Costco Prevails in First Sale Case Thanks to Copyright Misuse

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.”  That meant that the 2008 decision of the United States Court of Appeals for the Ninth Circuit remained unchanged.  But this was not the last to be heard of this controversial case.

On November 9, 2011, the United States District Court for the Eastern District of California, per Senior Judge Terry J. Hatter, Jr., granted Costco a summary judgment victory due to the fact that Omega engaged in copyright misuse.  Yes, the plot thickened.  The district court originally granted summary judgment to Costco on the basis of the first sale doctrine, which was overturned by the Ninth Circuit and then affirmed by the Supreme Court in the tie decision, or non-decision of December 2010.  That meant that the case would proceed because the first sale doctrine summary judgment victory was erased.  But not so fast!  Judge Hatter had other ideas!

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 that went up to the United States Supreme Court 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.

The district court initially granted Costco a summary judgment victory finding that the first sale doctrine protected Costco with respect to purchasing abroad, importing and then selling what they legally purchased abroad.  The Ninth Circuit disagreed and held that the Copyright 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, under the Ninth Circuit rule the exhaustion of rights associated with a sale of an copyrighted item seems to only be capable of happening country by country.  Such an outcome really strikes at the heart of the first sale doctrine.

Enter Round 2 in the United States District Court for the Eastern District of California.  In one corner is a wrongfully defeated Costco.  In the other corner is an overly confident Omega that thought their trickeration had paid off.  What trickeration you ask?  Good question.

Omega went into action to attempt to trap Costco at the behest of Omega authorized importers and retailers who were selling the watch in question for $1995 versus the $1,299 that Costco was selling it for.  As a potential solution Omega’s legal department suggested that Omega use a copyrighted design to control the importation and distribution of its watches in the United States, in fact obtaining registration Vu 574-660 in the U.S. for its Omega Globe Design.  Then beginning in September 2003, Omega started engraving the Omega Globe Design on the reverse side of the watches it was selling at the time.  The engraving size was approximately 3 millimeters, or about one-eighth of an inch.  So the copyright infringing Costco was alleged to be engaging in was the infringement of a design that had nothing to do with the watch itself and was minuscule in size.

Omega conceded, according to the district court decision, that the purpose of the copyrighted Omega Globe Design was to control the important and sale of its watches containing the design.  Such a move was necessary because the watches themselves could not be copyrighted.  The district court took these facts together and applied Ninth Circuit copyright misuse law, of which there is not much but there was enough.

The district court pointed out that according to the Ninth Circuit a defendant has engaged in copyright misuse when a copyright holder leverages their limited monopoly to allow them to control areas outside of their monopoly.  With the admission of Omega that they knew the watches couldn’t be copyrighted and they added a minuscule copyrighted design for the express purpose of preventing the importation and sale of the watches in the United States it wasn’t a great logical leap for the district court to find copyright misuse.  Of course, “not a great logical leap” doesn’t mean that it isn’t a big step forward in legal terms.  The copyright misuse defense is the red-headed stepchild of the defense world, so its application can never be taken for granted even when it logically seems to fit.

The district court acknowledged that the copyright misuse defense was being extended here in this case a bit farther than it had been before, saying:

Cases that have found copyright misuse have been limited to situations involving antitrust typing agreements and restrictive licensing agreements.  However, this is not to say that copyright misuse could not exist in other situations.  Indeed, the courts in Lasercomb, Practice Management and A&M Records all deliberately chose a broad rule for copyright misuse so that the rule could be applied to new situations as they arose.  If the contrary were true, then those courts would not have made a tying agreement or a restrictive licensing agreement a necessary element of copyright misuse.  Finally, “[c]opyright misuse is an equitable defense to copyright infringement, the contours of which are still being defined.” MDY Industries, LLC v. Blizzard Entertainment, Inc., 629 F.3d 928, 941 (9th Cir. 2010).

Still being defined? Perhaps that is true, but it would seem to be at a rather glacial pace if you ask me.  Don’t get me wrong, I think copyright misuse and patent misuse are under argued by attorneys and under used by the courts.  With exclusive rights should come great responsibility, and gratuitously trying to overreach and cause financial pain and hardship when you you are seeking to do something you don’t have a right to do is offensive.

If you ask me the decision of the district court can be summed  up rather pointedly by observing that the district court doesn’t seem to like what Omega did.  They lost under first sale and then when the Ninth Circuit and the Supreme Court missed the boat on first sale the case went back and Omega lost on another ground.  Do you see a pattern?  I have a hunch that if Omega appeals and wins the case will go back to the district court and they will lose again for a different reason.  The truth is Judges are people and when they see a manipulative situation that strikes them as being contrary to the law don’t expect them to want to rule in favor of that party.

This leads me to the other take home lesson.  Costco’s attorneys gave the district court a reason to side with their client and the district court took the opportunity.  Many times in my experience the way to prevail is to win on the story, set your client up as the good guy — Snow White if you will — and then give the Judge a plausible legal theory to agree with you.  We can jump up and down all we want, but at the end of the day lawyering is about convincing a Judge, a jury or a panel of Judges to rule in favor of  your client.  This was accomplished here with what many will classify as a creative theory and positive presentation of the facts.  Omega wasn’t the victim here, the victim was Costco!

Tip of the hat to Aaron Moss and the folks at Greenberg Glusker Fields Claman & Machtinger LLP, who represented Costco.  Getting copyright misuse to stick is no small feat, particularly so with misuse being found without an underlying Antitrust violation.