Ex©lusive Rights

Costco Wholesale Corporation v. Omega, S.A. (Brief for the United States as Amicus Curiae)

The Office of the Solicitor General last Wednesday filed an amicus brief in Costco v. Omega arguing that the Supreme Court should deny cert. To briefly review, Omega distributed watches to authorized dealers in Egypt and Paraguay. One or more of the authorized dealers imported the watches into the U.S. and then sold them to Costco. This stream of commerce enabled Costco to distribute the watches to customers below the regular U.S. retail price. In 2003, Omega began to engrave its watches with a small emblem — no more than a half centimeter across — which Omega registered with the copyright office. Omega filed suit alleging that Costco’s acquisition and sale of the watches constituted copyright infringement under 17 U.S.C. §§ 106(3) and 602(a).

The issue

Costco argued that under the first-sale doctrine Omega’s initial sale of the watches to the authorized dealers in Paraguay and Egypt denied it the ability to enforce exclusive distribution rights against Costco. 17 U.S.C. § 109 states in relevant part (emphasis added):

[T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

If this all sounds eerily familiar, it should. In 1998 the Supreme Court found in Quality King Distribs., Inc. v. L’Anza Research Int’l, Inc. that if a purchaser in the United States acquires a work that is lawfully manufactured domestically, distributed abroad, and then imported back into the United States, the purchaser is free to distribute the work without infringing a rightsholder’s copyright.

Quality King would be direct precedent for Costco except for a number of substantive factual and legal differences. In Quality King the works at issue were manufactured in the U.S. and took a round trip abroad and then back to the U.S. In Costco the watches were manufactured and distributed abroad and then were imported to the U.S. The issue in this case, thus, turns on whether 17 U.S.C. § 109’s requirement that works be “lawfully made under this title” for the first sale doctrine to apply should be interpreted as meaning “manufactured in the U.S.,” or if the phrase includes copies that were lawfully made abroad under a foreign copyright Act and imported.

Another factual difference between the two cases is that Quality King involved infringement via the importation right under Section 602, which the Act provides constitutes infringement under 106(3). Omega similarly brought suit alleging unlawful importation, along with infringing distribution directly under 106(3), but the facts did not fit the traditional definition of importation. A third-party, not Costco, brought the watches into the United States. Omega argued that Costco’s act of acquiring watches manufactured abroad that were not authorized for sale in the US was defacto importation. A finding otherwise, according to Omega, would allow a party to readily avoid liability under the rights granted in 602 by using a straw man.

The Ninth Circuit in Costco found that “lawfully made under this title” should be interpreted as “granting first sale protection only to copies legally made and sold in the United States.” The Ninth Circuit found that the Supreme Court’s holding in Quality King didn’t conflict with the Circuit’s previous precedent BMG Music, which found that “[c]onstruing [§] 109(a) as superseding the prohibition on importation set forth in . . . § 602 would render § 602 virtually meaningless.” Id. (quoting Scorpio, 569 F. Supp. at 49). And secondly, that recognizing a first-sale defense as to goods manufactured abroad would impermissibly extend the Copyright Act extraterritorially. See id. (citing Scorpio, 569 F. Supp. at 49).

The legal landscape has also changed since the Supreme Court addressed the interaction between Sections 109 and 602 in Quality King. Shortly after the Ninth Circuit issued its opinion in Costco v. Omega, President Bush signed into law the PRO-IP Act, which amended the language of 602 (new language in bold):

(a) INFRINGING IMPORTATION OR EXPORTATION.

(1) IMPORTATION—Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501.

(2) IMPORTATION OR EXPORTATION OF INFRINGING ITEMS.—Importation into the United States or exportation from the United States, without the authority of the owner of copyright under this title, of copies or phonorecords, the making of which either constituted an infringement of copyright, or which would have constituted an infringement of copyright if this title had been applicable, is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under sections 501 and 506.

It’s possible to argue that by creating the new importation and exportation rights in 602(a)(2), Congress reframed how we should read the grant in 602(a) pre-amendment. Congress, it could be contended, explicitly stated its intention that the first sale doctrine should apply to works manufactured in the U.S. through the passage of the Amendment. If 602(a)(2) of the post-amendment Act states that it’s infringing to import a work “the making of which either constituted an infringement of copyright, or which would have constituted an infringement of copyright if this title had been applicable” then 602(a)(1) would be superfluous if it isn’t read to encompass works that were made and distributed in a non-infringing way abroad. One could contend, thus, that Congress made it clear through the enactment of the PRO-IP Act that it intended for the for the first-sale doctrine to only limit the distribution of works manufactured domestically.

