Ninth Circuit Decision Reaffirms New Paradigm on Interplay Between First Sale, Import Rights Under the Copyright Act, Suggests Continuing Viability of Copyright Misuse Defense

January 26, 2015

On January 20, 2015, the United States Court of Appeals for the Ninth Circuit ruled in Omega S.A. v. Costco Wholesale Corp., No. 11-57137 (9th Cir. Jan. 20, 2015), that Costco Wholesale Corporation did not infringe Omega S.A.’s exclusive right to control importation and distribution of its copyrighted Omega Globe Design because of the “first sale doctrine” found in Section 109(a) of the Copyright Act.  The decision is noteworthy both because it aligns the Ninth Circuit’s application of the first sale doctrine with recent Supreme Court precedent and because it leaves available the equitable defense of “copyright misuse” discussed in Judge Wardlaw’s concurrence in the judgment.

Omega manufactures luxury watches in Switzerland and distributes them through authorized distributors and dealers around the world, including in the United States.  In 2003, Costco and Omega discussed the possibility of Costco’s selling Omega watches, but were unable to come to an agreement.  Costco, however, obtained one hundred and seventeen Omega Seamaster watches on the so-called “gray market” and sold forty-three of the watches to Costco members in California.  The chain of events by which Costco procured the Seamaster watches is complex:  First, Omega sold the watches to authorized foreign distributors.  Those distributors then sold the watches to unidentified third parties, who in turn sold them to ENE Limited, a New York company.  ENE Limited, finally, sold the watches to Costco.  Costco was thereby able to sell genuine Omega watches without following Omega’s authorized United States distribution channels.

Omega sued Costco in 2004, alleging that Costco had infringed Omega’s “exclusive right to distribute copies” of Omega’s copyrighted material under Section 602(a)(1) of the Copyright Act.  The watches themselves were not copyrighted; rather, Omega had engraved a small copy of the copyrighted Omega Globe Design–only approximately one-eighth of an inch in size–to the underside of the Seamaster watches in an effort to use copyright law to prevent their unauthorized importation into the United States.

In 2007, the district court granted Costco’s motion for summary judgment, ruling that Costco’s actions did not constitute copyright infringement under the first sale doctrine.  That doctrine, codified at 17 U.S.C. § 109(a), states that “the owner of a particular copy or phonorecord lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.”  In 2008, the Ninth Circuit reversed the grant of summary judgment based on its precedents holding that the first sale doctrine was applicable “only insofar as the claims involve[d] domestically made copies of U.S.-copyrighted works.”  Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 985 (9th Cir. 2008).  The Supreme Court granted certiorari, and an equally divided Court (with Justice Kagan recused) summarily affirmed in a non-precedential per curiam decision.  Costco Wholesale Corp. v. Omega, S.A., 562 U.S. 40 (2010) (per curiam).

The case therefore returned to the district court, which again granted summary judgment for Costco.  This time, the district court ruled in Costco’s favor based on the defense of “copyright misuse,” which the Ninth Circuit adopted in Practice Management Information Corp. v. American Medical Ass’n, 121 F.3d 516, 520 (9th Cir. 1997).  Copyright misuse is a judicially crafted, equitable doctrine that “forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office.”  Slip op. at 16–17 (Wardlaw, J., concurring in the judgment) (internal quotation omitted).  Omega, the district court concluded, misused its copyright in the Omega Globe Design by affixing it to non-copyrighted Seamaster watches in order to control their importation.

Omega again appealed to the Ninth Circuit.  But while the appeal was pending, the Supreme Court decided in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), that the first sale doctrine is not limited to domestically made copies, but rather applies with equal force to “copies of a copyrighted work lawfully made abroad.”  Id. at 1356.  The words “lawfully made under this title” in Section 109(a), a divided Court held, mean “made ‘in accordance with’ or ‘in compliance with’ the Copyright Act,” not made in the United States.  Id. at 1358.  And because the Supreme Court’s prior, equally divided affirmance in the first Omega appeal was non-precedential, see Trans World Airlines, Inc. v. Hardison, 432 U.S. 63, 73 n.8 (1977), the Ninth Circuit concluded that the holding in Kirtsaeng was fully retroactive and applicable to the Omega case.  The Ninth Circuit therefore affirmed the district court’s judgment, reasoning that under Kirtsaeng, “Omega’s right to control importation and distribution of its copyrighted Omega Globe expired” after the first authorized sale outside the United States, “and Costco’s subsequent sale of the watches did not constitute copyright infringement.”  Slip op. at 7.

Judge Wardlaw concurred in the judgment, but wrote separately to explain that she would affirm the district court’s grant of summary judgment on the basis of copyright misuse.  Expanding upon the district court’s analysis, Judge Wardlaw wrote that the doctrine applied because, as Omega had conceded, “it designed and secured copyright protection for the Globe Design for the purpose of using copyright law to restrict the unauthorized sale of Omega watches in the United States.”  Slip op. at 23 (Wardlaw, J., concurring in the judgment).  Omega had therefore “misused its copyright” in the Omega Globe Design “to obtain a copyright-like monopoly over uncopyrightable Seamaster watches.”  Id. at 24.

The Ninth Circuit’s decision in Omega is significant both for the majority’s holding on the first sale doctrine and for Judge Wardlaw’s reasoning on the copyright misuse doctrine.  The majority brought Ninth Circuit law into step with the Supreme Court’s decision in Kirtsaeng:  a copyright holder’s exclusive importation and distribution rights for a copy of the work are exhausted by an authorized first sale, even if that sale occurs abroad.  Judge Wardlaw’s separate opinion, meanwhile, serves as a helpful reminder that the copyright misuse doctrine continues to be a valid and important defense, “the contours of which are still being defined.”  MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 941 (9th Cir. 2010).

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Intellectual Property or Fashion, Retail and Consumer Products practice groups, or the author of this alert:

Howard S. Hogan – Washington, D.C. (202-887-3640, [email protected])

Please also feel free to contact the following practice group leaders:

Intellectual Property Group:
Josh Krevitt – New York (212-351-2490, [email protected])
Wayne Barsky – Los Angeles (310-557-8183, [email protected])
Mark Reiter – Dallas (214-698-3360, [email protected])

Fashion, Retail and Consumer Products Group:
Lois F. Herzeca – New York (212-351-2688, [email protected])
David M. Wilf  – New York (212-351-4027, [email protected])
Howard S. Hogan – Washington, D.C. (202-887-3640, [email protected])

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