Supreme Court Considers Case Over Using Copyright Law To Block Import Of Gray Market Goods

from the massive-abuse-of-copyright-law dept

Thu, Jan 7th 2010 5:37am — Mike Masnick

It's really stunning how frequently we see companies (and individuals) twisting and abusing copyright law to do things way beyond the obvious intentions of the law itself. I had been unaware of this particular case, but Michael Scott alerts us to a legal dispute between Omega (the watch makers) and Costco that the Supreme Court is considering taking, which could have massive implications for whether or not you could legally buy products in the US that were released in other countries. The link above to IP Watch does a really fantastic job explaining all the details clearly, so if you want to dig in, go there, but I'll try to give a quick summary.

Basically, lots of companies try to restrict distribution of their goods, even after they're sold -- often with things like authorized distributors and such. Many have tried to use trademark law to claim that others cannot sell their goods, but as the law has evolved, a pretty robust first sale right has been established in many places that effectively says that the manufacturer has no right to control what's done with a product after they've sold it to someone else. Thus, they cannot restrict later resales. One of the ways companies try to get around this is to claim that the products are "different," since first sale rights only apply to products that are the same. But how can a product be different? Well, for example, some companies claim that when they sell through authorized channels, it includes a warranty -- but the unauthorized channels do not include the manufacturer's warranty (even if they include a different warranty) and thus they are "different." Sometimes (bizarrely) this argument works, though other times it does not.

In this case, though, Omega tried a different strategy altogether. Rather than claiming it's a trademark issue, it's using copyright law. Copyright law also has a well-established first sale right, but here's where Omega gets tricky. As Steven Seidenberg at IP Watch explains:

There is, however, one significant difference between the first sale doctrines in US copyright and trademark law. Copyright law has an added qualification. Its first sale doctrine, Section 109(a), applies only to copies "lawfully made under this title."

Omega argued that because the copies of its watch design were made outside the US, they were not made under US copyright law and were thus not covered by the first sale doctrine. Costco argued that because the copies were made by the US copyright owner, they should be considered "lawfully made" under US copyright law.

Of course, being astute readers, you should be asking a very important question: what copyright is there in a watch? Ah, again, Omega gets sneaky:

The watchmaker inscribed a tiny, 0.5 cm globe design on the underside of its watches. This design is invisible when the watches are worn, so individuals are unlikely to purchase Omega’s high end watches in order to obtain copies of this inconspicuous design. Because this design is copyrighted, however, it may enable Omega to stop the import of grey market watches into the US.

Yes, it put a tiny, barely noticeable engraving on the watch, claimed copyright over that design and is using that copyright claim to try to keep certain watches from being resold in the US. In this specific case, it was a set of Omega watches that were legally sold in Europe (where Omega sells its watches at a much lower price than in the US). The buyer then sold that shipment of watches to Costco in the US, who offered them for retail sale. Hence the lawsuit.

This appears to be a dual abuse of copyright law -- first using copyright law to try to apply to an entire watch, when its really just a minuscule design that most people probably don't notice, and second in trying to route around copyright's well-established first sale doctrine with this convoluted argument that goods made in Europe aren't covered by the first sale right.

The really scary part? The 9th Circuit Appeals Court (known for some wacky rulings) overturned a district court ruling that had sided with Costco, and said that Omega's arguments made sense (pdf). If the Supreme Court does not overturn this ruling, it will likely mean that plenty of companies will use similar tactics to bar the sale of products originally sold outside the US from being resold in the US. This clearly is at odds with the very basis of copyright law and the concept of first sale rights. Hopefully, the Supreme Court recognizes this, though it doesn't have a very good track record on copyright cases.

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Filed Under: copyright, grey market
Companies: costco, omega

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The Anti-Mike (profile), 7 Jan 2010 @ 5:51am

The buyer then sold that shipment of watches to Costco in the US, who offered them for retail sale. Hence the lawsuit.

Here's a twist in all of this: Was Costco selling used mechandise as "new"? The first sale right would only apply to used goods, no?

Even though the product was "new in the box", was it not product that had already been retailed? Is the grey market material used, which in turn would lead it not to have guarantee coverage until the original buyer registered it and transferred that to the second buyer?

It seems like grey market may be greyer than they think.
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time to start a revolution, 7 Jan 2010 @ 5:56am

fuck these communist companies
if you want capitalism then FUCK OFF then i buy i do what i want

copyright should not even then exist
it should be a WHO EVER the hell makes it best and cheapest
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The Infamous Joe (profile), 7 Jan 2010 @ 6:03am

Re:
Oh come on. The first sale doctrine says absolutely nothing about the quality of the goods or if you call it new or not.

