Costco v. Omega oral argument summary

On Monday, November 8, 2010, the Supreme Court held oral argument in Costco v. Omega, No. 08-1423.  I attended, and provide a brief summary below.  As you may recall, SIIA submitted an amicus brief in the case supporting Omega, which seeks to prevent Costco’s unauthorized, grey market import and resale of watches bearing Omega’s copyrighted design.

SIIA’s brief argued that (1) Costco’s first sale defense does not apply in this case because the first sale doctrine only applies to copies “made under this title,” and a copy made in another country is not “made under this title” (copyright law is not extraterritorial); and (2) the court’s decision should not imply any effect on longstanding licensing practices in other industries, which do not implicate the first sale doctrine because “ownership of a copy” is not transferred.

This case arose when Costco sought to purchase watches from Omega for resale in U.S. Costco stores, and the parties could not reach an agreement (there was some ambiguity about whether the parties could not agree on price, or whether Omega simply refused to sell them to Costco).  Costco was not able to obtain the watches via authorized distributors, but somewhere in Omega’s distribution chain, a supplier apparently broke its distribution agreement and the watches were imported into the U.S. to a Costco agent/importer, and passed on to Costco.  Omega sued under, among other provisions, section 602 of the Copyright Act, which prohibits unauthorized importation of copyrighted works. 

The legislative history of section 602 indicates that a primary purpose was to give copyright owners the ability to segment national markets and prevent grey market import of works.  However, in 1998 the Supreme Court ruled in L’Anza v. Quality King that the first sale doctrine “trumped” section 602 as applied to copies that had been made in the United States, exported, then reimported.  Such copies were “made under this title” and thus once first sold, no longer could be controlled by the copyright owner.  L’Anza suggested, but did not hold, that copies made overseas would be subject to section 602 and not the first sale doctrine.  The Costco case directly raises that issue.

The oral argument in Costco was all over the place, and the result is difficult to predict.  Justice Kagan was recused due to the Solicitor’s Office’s prior brief opposing cert in the case.  I would not be shocked to see a closely divided court or a 4-4 decision.  On the one hand, Justices Breyer and Sotomayor appeared sympathetic to Costco’s position and concerned about the case’s impact on the free flow of goods.

On the other hand, Justice Scalia openly mocked Costco’s non-literal reading of the statute (at one point observing “nothing in the text [of the statute] supports your position”), and Justice Ginsburg’s prior concurrence in L’Anza suggests support of Omega’s position.  The other four justices asked fewer questions and were more difficult to read.

Interestingly, neither Costco nor Omega offered a simplistic reading of the statute, much to the chagrin of the justices.  Costco (perhaps acknowledging that section 602 must cover something meaningful) stated that if the copyright owner grants exclusive rights to a foreign manufacturer, then the first sale doctrine does not apply to a foreign made copy and section 602 prevents import.

Justice Scalia and others seemed unconvinced by this line-drawing, and confused (as was I) about section 602 drawing any distinction between exclusive and non-exclusive rights.  Justice Breyer seemed to float a softball to Costco, asking whether the first sale doctrine simply means what it says and once the owner has made a first sale, that’s it.  Surprisingly, Costco continued to press for a more nuanced reading of the statute, which seemed to confuse the justices.

Justice Ginsburg asked (revealingly, in my opinion) what section 602(a) is supposed to cover if not the goods in this case, and Costco’s answer was, effectively, that it covers very little but that fact should not influence the Court’s job in interpreting the statute.

Omega’s lawyer likewise received much skepticism, particularly from Justice Breyer.  J. Breyer asked at one point, “if you bought a desk at Home Depot, and it had the label ‘for home use only, not office,’ wouldn’t that worry you?”  Omega responded that no, it would not be a concern because this is the way the law has been for 25 years and there have been no such attempts.

Justice Alito wondered whether this case was a typical application of section 602, recognizing that Omega seems to be stretching the bounds of copyright law by using a tiny logo on its watches to trigger section 602.  Justice Ginsberg asked why Congress would “favor foreign goods” as Omega’s interpretation may suggest.  Omega responded that it would favor U.S.-made goods, because foreign goods would be of suspect legitimacy.

Like Costco, Omega also appeared to swing and miss at a softball question, when Justice Scalia asked whether “lawfully made under this title” effectively means “made in the U.S.”  As it did in its brief, Omega took a more complicated position, saying that “made under this title” could include making overseas with a grant of all relevant U.S. rights.  Predictably, J. Scalia railed on Omega for importing a meaning that’s not in the text of the statute.  Justice Sotomayor chimed in, suggesting that it should not matter where the copy was made but rather what the copyright owner did (i.e., sold it).

Finally, the U.S. Solicitor’s office weighed in, supporting Omega but offering a slightly different interpretation of the statute.  The U.S. did not believe that “lawfully made under this title” means simply made in the U.S., but rather made “subject to and in accordance with title 17.”  The distinction would be that a copy could be made in the U.S., could violate other laws or regulations (libel, decency, etc.), but yet be made lawfully “under this title.”

We will of course update you when the opinion is issued, likely sometime this winter.

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