Letter from AmeriKat - Costco Wholesale v Omega SA

Last Friday night the AmeriKat, in true display of her geekiness, was at the Royal Albert Hall for the cinematic screening of the Lord of the Rings Two Towers with live soundtrack played by the London Philharmonic Orchestra. Besides entertaining herself by listing the number of IP works and permissions in and required for execution of the performance, the performance itself was simply breathtaking. The amount of precision and timing required by the conductor and musicians to ensure the scoring was keeping time to the film was incredible. It was challenging of course to determine where to keep one's attention - the screen where Legolas was looking extremely pretty or the orchestra and choir who were booming ferociously away? (picture left - the AmeriKat becomes cross-eyed after trying to watch two things at once) In the end the AmeriKat managed to implement a duel-attention action plan which, although not most effective, enabled her to get the best of the artistry occurring in parallel.

Supreme Court to hear copyright parallel importation case

Artistry occurring in parallel will also be subject to attention soon, but this time judicial attention. Last Monday the US Supreme Court granted the writ of certiorari in the Costco Wholesale Corp v Omega SA case. The Supreme Court will have to decide whether Costco can be held liable for copyright infringement for re-selling luxury Swiss watches including the Omega Seamaster line (picture bottom right - an example of a Seamaster watch) that Costco obtained through third-party sources.

In 2004 Omega, owned by The Swatch Group Ltd, brought copyright infringement proceedings against Costco alleging that by selling Omega Seamaster watches obtained from a New York-based third-party who had imported them into the US, Costco had violated US copyright law. The Omega Seamaster watch includes an engraved emblem of a globe on the back of the watch. Omega had registered this emblem with the US Copyright Office. Costco then went on to sell the watches for $1,299 - $700 less than Omega's suggested retail price. Costco argued that Omega was unable to impose limits on the manner in which its watches are re-sold after Omega makes its first sale of the watches.

At first instance a Californian federal judge agreed with CostCo's reasoning, but Omega appealed to the Court of Appeals for the Ninth Circuit. Costco argued that precedent that should have been relied upon was the Supreme Court ruling of Quality King Distributors v L'Anza Research International (1998) which held that copyright owners do not have a right to control the market of their goods that have been imported and re-sold in the US. The Court of Appeals disagreed and overturned the lower court's decision in 2008 holding that copyright owners did have the right to control the manner in which their goods are imported and sold in the US irrespective of the first-sales doctrine (a.k.a. the exhaustion rule) enshrined in section 109(a) because this did not apply to goods manufactured abroad. The Court of Appeals decision relied substantially on section 602(a) of the Copyright Code which deals with infringing importation of copies and the case of BMG Music v Perez (1991) where BMG Music was able to prohibit a reseller's business.

In particular, the appeals court refused to overrule BMG Music by virtue of the Supreme Court's decision in Quality King because they felt that the latter case was concerned with "round trip" importation and not the type of importation at issue in Omega's case. In addition the appeals court held that to benefit from the exemption in section 109 the watches had to be "lawfully made under this title". "Lawfully made made under this title", the court held, meant "lawfully made in the US" and because the watches were made overseas Costco could not rely on this section and the doctrine of first-sales. Unhelpfully, Justice Stevens dicta in the Quality King case appeared to help support this definition, but other commentators believe that the case actually left this issue unresolved.

Costco then appealed to the Supreme Court citing that the appeals court's ruling was inconsistent with the plain language of copyright law and the implication of the appeal's court decision was too onerous on retailers. The question that the Supreme Court will have to answer is:

Whether the Ninth Circuit correctly held that the first-sale doctrine does not apply to

imported goods manufactured abroad.

Several business groups and companies such as eBay have filed amicus curiae briefs in support of Costco's appeal but the US Department of Justice (DoJ) argued that the Supreme Court should reject Costco's appeal because the legal position was apparently clearly in Omega's favor. eBay's filing stated that the lower court's ruling

"could have a detrimental effect on the ability of buyers and sellers of secondary-market goods to engage in commerce in the United States."

It will not come as a surprise that high-end retail companies actively try to control distribution of their products to ensure that they do not retail for less or are sold in otherwise undesirable channels. However, these companies may often offer their products at a cheaper price to distributors based in countries other than where the product is inevitably retailed. Retailers such as Costco will buy the products from these overseas distributors and import them into the US to sell at a discount. This secondary market, so to speak, is known as the "gray market". According to a 2008 study by KPMG and the Alliance for Gray Market and Counterfeit Abatement represents $58 billion in products in just the technology industry alone and an overall potential loss of $10 billion annually. [The AmeriKat has been trying to find some recent data in regards to the gray market's impact on the fashion industry - please let her know if you know where any resides!] Richard Galanti, Chief Financial Officer for Costco however states that "vast majority" of what Costco buys is "directly from the manufacturers" and that goods from the gray market only account for a small proportion of their $70 billion revenue (which is still a large sum!).

The Supreme Court's decision will have a substantial impact on what goods retailers, especially those on-line retailers such as eBay or Amazon, can sell and import into the U.S. If luxury brands and companies are concerned to control the distribution and retail prices of their goods, then they should be charged with ensuring that their contract with the distributor stipulates that the subsequent retail price is set in stone and/or restricted to non-US countries or just cut out the middle man and sell straight to the retailer or consumer. To hold otherwise would in essence allow companies to overly control trade channels through the guise of copyright law (and you can just predict the increased litigation if the Supreme Court were to uphold the 9th Circuit's ruling).

(picture top right - if the AmeriKat had a Seamaster watch, it would let her know it was nap-time)

The AmeriKat is hopeful that the doctrine of first-sale should come out fighting strong. There are too many interests, commercial and consumer alike, that could be severely affected if the Supreme Court held otherwise. The oral arguments are expected to be heard this September.