You still have managed, despite all the words you put on every post, to bring nothing to the table.

Gah.
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some old guy, 7 Jan 2010 @ 6:06am

Re:
The first sale right would only apply to used goods, no?

Wrong.
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Valkor, 7 Jan 2010 @ 6:09am

Re:
You have heard of middlemen, distributors, and wholesalers, right? First sale applies to anyone after the manufacturer, and has nothing to do with the status of New vs. Used.
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Bt Garner, 7 Jan 2010 @ 6:15am

If the watches are not covered by the US Law (since, according to Omega they are made outside of the US), then why should a US Copyright Law be used to dictate if they can be sold in the US? Sounds like Omage is trying to have it both ways.
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Ima Fish (profile), 7 Jan 2010 @ 6:36am

Mike, I wish you wouldn't use the term "gray market goods." It implies there is something wrong with them. That the goods are not genuine. However, they're completely legit and are probably made in the exact same factory.

To me the headline should have been, "Supreme Court Considers Case Over Using Copyright Law To Block First Right Sales of Imported Goods."
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Ben, 7 Jan 2010 @ 6:36am

Cert. is still pending
The post is a little unclear about this, so I thought I'd clarify a bit. The short of it is that the Supreme Court hasn't decided whether or not to hear the case yet. You can read more at the link.
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Anonymous Coward, 7 Jan 2010 @ 6:37am

What do you have against businesses segmenting their markets by territory and then trying to enforce it? And what if trademark and copyright are part of the toolset, so what? You wouldn't have a problem with a contract suit against the distributor who wrongfully sold to Costco, would you? What's the difference?
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troll watch, 7 Jan 2010 @ 6:42am

Re:
Used - that's a stretch.
Please, at least try to put in a little effort. Your trolling performance lately has seen a significant drop in all aspects.
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Ima Fish (profile), 7 Jan 2010 @ 6:43am

Re:
"What do you have against businesses segmenting their markets by territory and then trying to enforce it?"

What do you have against people reselling what they buy. If Costco legitimately buys watches, why should there be a law barring Costco from reselling them?

"And what if trademark and copyright are part of the toolset, so what?"

Agreed. It should not matter whether there are trademarks or copyrights involved. If you buy something, you should have the right to resell it.
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Ima Fish (profile), 7 Jan 2010 @ 6:44am

Re: Re:
The Anti-Mike is always wrong. That's his MO.
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Valkor, 7 Jan 2010 @ 6:45am

Re:
1) Business have no authority to "enforce" their market segments.
2) Trademark and Copyright are not a "toolset", they are consumer protection and limited monopoly statues, respectively, not anti-competitive cudgels.
3) Omega is not suing their contracted distributor, nor are they suing an independent middleman. They are suing Costco, the retailer. The difference is that your hypothetical is a contract dispute, and this is a first sale dispute.

Thanks, try again.
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econ 101, 7 Jan 2010 @ 6:48am

Re:
free market?
supply and demand?

just what are you talking about, certainly not a working economy - sounds more like a broken one
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The Anti-Mike (profile), 7 Jan 2010 @ 7:04am

Re: Re:
While I hate to use wikipedia for anything, I think this is a good thing to put in the game:

The first-sale doctrine is a limitation on copyright that was recognized by the U.S. Supreme Court in 1908 (see Bobbs-Merrill Co. v. Straus) and subsequently codified in the Copyright Act of 1976, 17 U.S.C. § 109. The doctrine allows the purchaser to transfer (i.e., sell or give away) a particular lawfully made copy of the copyrighted work without permission once it has been obtained. This means that the copyright holder's rights to control the change of ownership of a particular copy end once that copy is sold, as long as no additional copies are made. This doctrine is also referred to as the "first sale rule" or "exhaustion rule."

The very first thing that is required is that the work (in this case a watch) is purchased. As wholesalers of Omega are "market restricted", the only way you get watches from one market to another is to buy them from a retailer, even if you are buying them by the case rather than on an individual basis.

Thus, while they boxes they are in have never been opened, the product has in fact been sold at retail. After all, there is no other way to obtain the goods without a wholesaler breaking their agreement with Omega, which would likely cost them their wholesale agreement.

