JANUARY 2011 IP ROUNDTABLE
The Intersection of International Trade and Exhaustion of IP Rights: Can Gray Market
Goods Still be Imported?
Eugene Y. Mar – Intellectual Property and Technology Litigation, Farella Braun
+ Martel LLP
Allyson M. Franco – Intellectual Property and Technology Litigation, Farella
Braun + Martel LLP
In the era of globalization, retailers have taken advantage of price discrepancies that exist
between the domestic and international markets by purchasing goods that were initially sold
overseas and importing them into the United States for resale. These merchandise, known as
gray market goods, were priced at greater discounts in foreign markets, and retailers could resell
the merchandise within the United States at the higher domestic prices. As e-commerce grew
exponentially during this decade, the practice of buying and reselling gray market goods also
flourished on the Internet. However, can manufacturers protect their domestic markets and
distribution channels by invoking protection under the U.S. Copyright or Patent Acts? And how
can retailers and purchasers of foreign goods ensure that the merchandise acquired from
secondary markets do not infringe a U.S. copyright or patent? The recent decision from the 9th
Circuit in the Omega, S.A. v. Costco Wholesale Corp. case brings this issue back to the forefront.
The following cases offer some guidance on these issues:
Quality King Distributors, Inc. v. L'anza Research Int’l, Inc., 523 U.S. 135 (1998)
In this case, the Supreme Court addressed the applicability of the first sale doctrine to
imported goods that were originally manufactured in the United States. As codified at 17 U.S.C.
§ 109(a), the first sale doctrine entitles “the owner of a particular copy . . . lawfully made under
this title” to sell that copy without the copyright owner’s authorization. L’anza, a Californiabased manufacturer of hair care products bearing copyrighted labels, sold its products in the
United States exclusively to distributors who agreed to resell the products only to authorized
retailers within particular geographic areas. L’anza also sold its products to overseas distributors
for lower prices and without any resale restrictions. The products at issue here were first sold by
L’anza legally to a foreign purchaser, who subsequently sold them to Quality King. Quality
King then imported the products back into the United States without L’anza’s permission and
resold them at discount prices to domestic retailers who were not in L’anza’s authorized
distribution chain.
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L’anza sued Quality King for copyright infringement under 17 U.S.C. § 602(a), which
provides that “[i]mportation into the United States, without the authority of the owner of
copyright under this title, of copies. . . of a work that have been acquired outside the United
States is an infringement of the exclusive right to distribute copies . . .under section 106,
actionable under section 501.” The district court rejected Quality King’s first sale defense and
entered summary judgment in favor of L’anza. The Ninth Circuit affirmed.
In a unanimous opinion, the Supreme Court reversed, holding that the first sale doctrine
applies to imported copies such as these. 523 U.S. at 145, 154. The Court noted that § 106
“expressly states that all of the exclusive rights granted by that section—including, of course, the
distribution right granted by subsection (3)—are limited by the provisions of §§ 107 through
120.” Id. at 144. Section 109(a) not only falls within that range but “expressly permit[s] the
owner of a lawfully made copy to sell that copy ‘[n]otwithstanding the provisions of section
106(3).’” Id. Given that § 602(a) unambiguously states that unauthorized importation violates
the limited rights “under section 106,” the first sale doctrine provides a complete defense to any
purchaser of goods lawfully made under the Act “who decide[s] to import them and resell them
in the United States.” Id.
In a brief concurring opinion, Justice Ginsburg noted that Quality King “involve[d] a
‘round trip’ journey, travel of the copies in question from the United States to places abroad, then
back again[,]” and that the Court’s opinion therefore did not “resolve cases in which the
allegedly infringing imports were manufactured abroad.” Id. at 154 (Ginsburg, J., concurring).
Omega, S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008)
The facts of this case required the Ninth Circuit to determine Quality King’s applicability
to so-called “gray market” goods. Also known as “parallel imports,” gray market goods are
“genuine products possessing a brand name protected by a trademark or copyright. They are
typically manufactured abroad, and purchased and imported into the United States by third
parties, thereby bypassing the authorized U.S. distribution channels.” Parfums Givenchy, Inc. v.
Drug Emporium, Inc., 38 F.3d 477, 481 n.6 (9th Cir. 1994).