Policy considerations

Costco and a group of amicus petitioners argued, inter alia, that the Ninth Circuit’s decision created negative policy considerations for domestic manufacturing. The Ninth Circuit’s opinion could be read to provide companies that manufacture goods abroad with an additional mechanism to enforce third-tier price discrimination that is not available for works made in the United States. A rightsholder who manufactured works abroad could theoretically bring a suit against all subsequent distributions of the work in the United States (though the S.G.’s brief noted that the Ninth Circuit explicitly refrained from addressing the question of whether “parties can raise 109(a) as a defense in cases involving foreign-made copies so long as a domestic sale has occurred.”). If the first-sale doctrine only applies to works manufactured in the U.S., contended amicus petitioners, and not those manufacturd abroad– if domestic manufacturing offers a copyright holder less ability to prevent arbitrage, and less rights in general, than overseas manufacturing — then the Copyright Act is actively creating incentives for companies to ship manufacturing, and manufacturing jobs, overseas.

A second potential policy problem with the Ninth Circuit’s opinion, argued petitioners, is that it creates a number of “nonsensical” liability outcomes. As Costco argued in its petition:

[T]he decision below mandates a number of nonsensical outcomes, including the following, non-exhaustive list:

• Imported copies of copyrighted material – be it a British version of a Harry Potter book imported by an individual consumer under the §602(a)(2) “suitcase exemption,” a Picasso fine art print purchased from a foreign art dealer, or a foreign-made classical compact disc – cannot lawfully be resold, loaned, or even given away by the purchaser without committing copyright infringement.
• Libraries are unable to lend foreign-language texts made abroad.
• Movie rental businesses such as Netflix and Blockbuster and used-DVD and -CD resale shops, whose existence depends on the first-sale doctrine, can be shut down merely by shifting disc duplication to Mexico or Canada.
• It is impossible to rent or resell a foreign-produced automobile whose on-board computer systems are loaded with control software covered by a United States copyright registration.

The Solicitor General’s brief

The SG argued that the Supreme Court should deny cert because the Ninth Circuit’s finding in Costco was consistent with Quality King, and the findings of other Circuits, and because there was no evidence that the “most serious potential consequences” had “materialized.”

• An interesting part of the SG’s brief was how it dealt with the petitioner’s amicus’ policy arguments. The SG noted that the adverse policy effects were “indeed troubling” and “legitimate concerns,” but that the petitioner’s had provided “no basis for concluding that the most serious policy concerns . . . have actually materialized.” The SG stated that the petitioner has forwarded “no evidence that the differential treatment of domestic- and foreign-made copies has caused increased outsourcing of manufacturing operations, and it [has cited] no case in which a copyright owner has sought to extract royalties at multiple stages at an otherwise lawful distribution chain within the United States.”

• The SG also raised, but took no position on, whether the plaintiffs’ claims should be denied by a finding of copyright misuse.  Argued the SG:

The ‘principal fuction’ of copyright law is the protection of original works, rather than ordinary commercial products that use copyrighted material as a marketing aid.” Quality King, 523 U.S. at 151. Although the doctrine of copyright misuse is both controversial and rarely invoked, it has been recognized by at least one court of appeals. See Lasercomb Am., Inc v. Reynolds, 911 F.2d 970, 973-077 (4th Cir. 990). The United States takes no position on the appropriate resolution of petitioner’s copyright misuse defense. To the extent that the particular type of copyrighted material at issue here raises distinct policy concerns, however, those concerns are best addressed on remand under a legal theory specifically targeted at that alleged abuse.

• The SG’s brief led with a discussion of how there is no split between the Ninth Circuit’s interpretation and other circuits. I’ve seen the data detailing how a large segment of the Supreme Court’s docket is comprised of cases that involve circuit splits. My initial impression, though,  is that the Supreme Court grants cert in copyright cases that involve a fundamental question of the structure of the Act, and that circuit split considerations play a smaller, if not marginal, role. This is probably an issue that is worth looking into in more detail at a later time.