In order to apply the First Sale Doctrine, you must first have a sale. Otherwise, the goods would still be within Omega's distribution channels, and subject to whatever contractual arrangements exist.

Now, if CostCo sells these "used" goods without indicating that they are used, there would be an issue there as well, not for copyright, but rather as a false representation. Many companies do not honor guarantees for products sold outside of their home market, or will only honor them if you "carry in" the product to the service center in it's home market, as is their right.

There are some interesting implications here...

As a side note, shopping in places like HK is great for this, the same shop will often have the same product in three different versions: Local market, grey market, and black market. The local market are actually intended for the HK market, the grey market often comes from mainland market or places like Indonesia or Thailand (where retail prices may be lower). The black market products are often assembled in the same factories as the real products, but may use rejected components, could be repaired "failed" units, or could be complete knock offs. You trade price point for quality. The grey market products are often 10-30% lower in price than the local market products, but usually are not able to get warrantee coverage
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The Infamous Joe (profile), 7 Jan 2010 @ 7:09am

Re: Cert. is still pending
Mike does note this, but a little extra clarification never hurts.
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some old guy, 7 Jan 2010 @ 7:11am

Re: Re: Re:
wow, yet another lengthy post by the TAM that doenst actually say anything useful to the topic at hand.

How you go to such lengths to sound intelligent, but never actually say anything.
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The Anti-Mike (profile), 7 Jan 2010 @ 7:17am

Re: Re: Re: Re:
In the future I will try to limit my posts to only using words that Mike has used in the original post, okay?

NOT.

I stated up from it was a "twist", my own look at it. If you don't like it, just skip to the next comment. It's just an opinion, that's all.
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DCX2, 7 Jan 2010 @ 7:27am

Re: Re: Re:
If it's in the original box with the original wrapping, it is new. You can sell something new to someone else...and it's still new, as long as it's in the unopened box.
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DCX2, 7 Jan 2010 @ 7:34am

Re: Re:
2) Trademark and Copyright are not a "toolset", they are consumer protection and limited monopoly statues, respectively, not anti-competitive cudgels.

And there lies the rub. Capitalist companies think trademark and copyright exist to protect their profits. Lately, it even appears as if this is the way it was meant to be; I fully expect that if SCOTUS heard this case, they would choose to protect business models instead of consumers.

But the real purpose of trademark is to protect consumers from fakes, not to provide an avenue for you to sue your competitor. And the purpose of copyright is to limit monopolies so that, eventually, goods make their way into the public domain.

But we all know that Congress will never let The Mouse enter the public domain...
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Mark, 7 Jan 2010 @ 7:43am

Re: Re: Re: Re:
The anti-Mike. Did you purchase any presents over the christmas holiday and then give them to friends/family. If so, do you consider the items when they were recieved by the recipient to be new or used?
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The Infamous Joe (profile), 7 Jan 2010 @ 7:43am

Re: Re: Re:
No, seriously, dude, stop it. One more time and I swear I'm gonna hit you in the nose with a rolled up newspaper.

The very first thing that is required is that the work (in this case a watch) is purchased.

Which, it was.

TFA:
Some watches that were initially sold in Europe and intended for that market were resold to Costco, which imported them into the US.

Note the key word "sold" there. Further reading will result in the word "resold". I know, crazy, right?

Thus, while they boxes they are in have never been opened, the product has in fact been sold at retail

This has no bearing on anything. At all.

Now, if CostCo sells these "used" goods without indicating that they are used, there would be an issue there as well, not for copyright, but rather as a false representation.

I am beginning to think you don't know the definition of "used", or that it is different than "sold". You do realize that almost everything you buy has been sold at least once, unless you're buying straight from the manufacturer, right? Please tell me you do.

Many companies do not honor guarantees for products sold outside of their home market, or will only honor them if you "carry in" the product to the service center in it's home market, as is their right.

Proof, please. I have returned things that were still under the manufacturer's warranty, and not once did they ask where I bought it, or for how much.

There are some interesting implications here...

In that yet *another* company is trying to misuse IP laws to fit their own agenda, yes. Very interesting.
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Ima Fish (profile), 7 Jan 2010 @ 7:49am

Re: Re: Re:
"While I hate to use wikipedia for anything..."