Omega, a Swiss watch manufacturer, sold watches bearing a U.S.-copyrighted logo to its
authorized distributors in Latin America, who then sold them to third parties. Costco eventually
purchased the watches from a New York-based company and sold them to customers in
California. Omega sued Costco for copyright infringement under §§ 106(3) and 602(a). Omega
did not authorize the importation of the watches into the U.S., the sale between the New York
company and Costco, or any of the sales by Costco to consumers. Costco moved for summary
judgment, arguing that the first sale doctrine barred Omega’s suit. In Omega, S.A. v. Costco
Wholesale Corp., 2007 WL 7029734 (C.D. Cal. Feb. 6, 2007), the district court granted Costco’s
without explanation.
The Ninth Circuit reversed, finding that its precedent foreclosed Costco’s reliance on the
first sale doctrine. The court had twice decided on similar facts that the doctrine provides no
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defense to the unauthorized importation of foreign-manufactured copies. BMG Music v. Perez,
952 F.2d 318 (9th Cir.1991); Drug Emporium, 38 F.3d 477. Its rationale was that “a contrary
interpretation would impermissibly extend the Copyright Act extraterritorially,” given the phrase
“lawfully made under this title” in section 109(a). BMG Music, 952 F.2d at 319. Moreover, “the
application of § 109(a) after foreign sales would ‘render § 602 virtually meaningless’ as a tool
against the unauthorized importation of nonpiratical copies because importation is almost always
preceded by at least one lawful foreign sale . . . .” Id. at 319-20 (internal citation omitted). The
Ninth Circuit subsequently clarified that the first sale doctrine did apply to “copies not made in
the United States so long as an authorized first sale occurs here.” Costco, 541 F.3d at 986 (citing
Drug Emporium, 38 F.3d at 481). This exception to the general rule was necessary because
“permitting the first sale defense only against claims involving copies that are ‘legally made and
sold in the United States’ . . . [would] give greater copyright protection to foreign-made copies
than to their domestically made counterparts,” a result supported by neither the text of the
Copyright Act nor its legislative history. Id.
The Costco court held that Quality King had no effect on the Ninth Circuit’s prior
holdings “that § 109(a) can provide a defense against §§ 106(3) and 602(a) claims only insofar as
the claims involve domestically made copies of U.S.-copyrighted works.” First, the court noted
that Quality King was distinguishable “because [its] facts involved only domestically
manufactured copies,” not copies made abroad. Id. at 987. Further, Quality King’s reasoning
was “not clearly irreconcilable” with the “general rule that § 109(a) refers ‘only to copies legally
made ... in the United States.’” Id. at 990 (internal citations omitted). The court emphasized
Quality King’s determination “that copies of a work copyrighted under Title 17 are not
necessarily ‘lawfully made under [Title 17]’ even when made by the owner of the copyright.”
Id. at 988. As Quality King explained, “the category of copies covered by § 602(a) . . .
encompasses ‘copies that were “lawfully made” not under the United States Copyright Act, but
instead, under the law of some other country.’” Id. (citing 523 U.S. at 147). The Supreme
Court’s analysis led the Ninth Circuit to conclude that “something more is required” for a copy
to be covered by § 109(a) than its manufacture by the owner of a U.S. copyright, and “that
‘something’ is the making of the copies within the United States, where the Copyright Act
applies.” Id. (emphasis in original).
In this case, there was no genuine dispute that Omega had manufactured the watches in
Switzerland and never authorized their sale in the United States. Id. at 990. Thus, the exception
to the general rule for foreign-made copies that have been lawfully sold domestically did not
apply, and Costco could not rely on the first sale doctrine as a defense. Id.
Costco Wholesale Corp. v. Omega, S.A., 562 U.S. __ (2010), affirmed per curiam
A.
Briefs of Amici Curiae
When the Supreme Court granted certiorari, several amicus briefs were filed in support of
each side, underscoring the potential policy implications of the case. Two representative briefs
are summarized below.
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1.
