Uncertainty Prevails for U.S. Distributors and Retailers in Wake of Supreme Court's Costco Decision
Can a U.S. retailer import copyrighted goods it purchased overseas at prices significantly below those in the U.S., and then sell them at retail prices significantly below those prevailing in the U.S. for the same product models? The answer is a clear “maybe.”
On Dec. 13, 2010, the U.S. Supreme Court issued its first major business decision of the current term, a one-sentence, 4-4 opinion affirming the decision of the 9th Circuit Court of Appeals in Costco Wholesale Corporation v. Omega, S.A. that a U.S. retailer could not import copyrighted goods because both their manufacture and their first purchase had occurred overseas.
The "first sale doctrine"
At issue—and still unresolved because of the Court’s 4-4 deadlock—was the question of whether the so-called “first sale doctrine” embodied in 17 U.S.C. §109(a) applies when the first purchase of foreign-manufactured copyrighted goods is overseas prior to their importation into the U.S. The first sale doctrine holds that once a copyrighted product has been sold to a first purchaser, the first and subsequent purchasers are entitled to sell or otherwise dispose of the product without the permission of the copyright holder.
This doctrine is based on the theory that once the first sale occurs, the copyright holder has received the benefit of its copyright protection. Because of this rule, subsequent transactions involving copyrighted products are legal whether they are yard sales, a friend lending a book to another, or the resale of the goods in the open market.
For several years, Costco, relying on the first sale doctrine, had been purchasing Omega watches overseas and reselling them in the U.S. at retail prices significantly lower than those of its competitors. Costco was not an authorized Omega dealer. Omega had long been aware of Costco’s actions, but did nothing to impede Costco until others began following Costco’s lead, and Omega’s authorized dealers complained that their pricing was being undercut. At this point, Omega purposefully had its corporate logo inscribed on the back of its watch cases with the intent of subsequently registering that logo for the admitted purpose of controlling Costco’s future actions.
Importation of copyrighted goods into the U.S. without the permission of the copyright holder is copyright infringement prohibited by 17 U.S.C. §602(a)(1). Copyrighted goods that are imported into the U.S. without the permission of the copyright holder are known as “grey market goods.” By placing its copyright on its watch cases, Omega was intent on arguing that any copyrighted watches Costco would subsequently import were grey market goods and that their sale constituted a copyright infringement.
Prior to the Costco case, the Supreme Court had held in Quality King Distributors, Inc. v. L’Anza that copyrighted goods purchased overseas were entitled to the protection of the first sale doctrine. However, the copyrighted goods involved in that case had been manufactured in the U.S., then sold to a foreign buyer and were being re-imported into the U.S. Omega argued that the prior case holding did not apply when the copyrighted goods were manufactured overseas and their first purchase was overseas, because the “first sale” had to occur in the U.S.
The 9th Circuit agreed with Omega, and the Supreme Court was unable to come to a conclusion, leaving those of us within the 9th Circuit’s jurisdiction with differing results when copyrighted goods are first purchased overseas. The first sale doctrine applies if the goods were manufactured in the U.S., first sold overseas, and then re-imported into the U.S., but it doesn’t apply when goods are manufactured overseas and first sold overseas prior to importation into the U.S.
Split decision yields split results
The ruling has two obvious results. First, it means that U.S. prices for certain products such as watches and textbooks will likely remain higher than overseas pricing for the identical products, since the copyright holder remains in control until the first U.S. sale. Second, it will leave a good deal of confusion about when a U.S.-based retailer or distributor may or may not import copyrighted goods when they are purchasing those goods from someone other than the copyright holder or a distributor licensed by the copyright holder.
The U.S. Department of Justice under Elena Kagan, the department’s solicitor general at the time, had argued in Omega’s favor before the 9th Circuit in the Costco case. As a Supreme Court justice, Kagan recused herself from consideration of the case, and the remaining eight justices split evenly, thereby leaving the 9th Circuit’s opinion as the law of the case.
Because Justice Kagan was the solicitor general making the government’s case against Costco’s position, some have speculated that the Supreme Court, in a future case in which Justice Kagan is not recused, might well adopt the 9th Circuit’s reasoning and decide in favor of the government position. We are not as certain. Solicitor General Kagan was a skilled lawyer arguing her client’s case; Justice Kagan is free to see the matter differently in a case in which she was not involved at the lower court level.
All we can be certain of now is that while we know how the 9th Circuit will rule in the future, we don’t really know what the Supreme Court or another federal appeals court may do when this issue next arises. Since the Supreme Court did exercise its discretion to accept the Costco v. Omega case, we are reasonably certain that the Court has a strong interest in the issue and will likely be looking in the future to take another, similar case in which Justice Kagan had no prior involvement and will be able to vote.
Bill Weigand and Steve Ellis are members of DWT’s Distribution Counseling Group, which assists clients in matters relating to the legal aspects of manufacturing, supply chain management, product distribution, and franchising.