Anti-Mike, you are fricken hilarious! Do you have your own blog I can read? You're wasting your comedic talents here. Seriously.
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C.T., 7 Jan 2010 @ 7:50am

Courts are constrained by law
Mike,

Before you criticize a court for a ruling you disagree with, it's important to remember that judges have a duty to apply laws as they are written...not as they *wish* they were written. I agree with you that the 9th circuit's ruling is troubling doctrinally, but it's unfair to criticize the court unless the ruling is at odds with the governing statutes. In this case there is a wrinkle that may have in fact tied the 9th circuit's hands. The first sale doctrine applies only to products made "made under" the US Copyright Act. The ambiguity of this term was recognized by the Supreme Court more than a decade ago in a case Quality King v. L'anza... however, that case involved goods produced in the US so the court did not opine on whether the first sale doctrine would apply to goods produced outside of the US.

I fundamentally agree with you that ruling that the first sale doctrine doesn't apply to works produced overseas is bad policy. However, it may be Congress who needs to change the statute in order to avoid this result. That the result is in tension with the "spirit" of copyright is not something the court can base a decision if the statute clearly governs otherwise. To be sure, the phrase "produced under this title" leaves some wiggle room. However, there are considerations that counsel against applying our copyright laws to goods and producers who are situated overseas.
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jjmsan (profile), 7 Jan 2010 @ 8:20am

Re: Courts are constrained by law
Very nice, except the circuit court found one way and the appeals court found differently, so if both are constrained by law then the law has two opposite results. Judges are not constrained by anything, they can find against law precedent or statute if they want. Federal judges are tenured for life and I have never heard of one being removed for their rulings.
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Ben, 7 Jan 2010 @ 8:35am

Re: Re: Courts are constrained by law
The court below didn't actually make any findings. From the 9th Circuit opinion, "The district court ruled without explanation in favor of Costco . . . ."

Under existing law, the 9th Circuit was right. This is either something for SCOTUS to change, or Congress to fix.
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The Groove Tiger (profile), 7 Jan 2010 @ 8:49am

Re: Re: Re:
Newsflash: the manufacturers sell their goods to the distributors, who then sell them to the retailers. Wow, that's a lot of "used" goods isn't it? In most cases, they're twice "used". I bet you don't want to ever again buy toilet paper.
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The Anti-Mike (profile), 7 Jan 2010 @ 9:08am

Re: Re: Re: Re:
I knew someone was going to hit this.

Distribution networks are not the same as retail sale. Once something that be sold at retail, it isn't "new", just "new in the box".

Example, the original retail buyer would be eligible for a guarantee, but the second buyer would only be eligible if it was first registered and then transferred. The second buyer is not the original retail customer.

For the consumer that gets something "new in the box" thinking it is new, they will be disappointed when the guarantee isn't applicable or available in their market, because they bought what is a re-retailed, out of market product.
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The Anti-Mike (profile), 7 Jan 2010 @ 9:10am

Re: Re: Re: Re: Re:
Actually, for the purposes of guarantee, I am the purchaser (I would be the one with the bill to prove the purchase).

Also, I am not re-retailing the product, I am giving it as a gift. Not quite the same thing, is it?

An interesting side note: I often buy products in Asia when I travel, sometimes I give them as gifts. I am very careful though to mention to people that they likely have to guarantee that would apply here. If they have an issue, they can let me know and I can exchange it or get service on my next trip.
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The Anti-Mike (profile), 7 Jan 2010 @ 9:40am

Re: Re: Re: Re: Re: Re:
correction: have to guarantee = have no guarantee
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Anonymous Coward, 7 Jan 2010 @ 10:20am

Re: Re: Re: Re: Re:
An opinion based on the opposite of everything Mike Masnick related. So it's actually less than an opinion.
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Mike Masnick (profile), 7 Jan 2010 @ 10:32am

Re:
To me the headline should have been, "Supreme Court Considers Case Over Using Copyright Law To Block First Right Sales of Imported Goods."

Ah, good point. Yeah, I really don't like the term "grey market" either, but couldn't think of a better way to describe it.
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Mike Masnick (profile), 7 Jan 2010 @ 10:34am

Re: Cert. is still pending
The post is a little unclear about this, so I thought I'd clarify a bit. The short of it is that the Supreme Court hasn't decided whether or not to hear the case yet. You can read more at the link.

Yup. Thanks for the clarification, but did want to point out that I noted repeatedly just that the SC was considering the case, which is what "cert is pending" means...
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Mike Masnick (profile), 7 Jan 2010 @ 10:38am

Re: Courts are constrained by law
I fundamentally agree with you that ruling that the first sale doctrine doesn't apply to works produced overseas is bad policy. However, it may be Congress who needs to change the statute in order to avoid this result.

Fair enough. That is a good point, and one worth making.
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Chris Brand, 7 Jan 2010 @ 11:20am

Sounds like a case the Canadian Supreme Court got right
Euro-Excellence v. Kraft Foods http://scc.lexum.umontreal.ca/en/2007/2007scc37/2007scc37.html
As Michael Geist described it "Kraft Canada tried to use copyright law to block the imports, arguing that while the chocolates were legit, the inclusion of the image of the mountain on the Toblerone bar involved an infringement of copyright."
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Big Al, 7 Jan 2010 @ 1:57pm

Re: Re: Re: Re: Re:
And what makes you think that any of these items were sold at retail?
One of the beauties of 'grey' imports is that they are bought wholesale from overseas distributors and shipped to a local distributor prior to distribution to the point of sale.
There is no 'retail' sale any more than when manufacturer ships to distributor A who on-sells to distributor B who on-sells.... until it eventually arrives on the store shelves.
Please try to understand basic commerce before making vague comments about 'retail' versus 'wholesale'.
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Idobek (profile), 8 Jan 2010 @ 5:35am

Wow
The part of this story that surprised me most was that a US company sold a product cheaper in the EU than in the US. I don't think I have ever heard of that happening before; it's always the other way around.
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JEDIDIAH, 8 Jan 2010 @ 9:03am

What's the difference?
What's the difference is that an unrelated law doesn't have to be abused and everyone doesn't have to be pushed down the slippery slope in the process. If there is a cause of action for Omega to go after the company that they have an actual business relationship then they should do that. The law should not be bent out of shape so that someone can abuse you in some inventive new way.

I would rather not have my own rights eroded.
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Dementia (profile), 8 Jan 2010 @ 12:26pm

Re: Re: Re:
So explain how a sale from a manufacturer to a wholesaler isn't, in fact, a sale. By your way of thinking, everything we buy is used because before we can buy it at retail it must be sold from the producer to the distributer.
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Dementia (profile), 8 Jan 2010 @ 12:34pm

Re: Re: Courts are constrained by law
Except for the fact that one of the key purposes of a judge is not to simply apply the law, but to interpret the law so that when applied they ensure justice is provided to the greatest extent to all parties involved.
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dnball (profile), 8 Jan 2010 @ 6:12pm

Re: Re: Re: Re: Re: Re:
I have a serious question: Why take the time to flame?

I get it that flaming may satisfy some primitive, blood lust impulse and may even satiate an ego need, but really, are those the aspects of our psyches that we should be presenting to the world?

At the end of the day, civility is far more fun because you get to play with ideas -- good ones, bad ones, and really odd ones. And if you just have to be snide, then resorting to wit or Latin is pretty satisfying.

Tum podem extulit horridulum.
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Lola Lopez, 28 Apr 2010 @ 5:43pm

Re:
No, of course not the grey market does not mean that the items are USED.

The Merchandise is purchased from distributors before it reaches the market it was intended for. In NO WAY does grey goods= USED it actually = savings for you!!!!!
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Lola Lopez, 28 Apr 2010 @ 6:21pm

Re:
No, of course not the grey market does not mean that the items are USED.

The Merchandise is purchased from distributors before it reaches the market it was intended for. In NO WAY does grey goods= USED it actually = savings for you!!!!!
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Richard (profile), 12 Jun 2012 @ 2:42pm

Re:
What do you have against businesses segmenting their markets by territory and then trying to enforce it?

A little thing called the WTO.

Also I note that the Omega/Wiley interpretation of US law would place the US in violation of the TRIPS agreement (for once "international obligations" don't favour the copyright maximalist!
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Richard (profile), 12 Jun 2012 @ 2:56pm

Re: Re: Re: Courts are constrained by law
Under existing law, the 9th Circuit was right. This is either something for SCOTUS to change, or Congress to fix.

I disagree. The wording is quite straightforward and can be interpreted - as the district court did in Pearson:

see
http://www.pattishall.com/pdf/4-27-10_Omega_v_Costco_Blog_Post.pdf

"In Pearson, the district court held
that the language of Section 109(a) means that "'lawfully made under this title' refers not to the
place a copy is manufactured, but to the lawfulness of its manufacture as a function of U.S.
copyright law."

Clearly no change to the statue is needed - although given your strange system of legal precedents it may be that your Supreme court needs to correct some strange decisions made elsewhere.
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