Court Soundly Rejects Watchmaker's Attempt To Abuse Copyright Law To Stop Sale Of Its Watches At Costco

from the copyright-misuse! dept

In a perfectly timed ruling by the 9th Circuit appeals court, watchmaker Omega's weak attempt to abuse copyright law to block the sale of some of its watches at Costco has again been rejected [pdf]. The timing is perfect because today is "You Bought It, You Own It" day for Copyright Week, and that was the key principle at stake in this case. This case has gone on for many, many years and we've covered many of the twists and turns.

The short(ish) version is that Costco bought a bunch of Omega watches intended for sale in Europe, not the US, then imported them and put them on sale in its stores, at a much lower price than Omega normally sells its watches in the US. Omega, in an attempt to block just this sort of thing, had inscribed a tiny globe on the back of the watch (where no one would ever really see it), then copyrighted that image, and sued Costco for infringement. The case was first fought on first sale grounds, with the 9th Circuit originally siding with Omega, arguing that because the globe wasn't "lawfully made under this title" (because it was made in Europe, not under US law), "first sale" rights didn't apply. The case went up to the Supreme Court which ended in a 4-4 tie, because Justice Kagan didn't take part (she had filed an amicus brief in the case while she was Solicitor General). The case then went back down to the district court to determine whether or not it was still copyright misuse, even if first sale wasn't an issue.

In a bit of a surprise, the district court agreed that it was copyright misuse. This is pretty rare. While people sometimes argue copyright misuse, it rarely gets very far, so it was good to see the court agree.

Omega appealed (of course) and now the 9th Circuit has sided with the lower court, mainly by revising its first sale opinion, thanks to the Kirtsaeng ruling in the Supreme Court on whether or not first sale rights apply to books purchased outside the US and then imported. That case faced similar issues as the original Costco/Omega case, but with all 9 Justices, the Supreme Court was able to get it right.

In reviewing the case, the 9th Circuit notes that, thanks to Kirtsaeng, Costco selling the watches was easily protected under the First Sale doctrine. There's barely any discussion at all, because the ruling is now completely clear: of course Costco can sell those watches.

It is clear, then, that Omega has no infringement cause of action against Costco. Omega’s only allegation is that Costco violated Omega’s copyright-based importation and distribution rights by selling gray market watches without a prior authorized first sale in the United States. Omega concedes that it authorized a first sale of the watches in a foreign jurisdiction. Omega’s right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement. Kirtsaeng, 133 S. Ct. at 1366; 17 U.S.C. § 109(a). Thus, application of the first sale doctrine disposes of Omega’s claim, resolves this case in Costco’s favor, and conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market.

Because of this, the court doesn't really need to get into the copyright misuse claim, but a concurring opinion, by Judge Wardlaw, discuses it anyway, saying that copyright misuse would apply here, even if the First Sale issue didn't turn out the way it did:

The district court correctly held that Omega misused its copyright “by leveraging its limited monopoly in being able to control the importation of [the Globe Design] to control the importation of its Seamaster watches.” The district court did not clearly err in finding that: (1) Omega copyrighted the Globe Design, at the advice of its legal department, to control the importation and distribution of Omega watches into the United States; and (2) Omega told its authorized distributors that the purpose of suing Costco was to “stem the tide of the grey market” and the “unauthorized importation of Omega watches into the U.S.” In other words, Omega attempted to use the copyrighted Globe Design to decrease competition in the U.S. importation and distribution of its watches by it and its authorized dealers—an obvious leveraging of a copyright to control an area outside its limited monopoly on the design.

Omega argues that its anti-competitive motives are irrelevant to the issue of copyright misuse. According to Omega, our inquiry should instead focus on the copyright holder’s objective conduct or use. But Omega’s semantic hairsplitting is unpersuasive. By definition, “use” includes an inquiry into purpose.... However, we need not decide whether Omega’s motives are sufficient to establish copyright misuse. The undisputed record shows that before this lawsuit consumers were able to a buy a genuine Omega Seamaster watch from Costco for 35% less than Omega’s suggested retail price. This is no longer the case. Thus, at least one consequence of Omega’s lawsuit has been a reduction of intrabrand price competition for uncopyrightable Omega watches in the United States.

Later, the concurrence notes:

The Copyright Office granted Omega the exclusive right to control the importation and distribution of the Globe Design into the United States. It did not empower Omega to restrict competition from unauthorized retailers selling genuine, gray market Seamaster watches in the United States. Although the Globe Design engraved on the underside of the Seamaster watches was copyrighted, Omega misused its copyright when it used its intellectual property protection to obtain a copyright-like monopoly over uncopyrightable Seamaster watches.... Omega’s expansion of its copyrightlike monopoly eliminated competition from unauthorized watch retailers like Costco, thereby allowing Omega to control—through its exclusive distributor, Swatch U.S.A.—the retail pricing of Seamaster watches sold in the United States. If the copyright law allowed Omega to use its copyright to combat the importation and sale of all gray market watches that are stamped with the Globe Design, it would effectively grant Omega a copyright-like monopoly over the distribution and sale of Omega watches in the United States. Because such an outcome directly controverts the aims of copyright law, it is impermissible.

