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Ninth Circuit: First sale doctrine doesn't apply to goods purchased abroad and imported to US
September 10, 2008

In a decision last week, the Ninth Circuit reversed a district court's grant of summary judgment to a copyright defendant on the basis of the "first sale" doctrine, codified at 17 U.S.C. § 109(a). The defendant obtained the products bearing the copyright from a third party who legally purchased them outside the United States. The court held that the first sale doctrine did not insulate this action from liability under 17 U.D.C. § 602(a), which states unauthorized importation is a violation of the copyright holder's distribution right.

In doing so, the court held there was no clear inconsistency with its precedents allowing a defendant in a copyright infringement action to claim the "first sale doctrine" as a defense only where the disputed copies of a copyrighted work were either made or previously sold in the United States with the authority of the copyright owner, and the Supreme Court's decision in Quality King Distributors, Inc. v. L'anza Research International, Inc.. There, the issue was whether copies produced in the United States, shipped abroad, and then ultimately re-imported and sold without consent constituted infringement; the Court held it did not. Here, it was undisputed the copies were manufactured and obtained abroad, thus taking them outside the decision in Quality King. As a result, the defendant could not use the first sale doctrine as a defense to avoid liability for infringement.

More concerning Omega S.A. v. Costco Wholesale Corp. after the jump.

Omega manufactures watches in Switzerland and sells them globally through a network of authorized distributors and retailers. Engraved on the underside of the watches is a U.S.-copyrighted "Omega Globe Design." Costco obtained watches bearing the copyrighted design from the "grey market" through the New York company ENE Limited, which purchased them from authorized Omega dealers overseas. Costco then sold the watches purchased from ENE Limited to consumers in California.

Omega filed a lawsuit alleging that Costco's acquisition and sale of the watches constituted copyright infringement under 17 U.S.C. §§ 106(3) and 602(a), and subsequently moved for summary judgment. Costco filed a cross-motion on the basis of the first sale doctrine, 17 U.S.C. § 109(a), arguing that Omega's initial foreign sales of the watches precluded claims of infringing distribution and importation in connection with the subsequent, unauthorized sales. The district court ruled in Costco's favor and awarded Costco $373,003.80 in attorney's fees.

On appeal, the Ninth Circuit reversed. The court noted that the text of the Copyright Act establishes by syllogism that the first sale doctrine of § 109(a) limits the provisions of § 106(3), which states that "the owner of copyright under this title has the exclusive rights . . . to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending." § 602(a) further provides that it violates the copyright holder's distribution right to import copyrighted articles without permission from the copyright holder.

While Omega conceded that § 109(a) generally limits § 106(3), it contended that § 109(a) did not apply to its case because, although the Omega Globe Design was copyrighted in the United States, the watches bearing the design were manufactured and first sold overseas. Thus, Omega claimed that the copies of the design were not "lawfully made under [Title 17]" under those circumstances, and did not trigger the first sale doctrine. Costco responded that Omega's position was not correct in view of the Supreme Court decision in Quality King.

The Ninth Circuit held that Quality King did not directly overrule its prior precedent on grey market goods such as these. The court distinguished Quality King on the basis it involved "round trip" importation: a product with a U.S.-copyrighted label manufactured inside the U.S., exported to an authorized foreign distributor, sold to unidentified third parties overseas, shipped back into the U.S. without the copyright owner's permission, and then sold in California by unauthorized retailers. Therefore, since Quality King involved only domestically manufactured copies, the Supreme Court did not address the effect of § 109(a) on claims involving unauthorized importation of copies made abroad. This was made explicit in Justice Ginsburg's concurrence in Quality King.

The court also rejected Costco's contention that the Supreme Court's brief discussion on extraterritoriality is irreconcilable with the Ninth Circuit's general limitation of § 109(a) to copies that are lawfully made in the United States. The court noted that the common understanding of the presumption against extraterritoriality is that a U.S. statute "appl[ies] only to conduct occurring within, or having effect within, the territory of the United States, unless the contrary is clearly indicated by the statute." Recognizing the importance of avoiding international conflicts of law in the area of intellectual property, the court held that the Copyright Act presumptively does not apply to conduct that occurs abroad even when that conduct produces harmful effects within the U.S. Accordingly, because the coyprighted products were puchased overseas, the first sale doctrine did not offer Costco any protection, and the district court's decision was reversed.

To read the full decision in Omega S.A. v. Costco Wholesale Corp., click here.

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