™ ™ Legal Info Copyright © 2009,  AFTA™ - American Free Trade Association  BACKGROUND INFORMATION OMEGA S.A. v. COSTCO WHOLESALE CORPORATION For at least ninety-five years, the first sale doctrine in U.S. copyright law found at §109 has allowed those who buy copies of a copyrighted work to resell, rent, or lend those copies. The first-sale doctrine is a limitation upon copyright that was recognized by the U.S. Supreme Court in 1908 and subsequently codified in the Copyright Act of 1976, 17 U.S.C. § 109. The doctrine of first sale allows the purchaser to transfer (i.e. sell or give away) a particular, lawfully made copy of the protected work without the permission of the copyright holder once the copy has been obtained by the purchaser. The Copyright Act, however, also contains §602. §602 of the Copyright Act provides owners with the ability to prevent unauthorized importation of copyrighted works acquired abroad. When first faced with these two arguably conflicting sections of law, the Supreme Court, in 1998 (Quality King Distributors Inc., v. L'anza Research International Inc. 523 U.S. 135 (1998)), found that §602 is not compromised by §109 and that the first sale doctrine protects unauthorized importation into the US of copyrighted works (shampoo bottle labels) which were first made in the US, then exported and ultimately reimported for sale at discount retail outlets. This was a very significant case for grey market imports of all types of products in connection with which the price outside the US may be lower than the price inside. However, the importation of goods first manufactured outside the US under the copyright laws of other countries was specifically excluded from that decision, leaving undecided whether goods "lawfully made" under the Copyright Act but made outside the United States also benefit from the first sale doctrine. In Omega S.A. v. Costco Wholesale Corp. which will now be heard by the U.S. Supreme Court, the Ninth Circuit Court of Appeals had held that the first sale doctrine in §109 of the Copyright Act does not protect against unauthorized importation of copyrighted goods in connection with which the U.S. copyright owner had not authorized such importation. The Court relied upon its earlier holding in BMG Music v. Perez to support its decision. BMG was the case which first pitted the first sale doctrine found in §109 of the Copyright Act against the copyright owners’ right to prohibit unauthorized importation of copies acquired abroad found in §602 of the Copyright Act. In this case, the plaintiffs owned copyrights to a variety of sound recordings produced overseas which were brought into the U.S. without authorization of these U.S. copyright holders. At both the District and Appellate levels, the Ninth Circuit held that the first sale protection applies “only to copies legally made and sold in the United States” because only those copies are “lawfully made” as is required by the first sale doctrine found at §109 of the Copyright Act. The Court also stated that the first sale doctrine could not apply to copies made abroad because it would require the extraterritorial application of U.S. law without express Congressional intent to do so. To reiterate, in BMG the Ninth Circuit held that to be “lawfully made” as required for first sale protection, the copyrighted work had to be both legally made and first sold in the United States. Several years after the BMG decision, the Ninth Circuit was again faced with a similar fact pattern in Parfums Givenchy, Inc. v. Drug Emporium, Inc. In this case, the plaintiff again sought to prevent importation and sale of copyrighted works manufactured and first sold abroad. Drug Emporium, however, argued that if the first sale doctrine only applied to copies made and sold in the United States, then it would never apply to foreign manufactured copies and would therefore provide greater copyright protection to goods made overseas than those made domestically. The Court agreed that the distinction between U.S. and foreign made goods was not the legislative intention when passing §109 of the Copyright Act, but it nevertheless upheld its decision in BMG that the copyrights owners’ right to prevent unauthorized importations was not compromised by the first sale doctrine. In Parfums Givenchy, the Ninth Circuit held that in order for a copyrighted work to be “lawfully made” and protected by the first sale doctrine, it had to either have been made in the United States or, if made outside of the United States, the U.S. copyright owner had to have authorized the first sale (importation) of that product in the United States. Because no such authorization had been given, the determination of copyright infringement was upheld. The Quality King decision reached the Supreme Court in 1998 to resolve a judicial circuit split regarding the interplay between these two same sections of the U.S Copyright law. In Sebastian International, Inc. v. Consumer Contacts,  the Third Circuit concluded that the two sections of law acted independently and one was not compromised by the other. In this case, the Court determined that the first sale doctrine prohibited the copyright owner from preventing importation of U.S. manufactured products with copyrighted labels sourced from foreign distributors, without regard to whether or not the manufacturer had authorized the reimportation of those goods. The Ninth Circuit, however, not surprisingly, had reached the opposite conclusion when it was first presented with the original Quality King  case. The Ninth Circuit reaffirmed its prior decisions by claiming that the first sale doctrine only applied to U.S. manufactured goods in connection with which the U.S. copyright owner had authorized the first sale of those goods into the United States. Because of the different decisions reached by the different judicial circuits on essentially the same issue, the Supreme Court agreed to a hearing in the Quality King case. On appeal, the Supreme Court agreed with the Third Circuit that §602 of the Copyright Act “does not categorically prohibit the unauthorized importation of copyright materials.” The Court held that regardless of the location of the first sale, an owner of a copyrighted item “lawfully made” pursuant to the Copyright Act “has an unfettered right to dispose of it.” While the Court’s decision itself did not specifically limit its application to U.S. manufactured products, because the facts of the case were specifically about a U.S. manufactured shampoo label, the concurring opinion of Judge Ginsburg specifically limited applicability of the Court’s decision to copyrighted goods making a “round trip journey.” Since Quality King only addressed parallel importation of domestically manufactured goods, unauthorized importations of any other products remained a question mark. In 2004, however, Omega challenged the perception that Quality King might also apply to foreign-made goods by filing a complaint for copyright infringement against Costco Wholesale Company in the U.S. District Court for the Central District of California. Omega claimed protection against unauthorized imports under §602 of the Copyright Act and Costco claimed protection for its resale of genuine products under the first sale doctrine set forth in §109 of the Copyright Act. The District Court agreed with Costco; the Appellate Court agreed with Omega. And, now, the Supreme Court will render the final verdict. The ultimate question presented to the Court is the plain meaning of the phrase “lawfully made under this title” as included in §109(a) of the Copyright Act as a type of caveat to the first sale doctrine. A variety of amici briefs filed with the Supreme Court clearly set forth the variety of issues concomitant with an ultimate decision in favor of Omega. While it may be far-fetched to think, should the Court rule in favor of Omega, that U.S. manufacturers will intentionally relocate U.S. manufacturing facilities abroad just to be able to rely upon the U.S. Copyright Act to stop gray market imports and sales, because U.S. consumers lack the ability to determine where most of the products they purchase were first manufactured, the potential liabilities and restraints on trade could be tremendous. Moreover, in this economic climate when the Administration is touting its commitment to job creation, any further incentive for U.S, manufacturers to even consider going overseas seems, at best, ill timed (which is what makes the Solicitor General’s amicus brief urging the Court not to grant certiorari even more perplexing). Moreover, the scope of application of a decision in favor of Omega could be devastating. In fact, last October, the 2nd District in Wiley & Sons v Kirtsaeng  held that, pursuant to the Ninth Circuit’s holding in Omega, even textbooks manufactured outside of the United States could not be imported into the U.S. without authorization of the U.S. copyright owner.   AFTA will be filing briefs in the Omega case and urges all parallel market participants to join the Association and become a part of what is a critical crossroad in the history of the domestic parallel market industry.