) and 602(a). Costco asserted that the first sale doctrine precluded any infringement claims against it1. In Omega v. Costco, the trial court ruled for Costco, the Ninth Circuit reversed and ruled that the first sale doctrine does not apply to imported goods manufactured abroad. The case went to the Supreme Court. Justice Kagan took no part in the consideration or decision in this case. The remaining justices split 4-4, which means that the court is not making a ruling that clarifies or speaks to the issues brought up2.
Under the first sale doctrine, codified in 17 U.S.C. § 109(a), the owner of any particular copy “lawfully made under this title” is allowed to resell or transfer that good without authorization from or further obligation to the copyright holder. The Ninth Circuit Court believed the description “lawfully made under this title” in first sale doctrine meant all goods made outside United States are not under protection of US law.” Thus people who had the copies which were manufactured in foreign countries could not import and resell them in the United States under the correct interpretation of the first sale doctrine.
Earlier in Quality King v. L’anza case, the Supreme Court held that the first sale doctrine endorsed in § 109(a) is applicable to imported copies1. Quality King v. L’anza involved domestically manufactured copies sold to a party outside the United States and then imported --- a round trip importation. However, Omega v. Costco involved copies manufactured outside the United States and then imported. These two cases make it apparent that, while the location of the sale may not matter, the location of the manufacture will impact the applicability of the first sale doctrine. I do not think it is correct to narrow the first sale doctrine based on where the copies were manufactured. This holding will exclude all copies made outside the United States, even those made by or with the authorization of the United States copyright owners.
Commerce in copies of copyrighted works constitutes a substantial part of the United States economy. Copyright protection has a far reaching effect on commerce. Commerce in copyrighted works depends on the confidence that retailers and consumers will be free from downstream restraints imposed by a copyright owner. The right is secured by the first sale doctrine2. Mass retailers in United States, such as Target corporation, attract customers by offering high quality goods at reasonable and discount prices. Target has a substantial percentage of products that are produced and first sold abroad and imported. Also, many retailers purchase goods for resale from wholesale importers and distributors, who arbitrage goods to take advantage of lower foreign pricing. The first sale doctrine is very important to these retailers. They need confidence that these foreign-manufactured goods can be purchased and resold in United States commerce free from claims of copyright infringement. So narrowing the scope of the first sale doctrine, as the Ninth Circuit did in Omega v. Costco, will create fears of copyright liability among these mass or small retailers. They may face copyright infringement lawsuits that will cost tens of billions of dollars annually because of the narrow application of the first sale doctrine.
The first sale doctrine also gives rise to aftermarkets for many copyrighted works. Aftermarkets for rental and purchase enable more consumers to enjoy a greater number of copyrighted works, and spread access to cultural works to persons with lower incomes. The selling prices for movie DVDs are at least ten times more than their rental prices. Consumers can get “like new” used books on Amazon for half of their original prices. For students, the prices of textbooks are so high that they will usually try to get used books rather than buy them directly from a book store with their recommended price. So all of these commerce activities are important and we should make sure to keep their currently lawful status.
With the decision made in the Omega v. Costco case, any copyright owner could end commercial activities, such as DVD rental and used book selling, by moving production overseas. Eliminating first sale privileges for imports will reduce the value proposition from the purchase of copyrighted works. While consumers know that the books, DVDs and video games they purchase can be traded, given away, or sold, they would be more likely to resell or trade in their used copies to fuel purchases of other copyrighted copies. Thus, the loss of first sale resale rights likely will reduce purchasing in primary market sectors, both by reducing the initial incentive to purchase and denying consumers the proceeds from sales of used books.
With the argument above, I believe it is not correct to exclude all copies manufactured overseas from being protected by the US copyright law.
Even if the Ninth Circuit held that first sale doctrine is applicable to both copies manufactured domestically and internationally, I do not think the ruling for Omega v. Costco should be reversed. Costco obtained the Omega watches through the grey market – Omega sold the watches to authorized distributors, third parties bought the watches, sold them to the New York Company ENE limited, and ENE sold the watches to Costco. Omega did not authorize the importation or resale in the United States1. Suppose Costco won the suit under this unauthorized status, hundreds of other retailers or wholesale companies will use the same channel to get goods from the grey market. Those product companies will lose their control to the prices of their goods. So I think the first sale doctrine should be redefined to protect product companies from unfair competition from the grey market.