At first blush, Costco Wholesale Corp v. Omega, S.A., which the U.S. Supreme Court earlier this month agreed to hear, doesn't involve the kind of cutting-edge issues that copyright lawyers usually grapple with in the digital age. So why is the Court willing to consider a dispute between a company that makes fancy watches and a company that imports and resells them? It sounds like the kind of lawsuit that should have been resolved 200 years ago.
But this lawsuit -- and many others that hinge on its outcome -- is very much a product of the Internet-driven global economy. Just ask John Mitchell, a Washington, D.C., attorney who's engaged in a fight with textbook-makers over whether his client, Ganghua Liu, has the right to resell English-language textbooks that were imported from China. In September, a New York federal court denied Mitchell's motion to dismiss the suit, brought by textbook makers John Wiley and Sons Inc. and Pearson Education, but Mitchell has appealed that decision to the 2nd U.S. Circuit Court of Appeals. A second suit that addresses what's called the "parallel importation" of textbooks is set to be argued before a 2nd Circuit panel on May 19.
What's at stake in these disputes is the ability of resellers large (Costco) and small (Liu) to offer legitimate, non-pirated versions of copyrighted goods to U.S. consumers at prices that undercut those charged by the copyright holders -- something that's possible thanks to the robust secondary markets provided by major Internet retailers such as eBay and Amazon. Mitchell says that the business model that supports such reselling may be new for modern entrepreneurs, but it's protected by very old law. "Essentially for 150 years, the courts have recognized that the distribution right of copyright owners ends once they sell their copy," says Mitchell. "But in recent years more and more copyright owners are trying to exert control. They're saying, 'We made these copies outside the U.S. and therefore the law of the land doesn't apply to our copies.'"
However the Supreme Court ultimately decides Costco v. Omega, the opinion is sure to have an impact on the textbook suits and other such cases. The issue before the Court is a narrow but important one: Can copyright owners assert rights over imported goods that have already been sold once? Consumer rights advocates say no, and argue that luxury goods makers especially are trying to use what amounts to an importation loophole to avoid the "first sale" doctrine that protects consumers as well as businesses that profit from so-called secondary markets. (Under first sale doctrine, a copyright or patent holder can't use intellectual property rights to control resold or used goods in secondary markets.)
Costco lawyers at Robbins, Russell, Englert, Orseck & Untereiner write in their brief that in 2003, Omega began to stamp its Seamaster watches with a small globe design, less than 5 millimeters across, "for the express purpose of invoking the Copyright Act to restrict the resale of its products." At the time, Costco was already selling Omega watches at prices well below the company's suggested retail prices after buying them from foreign importers who had purchased the watches. For instance, Omega sold batches of Seamaster watches to distributors in Egypt and Paraguay, and Costco bought 117 of those watches in 2004. The retail chain then began selling the Seamasters for $1,299 -- $700 less than Omega's suggested U.S. retail price.
Omega then sued Costco for copyright infringement, saying it hadn't authorized the sale of those watches, which were also "copies" of its copyrighted globe design. After losing in district court, Omega scored a win at the 9th U.S. Circuit Court of Appeals, where a panel of judges agreed that by importing the watches, Costco had violated Omega's exclusive right to distribute and sell its copyrighted goods as outlined in a section of the U.S. copyright code dealing with importation rules. In its decision, the appellate panel cited a 1991 case in which BMG Music was able to use copyright to put a halt to a reseller's business, BMG Music v. Perez.
Costco had argued that the controlling precedent should actually be a 1998 Supreme Court case, Quality King Distributors v. L'Anza Research International, which ruled that copyright holders don't have any say over the market for U.S. copyrighted goods that are imported and re-sold. Costco's lawyers argued "that dichotomy has no basis in law or logic, yet carries severe consequences ... for manufacturers, retailers, and consumers in the U.S." Two IP-savvy consumer rights groups, Electronic Frontier Foundation and Public Knowledge, weighed in with an amicus brief supporting Costco's petition. Omega, represented by Kellogg, Huber, Hansen, Todd, Evans & Figel, says that the Quality King decision doesn't apply to its Swiss-made watches, and the 9th Circuit agreed.
Fred Von Lohmann, a senior attorney at EFF, maintains Omega is just embracing a strategy of using copyright law as a pretext for a form of price discrimination that the Supreme Court banned in the Quality King case. The watch maker, he argues, may not like Costco's business of importing Omega watches and undercutting the prices charged by high-end jewelry shops, but that doesn't mean it should be allowed to use copyright law to shut down the resales. "If it's all right for Omega to put a copyrighted logo on the back of a watch and trump the first sale doctrine, it gives manufacturers the ability to use copyright law to block secondary markets of all kinds," says Von Lohmann.
In the consumer groups' brief, attorneys argue that if the 9th Circuit ruling is allowed to stand, countless resellers -- from used bookstores to neighborhood yard sales -- would be "barred from the simplest transaction" if the copies they're reselling were made outside the U.S. And, Von Lohmann says, if Omega's intepretation of the copyright-importation laws and the first sale laws hold -- and copyright holders are allowed to control the price of imported goods they've already sold once -- then copyright owners will have a huge incentive to move their manufacturing offshore, something that Congress most likely never intended.
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Calling for Time: Why the Supreme Court Will Consider 'Costco v. Omega'
Corporate Counsel
April 26, 2010
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R. Morgan
§ 602.a.1 of Title 7, c6:
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