Supreme Court Punts on Costco First Sale Copyright Case

By Gene Quinn
December 17, 2010

On Monday, December 13, 2010, the United States Supreme Court issued a non-decision in the matter of Costco Wholesale Corporation v. Omega, S.A. The Per Curiam decision simply read: “The judgment is affirmed by an equally divided Court. Justice Kagan took no part in the consideration or decision of this case.” What this means is that the decision of the United States Court of Appeals for the Ninth Circuit will remain unchanged, and there is supposedly no precedential weight given to the stalemate non-decision by the United States Supreme Court. Of course, it will be argued by those who need to prop up the Ninth Circuit decision that it can be assumed that the former Solicitor General and now Justice Kagan would have agreed with the Department of Justice position in favor of the Ninth Circuit ruling.  Unfortunately, this non-decision could well signal the beginning of the end for the first sale doctrine given that goods manufactured and sold outside the United States can apparently be controlled downstream by the copyright owner without the copyright owner having exhausted rights through the sale.

On a separate but related matter, one has to wonder how many of these non-decisions will be forthcoming over the next several years as Justice Kagan, who was the Solicitor General of the United States for the first 18 months of the Obama Administration, will recuse herself time and time again.

The dispute between Costco and Omega arose because Omega sought to prevent Costco from reselling genuine watches originally sold by Omega to authorized foreign distributors. Omega, a Swiss company that manufactures watches in Switzerland, did not authorize the importation of the watches by Costco, despite the fact that Costco legally purchased the watches abroad. Thus, the question in this case was whether copyrighted materials made abroad and legally purchased abroad can be imported without the express permission of the copyright owner. In other words, does the first sale doctrine extinguish the rights of the copyright holder when the goods are made abroad and sold abroad. A very good question of great importance, particularly given the global nature of trade, but one that the Supreme Court couldn’t answer.

The Ninth Circuit upheld Omega’s interpretation of the U.S. Copyright Act, holding that the Act 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 the holder sells those works to others. Aside from being ridiculous and contradictory with respect to the Supreme Court’s holding in Quality King, which held that the first sale doctrine is applicable to imported copies, the decision by the Ninth Circuit will raise transaction costs and grant copyright owners a tremendous level of rights. Under the Ninth Circuit rule the exhaustion of rights seems to only be capable of happening country by country, which is absurd.

The Supreme Court explained in Quality King:

The owner of goods lawfully made under the Act is entitled to the protection of the first sale doctrine in an action in a United States court even if the first sale occurred abroad. Such protection does not require the extraterritorial application of the Act.

Thus, much of the oral argument at the Supreme Court on November 8, 2010, was devoted to determining the meaning of the phrase “lawfully made under this Title.” What troubled some of the Justices throughout the oral argument, particularly Justice Alito, was the proffered simplistic definition of “lawfully made under this Title” being interpreted as “lawfully made in the United States” would mean that Congress intended to grant favored status to those things manufactured abroad, which simply makes no sense.

To say that foreign manufactured goods are afforded more rights than U.S. manufactured goods seems absurd on its face. It was bizarre to have the Department of Justice argue in this case that a copyright owner can indeed circumvent first sale protections simply because the goods were manufactured outside the United States. Eroding the rights of U.S. citizens and U.S. corporations because something was manufactured outside the United States simply should not be the law, and it shouldn’t be the articulated position of the United States government. The Justices on the Supreme Court that would have ruled in favor of this end-run around the first sale doctrine should be ashamed of themselves. Interpreting the laws of the United States to grant favored treatment to those outside the United States is the height of arrogance and a clear demonstration of a lack of understanding of the fundamental issues involved.

As long as the Ninth Circuit decision remains the law there will be a quite easy end-run around the first sale doctrine. Given that copyright owners so frequently want to circumvent the first sale doctrine and control downstream purchases and activities it can be expected that well funded copyright owners will avail themselves of the Ninth Circuit decision in an effort to control what purchasers do with the copyrighted materials they acquire. I would be shocked if the Hollywood Studios and Record Companies don’t seek ways to exploit this absurd loophole. Left unchecked, soon there would be no first sale rights and copyright owners could control downstream uses and sales of copyrighted goods without consequence. All because 4 Justices of the Supreme Court couldn’t bring themselves to understand the absurdity involved with granting foreigners superior rights to U.S. citizens and U.S. corporations.

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and President & CEO ofIPWatchdog, Inc.. Gene founded IPWatchdog.com in 1999. Gene is also a principal lecturer in the PLI Patent Bar Review Course and Of Counsel to the law firm of Berenato & White, LLC. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

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Discuss this

There are currently 4 Comments comments.

  1. Tom Kulik December 18, 2010 9:11 am

    Gene:

    Well said! The 4-4 split is stunning and shocking, When I first commented on this case on my blog, I remained convinced (perhaps naively) that the SCOTUS would rectify the 9th Circuit’s contorted decision, especially in light of the global nature of trade and the unintended consequences of seriously eroding the first sale doctrine by favoring foreign-made copies. Lo and behold, I am now left with the impression that a chunk of the court truly does not understand the fundamentals of the different branches of intellectual property law. Thanks for being far more vocal on this point…and keep up the good work!

  2. Tony December 18, 2010 11:40 am

    Isn’t the implication of the 9th circuits decision kind of ridiculous?

    For instance I buy an item if a foreign country made in a foreign country. I go to the United States. I definitely cannot resell under this decision. But worse yet wouldn’t I be infringing on copyrights by even giving the item a bought as a gift to someone in the US. The copyright owner sold the item to me and did not give me any right to transfer the copyright.

  3. Gene Quinn December 19, 2010 12:25 pm

    Tony-

    In the Ninth Circuit, which is the Western quarter of the United States, under your hypothetical you would be a copyright infringer. Of course, it is doubtful that any copyright owner would go after individuals, but the fact remains that what you have described would be infringement, which in my opinion is absurd.

    -Gene

  4. A. Hand December 19, 2010 10:52 pm

    I love when gene starts writing about copyrights. Does he have any expeirence in this area?

    it’s almost as good as when he tells us what he thinks the fed circuit is doing