In Support of Omega – The Motion Picture Association of America
(MPAA) and the Recording Industry Association of America (RIAA)
These trade associations, representing the interests of the United States motion picture
and recording industry, argued that Costco’s interpretation of the first sale doctrine would
undermine copyright owners’ ability to control entry into different markets and thereby diminish
the value of their U.S. copyrights. While distribution of copies in overseas markets allows
copyright owners to reap the economic benefit of copyright laws in those countries, the amici
noted that those benefits “may be substantially less generous or well enforced than U.S.
copyright law,” and moreover, that Congress intended them to “realize [a] separate benefit . . .
from their U.S. copyright.”
These amici also argued that “the prohibition on unauthorized importation in § 602 was
intended to protect domestic distribution rights and copyright holders’ ability to treat national
markets separately.” According to the amici, timing releases differently in different markets
enables record companies and film studios to capitalize on local promotional opportunities,
combat piracy, vary content by market, foster local distribution networks, and divide rights
across markets. Noting that the motion picture, television, and recording industries make
“substantial contributions to the national economy,” the amici urged the Court to decline
Costco’s invitation to extend the first sale doctrine to foreign-made copies.
2.
In Support of Costco – eBay Inc., Google, Inc., et al
This group of internet-based retailers, service providers, and trade associations contended
that “[t]he Ninth Circuit’s strained imposition of a place of manufacturing requirement on the
first sale doctrine will have a detrimental effect on e-commerce and secondary markets.” These
amici warned that adopting the Ninth Circuit’s interpretation of the first sale doctrine would
“encourage the producers of consumer goods to stamp their products with copyrighted symbols
in order to control downstream sales of the otherwise non-copyrighted products into the United
States.” According to the amici, this reduction of consumers’ redistribution rights “is
inconsistent with the purposes of copyright law.”
These amici further argued that “[e]xempting foreign consumer goods from the first sale
doctrine could unsustainably burden secondary markets” and small businesses by increasing
transaction costs associated with determining the legal status of a particular good. Noting that
the U.S. imported over $10 billion of secondhand goods in 2009, the amici urged the Court to
recognize the “significant value to our economy” of the international secondary market and
allow it to thrive. Moreover, the amici contended, the Ninth Circuit’s view of the first sale
doctrine would afford “goods stamped with copyrighted material and manufactured overseas . .
.greater protection under the Copyright Act than goods manufactured domestically.”
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B.
Outcome
On December 13, 2010, the Court issued a per curiam decision consisting of a single
sentence: “The judgment is affirmed by an equally divided court.”1 This result means that the
earlier decision remains binding in the Ninth Circuit but has no precedential effect on courts in
other circuits.
Discussion Topics
1. Does the Omega decision give copyright holders too much control over the distribution of its
copyrighted works? Should a copyright holder be allowed to treat each national market
separately for pricing, timing, and distribution purposes as the RIAA argues?
2. Will companies be further encouraged to manufacture its copyrighted goods overseas in
response to the Omega and Quality King decisions? Is this a desired goal of the Copyright
Act or any U.S. intellectual property law?
3. Should a copyright owner have the right to control the importation and distribution of nonpiratical copies?
4. In Quality King, there was a “round trip” importation: Copyrighted goods were
manufactured in the U.S., exported to an authorized foreign distributor, sold to 3rd party
overseas, shipped back into the U.S., and sold in the U.S. by unauthorized retailers. The
Supreme Court determined that a first sale defense was available in that scenario. In Omega,
the only difference is that the watches were made in Switzerland. The Ninth Circuit
determined that a first sale defense was not available. Why is this distinction tenable? Does
this distinction promote the further protection of U.S. copyrights in any manner?
5. In Quality King, the Supreme Court decided that a foreign sale could constitute a first sale under
the Copyright Act. Is this an impermissible extension of American law to foreign transactions?
6. What if Omega was aware that there were 3rd party distributors who were reselling their
watches in the United States? Should Costco be insulated from liability if Omega was aware
of the 3rd party distributors but did not seek to stop those sales?
7. Should Costco be entitled to a bona fide purchaser defense assuming Costco did not know
whether the watches were made in the U.S. or overseas?
8. What implications does Omega and Quality King have on the ability to assert patent
protection over (ii) goods manufactured domestically and exported overseas only to be
imported back into the United States, or (ii) goods manufactured overseas, sold overseas to
3rd parties, and then imported into the United States for resale?
1
The 4-4 split was made possible by Justice Kagan’s recusal from the case.
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