New England Biz Law Update
Intellectual property lawyers are closely watching a controversial decision submitted to the U.S. Supreme Court that allows manufacturers to use copyright law to control the re-sale of their goods via the legal but shadowy “gray market.”
“This is a big, big case,” said Mark Schonfeld, an IP litigator at Burns & Levinson in Boston who has been following the issue. Whether the court decides to review the 9th U.S. Circuit Court of Appeals decision, Omega, S.A. v. Costco Wholesale Corporation, will have an enormous impact on international trade, he said.
In 2004, luxury watchmaker Omega sued the discount warehouse retailer Costco for selling Omega products imported from Egypt and Paraguay.
While Costco had successfully argued that the “first sale doctrine” prevented Omega from controlling the watches after it sold them to the overseas buyers, the 9th Circuit found that the first sale doctrine does not protect copies of copyrighted material that are imported without authorization.
In May 2009, Costco petitioned for review by the U.S. Supreme Court, which has yet to decide whether to take the case. But on Oct. 5, it requested a brief from the solicitor general on the matter, a sign that the justices are carefully weighing whether to intervene.
“If the Supreme Court does not take cert with this case, it will become a very strategic move for manufacturers to put a copyrightable design on their products,” Schonfeld said. “This is a way manufacturers can control their distribution.” Conversely, if the court does take the case, Schonfeld said, “it could eliminate a company’s ability to use copyright to fight the gray market entirely.”
Mark A. Fischer, a copyright and trademark attorney at Fish & Richardson in Boston, said it will be “big news” if the Supreme Court accepts the case.
“It’s been a huge effort, and not an entirely successful one, to try to deal with the gray market,” he said. “The basic premise of using something copyrightable to try to protect a product has been around for a while, but it’s different to have this tested by the Supreme Court.”
Gray market
Based in Switzerland, Omega sells its watches around the world. Costco, a discount retailer that sells brand-name goods to its members, bought Omega watches from a New York company that imported them from so-called gray market sources overseas, which had in turn purchased them from Omega legally. Omega had intended the watches to be sold only outside the United States, where they tend to cost less than watches authorized for the U.S. market.
In 2004, Omega sued Costco in U.S. District Court in California, accusing the discount retailer of committing copyright infringement. Omega argued that the U.S. Copyright Act prevented Costco from selling the watches, which were marked with a small symbol that Omega had registered with the U.S. Copyright Office.
After Omega moved for summary judgment, Costco filed a cross-motion arguing that Omega had lost the right to control the fate of its watches after it sold them to distributors abroad.
The District Court granted the motion in favor of Costco and awarded it $373,000 in attorneys’ fees. Omega appealed the decision to the 9th Circuit, which reversed in September 2008, finding that the first sale doctrine applies only to copies “legally made … inside the United States.”
In May 2009, Costco petitioned the Supreme Court for review.
‘No basis in law or logic’
Roy T. Englert, a Washington, D.C., attorney who wrote Costco’s petition for a writ of certiorari, argued that the 9th Circuit had “gutted” the traditional interpretation of the first sale doctrine and upended a 1998 Supreme Court decision, Quality King Distributors v. L’Anza Research International.
The 9th Circuit opinion “grants U.S. copyright holders complete control over the resale, redistribution, and importation into the United States of any copyrighted works they manufacture abroad, even after those works are sold to others,” Englert wrote.
Quality King had found that “once a lawful first sale has occurred, even unauthorized resales do not infringe the copyright owner’s exclusive right to distribute,” Englert wrote. Therefore, he said, the 9th Circuit’s opinion conflicted with Quality King by narrowing that first sale protection to cover only copies that are made in the United States.
That reading of the law creates a dichotomy between “copies manufactured abroad and then imported into the United States” and “copies manufactured in the United States, sold abroad, and subsequently re-imported,” he wrote.
“That dichotomy has no basis in law or logic, yet carries severe consequences, not intended by Congress, for manufacturers, retailers, and consumers in the United States,” he argued.
If the 9th Circuit’s decision stands, Englert said, it could introduce “numerous absurdities that the lower court did not even acknowledge,” such as “copyright infringement liability for libraries that lend foreign books or movies.”
The lawyer for Omega, Michael K. Kellogg of Todd, Evans & Figel in Washington, D.C., countered that the 9th Circuit ruling is in line with Quality King.
That case found that “a copyright holder can authorize exclusive distribution in the United States without facing the threat that unauthorized importation of goods … will undercut the value of U.S. distribution rights,” Kellogg wrote.
Allowing Costco to sell imported goods that were not specifically authorized by Omega would create a “loophole” in copyright law, which was intended by Congress “to give copyright owners enforcement rights against unauthorized parallel imports,” he said.
‘Billion-dollar problem’
Lon F. Povich, general counsel for BJ’s Wholesale Club, a Natick, Mass.-based discount retailer that is one of Costco’s competitors, called the watchmaker’s argument “an interesting use of copyright law by Omega in an effort to limit value retailers’ access to their goods.”
Povich, whose company is not a party to the case, said the 9th Circuit ruling had not yet had any direct effect on BJ’s business, but it could.
“It’s possible to buy goods overseas, import them to the U.S., and still sell them to our members for less than the Newbury Street price,” he said. “It would appear that Omega has two issues. One, they want to protect against counterfeit goods, and two, they want to protect their image by only selling in certain outlets. While we are committed to not selling counterfeit goods, if we can legally acquire their product and sell it in a wholesale club, we are anxious to bring that value to our members.”
According to Fischer, if the Supreme Court declines to take the case, the 9th Circuit decision will become “the de-facto standard” across the country because it is the only appellate ruling on the issue.
That, Schonfeld said, would be a great expansion of manufacturers’ power to control their goods in an international market.
“The scope of the gray market problem is estimated to be $40 billion in the IT industry, and a billion-dollar problem in the car-parts industry,” Schonfeld said. “Locally, in the medical device industry, it’s enormous. I’ve been consulted by medical device companies. One of them reports to me that, for a certain testing device that they use, 25 percent of independent pharmacies are using the gray market version from Asia.”
If the Supreme Court allows the 9th Circuit decision to stand, Schonfeld added, he will have a powerful new tool to present to clients concerned about the gray market.
