Costco Wholesale Corporation v. Omega, S.A.: Extraterritorial Applicability of the First Sale Doctrine

In the Ninth Circuit decision of Omega, S.A. v. Costco Wholesale Corp., the court ruled that the first sale doctrine does not apply to imported works manufactured abroad. Costco appealed, and oral arguments before the United States Supreme Court took place in early November. The case was based on the following activity: Costco resold Omega watches, sold by Omega outside the United States at a relatively low price, without authorization. These watches featured a small etching of a copyrighted image, so Omega argued that Costco’s acts constituted infringing importation.

The first sale doctrine, codified in 17 U.S.C. § 109(a), provides: “. . . the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” The function of this statutory provision is to limit the copyright holder’s exclusive right to distribution. Without the first sale doctrine, a copyright holder would have an actionable claim, for instance, against a consumer selling a book or CD at a garage sale.

The decision in Costco v. Omega turned on the interpretation of the particular phrase “lawfully made under this title,” specifically whether the first sale doctrine applies to copyrighted work created outside the United States and then imported. Costco and Omega put forward arguments for defining “made” with various caveats. Costco maintained—with little basis in statutory language—that “lawfully made” means made in a way that complies with United States law; however, § 109 does not apply if an exclusive license was granted to operate in the foreign country. Costco Argument (PDF).  Omega simply argued that “lawfully made” refers to manufacture or grants of authority within the United State’s territorial jurisdiction. Omega Argument (PDF).  Geographic market segmentation and related price discrimination are not uncommon, but if the first sale doctrine applied, secondary markets would benefit from an arbitrage opportunity. However, as summarized by Public Knowledge, Omega’s argument “[t]aken literally . . . would produce the absurd result that the copyright owner’s control over foreign-manufactured copies would never expire, even after an authorized sale.” Omega, of course, points out that there is a dearth of evidence that the Ninth Circuit’s interpretation would lead to adverse consequences.

The Supreme Court issued its final decision without Justice Kagan’s participation on December 13, 2010. In its entirety, the opinion (pdf) reads: “[t]he judgment is affirmed by an equally divided Court.”  This is not the first time the Court has ruled on extraterritorial application of the Copyright Act. Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998) involved domestically manufactured copies sold to a party outside the United States and then imported—a round trip importation. In Quality King, the plaintiffs argued that 17 U.S.C. § 602, the provision defining infringing importation, was should trump § 109 in all cases of imported works. The Court rejected that argument and held that the locale of the sale was irrelevant. Alternatively stated, the first sale doctrine is a defense to actions involving the sale of goods originally manufactured in the United States. Omega v. Costco makes apparent that, while the location of the sale may not matter, the location of the manufacture will impact the applicability of the first sale doctrine.

Limiting the first sale doctrine’s reach raises concerns for secondary markets abroad. After the Costco v. Omega decision, there is now a greater incentive to manufacture abroad and enjoy greater copyright control than that granted over domestically made works. Other aspects of intellectual property law have similar features, such as patent exhaustion—also not applicable abroad. Quanta Computer, Inc. v. LG Electronics, Inc. (PDF); See Fujifilm Corp. v. Benun (PDF). The Costco v. Omega decision is expected to have impact in the realm of patent law as well.