And, finally, it concludes:

“The limited scope of the copyright holder’s statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts.” Twentieth Century Music Corp., 422 U.S. at 156 (footnote omitted). Omega’s attempt to expand the scope of its statutory monopoly by misusing its copyright in the Globe Design upset this balance. The watchmaker’s anticompetitive acts promoted neither the broad public availability of the arts nor the public welfare. Instead, they eliminated price competition in the retail market for Omega watches and deprived consumers of the opportunity to purchase discounted gray market Omega watches from Costco. Omega misused its copyright by engraving the Globe Design on the underside of its watches, and attempting to use copyright law to eliminate intrabrand competition from Costco in the retail watch market. Because the district court correctly held that Omega misused its copyright in the Globe Design by attempting to leverage its limited monopoly over the design to control the importation and sale of Seamaster watches, I would affirm the district court on the issue of copyright misuse.

While I understand why the majority ruling just went with the easy out with First Sale, it's too bad that this concurring ruling isn't the majority ruling, as we could use more useful opinions like this one when it comes to copyright misuse. Either way, kudos to the court for properly recognizing that even if you buy a watch outside the US, you should actually own it, and that copyright law shouldn't be able to get in the way of those property rights.

Filed Under: 9th circuit, copyright, copyright misuse, first sale, watch
Companies: costco, omega

Why The Supreme Court Needs To Make Sure That Selling A Used iPad Isn't A Copyright Violation

from the first-sale,-please dept

Over the last few years, we've been following a series of cases that have challenged the first sale doctrine -- which says that if you buy a product that has some element covered by copyright (i.e., a book) you're able to resell that item at a later date without seeking permission from the copyright holder(s). There was the very troubling ruling in the 9th Circuit in the Omega/Costco case, in which watchmaker Omega put a tiny little image on the underside of its watches -- for which it claimed copyright -- that were sold relatively cheaply outside of the US. When a bunch of those watches were purchased (legally) outside of the US, and then imported and sold by Costco (for less than what Omega was selling watches for directly in the US), the company sued... claiming copyright infringement on that tiny logo no one looks at.

Now, you might think that under the first sale doctrine, it wouldn't matter. But, the statute is inelegantly worded. It says that first sale applies to products made "under this" law. Omega argued that since the products were made outside the US, they weren't made under the US Copyright Act... and thus, were not subject to the Copyright Act or first sale when they showed up on US soil. The Supreme Court heard the case, but split down the middle, because Justice Kagan had filed an argument as Solicitor General in that case, and thus recused herself. Worryingly, as Solicitor General, she has argued that first sale does not apply to foreign goods.

Last year, we had another ruling, over in the 2nd Circuit, which in many ways was even worse. It involved a guy, Sudap Kirtsaeng, who had relatives in Asia purchase cheaper textbooks there and ship them to the US, where he then resold them at a profit (but still for less than what the publishers were charging in the US). Publisher John Wiley & Sons sued... and got a ridiculously broad ruling, saying that any product manufactured outside the US is not covered by the Copyright Act, and thus not eligible for first sale protection.

In fact, in many ways this ruling was even worse that the Omega ruling -- which at least said that if the manufacturer had authorized the product for sale in the US, then first sale rights would apply to all of those products, this ruling even said that this was not true. The court acknowledged that this was kind of a crazy situation, which could have ridiculous consequences (all manufacturing moves overseas immediately to get away from first sale doctrine), but says that's what the Copyright Act appears to say:

Kirtsaeng argues that this holding is undesirable as a matter of public policy because it may permit a plaintiff to vitiate the first sale doctrine by “manufactur[ing] all of its volumes overseas only to then ship them into the U.S. for domestic sales.” Defendant-Appellant’s Br. at 21. Phrased differently, it is argued that any such decision may allow a copyright holder to completely control the resale of its product in the United States by producing its goods abroad and then immediately importing them for initial distribution. In this sense, the copyright holder would arguably enjoy the proverbial “best of both worlds” because, in theory, the consumer could not rely on the first sale doctrine to re-sell the imported work. In other words, the copyright holder would have an incentive to“outsource” publication to foreign locations to circumvent the availability of the first sale doctrine as a defense for consumers wishing to re-sell their works in the domestic market. The result might be that American manufacturing would contract along with the protections of the first sale doctrine. Kirtsaeng argues that this could not possibly have been Congress’s intent. We acknowledge the force of this concern, but it does not affect or alter our interpretation of the Copyright Act.

