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First Sale Defense to Copyright Infringement Does Not Apply to Certain Goods Resold in the U.S – At Least in the States of the 9th Circuit

Intellectual Property Litigation Update Gavin J. Milczarek-Desai, Yakov Sidorin

Like many goods, Omega watches are not priced equally in every country. In some markets, they are cheaper than in the United States. Discount resellers, such as Costco, exploit this price difference by buying the products abroad and then importing and reselling the products at a discount to the standard U.S. retail price. Indeed, Costco acquired genuine Swiss-produced Omega watches from foreign distributors and then resold them in its U.S. stores at below-market prices. Based on a copyrighted logo on the watches, Omega sued Costco under Section 602(a) of the Copyright Act, which bars importation of copyrighted works without the copyright owner's permission. Costco defended by relying on the first sale doctrine of Section 109(a) of the Copyright Act, which allows the buyer of a legitimate copy of a work to lawfully resell the copy. The right to resell a copy is also referred to as "copyright exhaustion" because the copyright holder's rights over further distribution of the legitimate copy are "exhausted" by the sale.

In essence, Costco argued that the first sale doctrine allowed copies lawfully bought abroad to be imported into the United States notwithstanding Section 602(a). Omega countered that since copyright is a territorial concept, the first sale abroad did not "exhaust" the U.S. copyright. Costco prevailed at the trial court level; however, the 9th Circuit Court of Appeals reversed and found in favor of Omega. On December 13, 2010, the Supreme Court affirmed (without opinion and in a 4-to-4 split, due to the recusal of Justice Kagan) the decision of the 9th Circuit, which held that the first sale doctrine did not apply to goods that were made and initially distributed abroad.

The Supreme Court's ruling does not provide any clarification of the first sale doctrine and further does not have the same impact as a majority decision because the 4-4 ruling does not set a nationwide precedent. In other words, while the Supreme Court's decision effectively negates the first sale doctrine as a defense to copyright infringement for goods manufactured and initially distributed abroad and then resold in the states covered by 9th Circuit case law (AK, AZ, CA, GU, HI, ID, NV, OR, WA ), other circuits covering the remaining states are free to decide otherwise. Moreover, given that the Supreme Court was deadlocked in this case, a future appeal could very well result in a majority decision that changes the law nationwide in Costco's favor.

If you have any questions on this client update or other intellectual property litigation issues, please contact
Gavin Milczarek-Desai at (520) 770-8716 / gavin.milczarek-desai@quarles.com, Yakov Sidorin at (520) 770-8753 / yakov.sidorin@quarles.com or your Quarles & Brady attorney.