Supreme Court May Stop Time For Grey Market Watches

After much confusion in the lower courts – but no actual split among the appeals courts – the Supreme Court has agreed to hear a case about whether consumer goods manufacturers can use copyright law to stop sales of “grey market” imports (goods sold legally abroad and imported into the U.S.), where they compete with the same goods sold through the manufacturer’s authorized channels.

In this case, Costco Wholesale Corp. v. Omega S.A., Omega manufactured watches in Switzerland and sold them to unnamed third parties in Egypt and Paraguay, who resold them to U.S. importers.  The watches appeared on the shelves of discount warehouse store Costco, which sold them for about 30% less than Omega’s authorized sellers in the U.S.  To prevent this, Omega began engraving a small copyrighted logo on the back casing of its watches, and then sued Costco for violating Omega’s exclusive right to distribute its copyrighted work (the logo) in the U.S.

The Copyright Act has a defense called “first sale,” analogous to the “exhaustion” doctrine in patent law.  It says that once a copyright owner has sold a particular copy of its work, it loses the power to control any further distribution, sale, or rental of that copy, so long as the copy was “lawfully made under this title,” i.e., the Copyright Act.  This provision is what enables libraries and video rental stores to lend copyrighted materials, and it is what allows anyone to sell used books or videos without permission from the copyright owner.

The Ninth Circuit Court of Appeals held that “lawfully made under this title” means manufactured in the United States, so that whenever copyrighted items are manufactured abroad and imported, the first sale defense would not apply, and the copyright owner could control all future sales, rentals, or transfers of the goods – in this case, preventing Costco from selling the watches. 

Costco, and numerous amici (friends of the court), argued that Congress knew how to distinguish foreign and domestic manufacturing when it wanted to, and in fact had done so elsewhere in the Copyright Act.  Because the first sale rule does not mention the place of manufacture, they argued, it should be irrelevant.  They also pointed out the practical consequences of the Ninth Circuit’s decision: manufacturers may move their factories abroad in order to get more control over the chain of distribution in the U.S., while retailers may be wary of selling imported goods because they may contain a copyrighted symbol, label or packaging that would create liability for the retailer.

The Supreme Court asked the Justice Department’s Solicitor General for her opinion on whether to grant certiorari.  Although the Solicitor General advised the Court not to take the case, they have now done so.  The case will be heard next term.