Let There Be Discounts! Copyrights Cannot Be Used To Control Importation Or Impair Competition

January 27, 2015 | Bulletin No. 1174883.1

Who does not like a good discount? Well, manufacturers, like Omega, for one. Fortunately for consumers, in Omega S.A. v. Costco Wholesale Corp., (January 20, 2015, 11-57137) ___ F.3d ___, the Ninth Circuit recently affirmed a decision granting Costco’s motion for summary judgment and award of attorney’s fees, thereby allowing Costco to sell discounted Omega watches. In doing so, the Ninth Circuit upheld the first sale doctrine and copyright misuse defense by ruling that Omega cannot use its copyrighted work to control the importation and distribution of its Seamaster watches. 

Omega manufacturers luxury watches in Switzerland, which it distributes through authorized distributors and dealers around the world. Since September of 2003, Omega’s high-end Seamaster watch bears the Omega Globe Design copyright. This Globe Design, placed discretely on the underside of the Seamaster watch, is not a distinguishing characteristic that prospective watch buyers consider when deciding to purchase an Omega watch. The watch itself is not copyrightable, nor copyrighted. Indeed, Omega admitted it had affixed the copyrighted Globe Design to take advantage of section 602 of the Copyright Act, which prohibits the importation of copyrighted goods into the U.S. without the copyright owner’s permission.

Since Costco is not an authorized Omega retailer, it was unable to buy Omega watches directly from Omega. Yet, Costco was able to purchase 117 Seamaster watches on the so-called “gray market” sometime in 2004. Omega had first sold the watches to authorized foreign distributors. Unidentified third parties purchased the watches and sold them to ENE Limited, a New York Company. Then, Costco purchased the watches from ENE and sold 43 watches in California at prices thirty-five percent below Omega’s suggested retail price.

Because Omega did not approve the importation of the watches into the U.S. or Costco’s sale of the watches at a discounted price, Omega sued Costco for copyright infringement, specifically the importation of copyrighted work without the copyright holder’s permission under 17 U.S.C. § 602. In fact, Omega told its authorized distributors that the purpose of suing Costco was to “stem the tide of the grey market” and the “unauthorized importation of Omega watches into the U.S.”

The Ninth Circuit found that copyright distribution and importation rights expire after the first sale, regardless of where the item was manufactured or first sold. The first sale doctrine is codified at 17 U.S.C. § 109(a) and, in plain language, means that once a copyright owner consents to the sale of particular copies of work, that same copyright owner cannot later claim infringement for subsequent distribution of those copies. The Supreme Court revisited the first sale doctrine in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1355 (2013) and concluded this doctrine applies to protect a buyer or other lawful owner of a copy of copyrighted work lawfully manufactured abroad.

The concurring opinion reaffirmed the equitable affirmative defense of copyright misuse. Copyright misuse is an affirmative defense to copyright infringement designed to combat the impermissible extension of a copyright’s limited monopoly. The copyright misuse defense applies when a copyright is used in a manner that violates the public policy embodied in copyright law. The constitutional policy underlying copyright protection is to “promote the Progress of Science and useful Arts”( U.S. Const. art. I, § 8, cl. 8), and not to limit retail competition. Omega’s anticompetitive acts did not promote the arts and instead were intended to and did, in fact, eliminate price competition in the retail market. Thus, the court concluded that Omega had misused its copyright by leveraging its limited monopoly over the Globe Design to control the importation and sale of Seamaster watches.

The Ninth Circuit determined Omega should have known that copyright law neither condoned nor protected its actions and, therefore, affirmed the award of attorney’s fees requiring Omega to pay approximately $400,000 to Costco.

Take Away

Copyright owners must act responsibly when incorporating copyrights into consumer goods, using copyrights to control distribution of consumer goods, and when pursuing related infringement actions. Otherwise, if a court finds that a copyright owner has knowingly misused its copyright to unfairly limit competition, the losing copyright owner may be required to pay the prevailing parties’ attorney’s fees.

Questions

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Jennifer Scott | 916.321.4500