Buyer (and Reseller) Beware: The Copyright Act’s First-Sale Doctrine May Not Insulate a Reseller of Goods Manufactured Abroad
Under the first-sale doctrine of copyright law, a purchaser of a lawfully created copyrighted work (like a book, film, or CD) normally can later sell the work without the permission of the copyright holder, free from a claim of copyright infringement. But how does the first-sale defense apply to copyrighted works that are manufactured abroad and first sold abroad, and then imported into the United States by the purchaser for resale? On Monday, December 13, an evenly divided Supreme Court (as a result of the recusal of Justice Kagan) declined to substantively address this important question. The evenly split Court means that the Ninth Circuit’s opinion in Costco Wholesale Corp. v. Omega S.A. remains the law of the Ninth Circuit, but not necessarily that of all U.S. jurisdictions. In its opinion, the Ninth Circuit limited the first-sale doctrine defense by holding that the doctrine does not apply where foreign-manufactured copyrighted goods are made and first sold overseas and then later imported into the United States without the copyright owner’s consent for resale to consumers. Thus, such later importation and resale can be infringing, regardless of the legality of the original sale in a foreign country.
The initial suit was brought by Omega S.A., a maker of Swiss luxury watches, in the Central District of California. Omega discovered that Costco was buying discounted Omega watches manufactured overseas and intended for distribution outside the United States, and then importing those watches into the United States to sell in its Costco stores at below-market prices. Omega’s watches contained a copyrighted design engraved on the underside. Although the watches purchased by Costco were genuine, Omega alleged that Costco’s unauthorized importation and sale of those watches in the United States constituted copyright infringement. The District Court granted summary judgment to Costco, holding that the first-sale doctrine immunized Costco from liability notwithstanding that the watches were made and first sold abroad. Omega appealed to the Ninth Circuit, which reversed the District Court, finding the first-sale defense inapplicable to copyrighted goods made and first sold abroad, since Section 109 of the Copyright Act states that the first-sale defense applies to goods “lawfully made” under the Copyright Act. According to the Ninth Circuit, “lawfully made” means goods that are made in the United States and thus the first-sale defense applies only when the copyright owner’s products are manufactured or first sold in the United States.
In its petition for certiorari to the Supreme Court, Costco made several notable arguments, supported by a number of different groups, including libraries, technology companies, and retailers. Costco argued that the Ninth Circuit’s decision would ultimately drive United States manufacturers abroad in order to have complete control over distribution of their goods within the U.S. Furthermore, according to Costco, upholding the Ninth Circuit’s decision could significantly impair the importation of resale goods and the viability of second-hand retailers. Omega, which had a similarly large group of supporters, argued that the language in Section 602 of the Copyright Act clearly states that importation, without the copyright owner’s permission, is an act of infringement. Most importantly, Omega argued that applying the first-sale doctrine to goods manufactured abroad would essentially deprive copyright owners of their right to control the importation (and resale) of their goods, the very right the Copyright Act seeks to protect, pursuant to Section 602.
While the Supreme Court’s 4-4 deadlock left the Ninth Circuit’s decision undisturbed, it did not create precedent. However, the affirmance serves as a cautionary reminder that this matter is not settled. So buyers beware: if you are a purchaser and importer of foreign-manufactured goods that are subject to U.S. copyright protection, you could be liable for copyright infringement if your importation and resale into the United States is without the copyright holder’s consent. There may be exposure even where the imported article is not itself a typical creative work such as a film or book, as illustrated in this case where the defendant imported luxury watches that happened to include a copyrighted design. On the other hand, if you are a copyright owner seeking to control the importation and resale of your work, you may be able to use copyright law to your benefit against unauthorized resellers.
For more information on the first-sale doctrine and other copyright related issues, please contact your Fish attorney or any of the following: