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Gray Market Importers Score Win in Court Case

Wednesday, February 04, 2015
Sandler, Travis & Rosenberg Trade Report

Reflecting a March 2013 Supreme Court decision, a federal appeals court recently overturned its previous ruling and found that retailer Costco did not infringe the copyright of watchmaker Omega when it re-sold in its U.S. stores Omega watches obtained on the gray market abroad. However, says Sandler, Travis & Rosenberg founding member Lee Sandler, the majority opinion missed an opportunity to strengthen copyright protections by not addressing the issue of copyright abuse.

In 1998, the Supreme Court ruled that the first sale doctrine in U.S. copyright law, which provides that manufacturers lose the right to control the sale of copyrighted goods after their first authorized sale, applies to goods reimported after having been produced in the U.S. and then exported. Because the watches at issue in the Costco/Omega case (which feature a small copyrighted globe design that was the basis for Omega’s infringement claim) were produced abroad, the Court of Appeals for the Ninth Circuit initially found that the first sale doctrine did not apply and ruled in favor of Omega. However, the Supreme Court subsequently ruled in a separate case (Kirtsaeng v. John Wiley & Sons Inc.) that the first sale doctrine also applies to copies lawfully made overseas and then imported into the U.S. The Ninth Circuit has now revisited its decision in light of the Kirtsaeng ruling and held that Costco is free to resell the Omega watches it obtained on the gray market at whatever price it wants.

In the immediately prior decision in this case, a federal district court agreed with Costco (which at the time did not have the benefit of the Supreme Court’s Kirtsaeng decision) that Omega had abused its copyright of the globe design. Watches are not entitled to copyright protection because they are “useful articles,” the district court noted, but Omega impermissibly tried to extend the limited monopoly conveyed by its copyright of the globe design to the watches that featured it in an attempt to limit competition. One of the Ninth Circuit judges affirmed this reasoning and expressed regret that the majority decision did not address the issue.

Nevertheless, notes ST&R’s Sandler, the concurring decision “provides good language for arguing in future cases that brand owners should not be able to resort to clever copyright devices to gain distribution control not otherwise available under first sale or other competition law principles.” It may also be regarded as persuasive in any such case, Sandler added, because the court awarded legal fees to Costco based on the trial court’s copyright abuse determination.

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