In other words, yeah, that's crazy, but too freaking bad.

As we noted in April, the Supreme Court has agreed to hear the case.

Constitutional scholar Marvin Ammori has done an excellent analysis over at the Atlantic about some of the ridiculous consequences of such a ruling being upheld:

Here are some things you might have recently done that will be rendered illegal if the Supreme Court upholds the lower court decision:

1. Sold your first-generation iPad on Craigslist to a willing buyer, even if you bought the iPad lawfully at the Apple Store.
   
2. Sold your dad's used Omega watch on eBay to buy him a fancier (used or new) Rolex at a local jewelry store.
   
3. Sold an "import CD" of your favorite band that was only released abroad but legally purchased there. Ditto for a copy of a French or Spanish novel not released in the U.S.
   
4. Sold your house to a willing buyer, so long as you sell your house along with the fixtures manufactured in China, a chandelier made in Thailand or Paris, support beams produced in Canada that carry the imprint of a copyrighted logo, or a bricks or a marble countertop made in Italy with any copyrighted features or insignia.

Basically, if you sell anything that was made overseas that has anything covered by copyright on it... you might need to get permission to legally resell it. That's insane, and there's no way that was the intention of Congress in passing the law. The courts are supposed to avoid obviously nonsensical outcomes, but they don't always understand the consequences of their rulings. While the courts have (correctly) noted that Congress can fix and clarify the law later, Congress isn't very good at acting quickly on stuff like this and any time Congress even touches copyright law, it's something to worry about.

Ammori notes that there's actually a third case, over in the Third Circuit, Sebastian v. Consumer Contacts, in which the court "was reluctant to accept" the idea that first sale only applies to goods made in the US. So there's a pretty clear circuit split for the Supreme Court to work out. But, it's a little scary that it might come down in support of either the Omega or the John Wiley rulings -- and we already know that the Omega case had four of the justices in support of that absurd interpretation. Ammori points out that the Supreme Court has an opportunity to fix things and get it right this time around, and hopes that it will:

But the Supreme Court doesn't have to impose an absurd result on the nation. The first-sale doctrine reflects basic common sense -- and follows from the logic of treating copyrights and other "intellectual property" with no more protection than regular property. Ever since the end of Medieval feudalism, and the writings of John Locke, we have understood the importance of being able to buy and sell one's own property, including books and watches, both for reasons of economics and liberty.

The Court has several legal justifications for reaching the right result. Courts are supposed to interpret laws to avoid "absurd results" and to avoid constitutional problems -- such as infringing on the free speech rights of Americans that want to buy and sell their own books and creative works that are published abroad and taking away the property rights, without compensation, of the millions of Americans who buy and sell their own stuff every day, in person and online.

Ultimately the Court must choose between bringing copyright law into the Internet age or consigning us all to the dark ages. I hope they choose wisely.

I hope so too, though I have little faith on this one, considering that the Supreme Court always gets screwed up when it comes to copyright cases...

Filed Under: constitution, first sale, ipad, john wiley, marvin ammori, scotus
Companies: apple, costco, omega

Court Tells Omega Copyright Is Not A Sword; Rejects Attempt To Control Grey Market As Copyright Misuse

from the well,-look-at-that dept

You may recall our earlier stories concerning the legal fight between Costco and watchmaker Omega. In an attempt to stop grey market (legal, official products, but resold into a market not intended by the manufacturer) sales of one of its watches, Omega put a tiny 0.5cm engraving on the back of its watches, and claimed copyright on it. This had absolutely nothing to do with the incentive to create that tiny engraving, or because that engraving had value or was special in any way. It served one purpose only: to try to abuse copyright law to control the market.

Omega then claimed that Costco selling (legitimate) secondhand Omega watches that were bought from other sources was copyright infringement. We thought this was a crazy claim and pointed out two problems with it under the law. The first was that it seemed like copyright misuse, and second that it appeared to violate the first sale doctrine, allowing you the right to sell copyright-covered products you legally bought. The district court tossed out the case on the first sale question, but unfortunately, the appeals court overturned, with really convoluted reasoning. Since, US copyright law says first sale rights apply to all products "lawfully made under this title," Omega argued, and the court agreed, that objects made outside the US were not "made under this title," and thus had no first sale rights. It's pretty ridiculous that the court would let that go forward, but to make matters worse, the Supreme Court totally punted and just let the appeals court ruling stand.

But... the case wasn't over just yet. The appeals court and the Supremes were just focused on the narrow question of if the First Sale doctrine applied. So the case went back to the district court... and once again, the court has dumped the lawsuit... and went with the other big problem we saw with Omega's sneaky little plan: copyright misuse. This was a bit of a surprise. You don't see "copyright misuse" cases that often, and it's even rarer when that argument succeeds. But the judge was pretty clear.

Omega concedes that it decided to affix a new copyrighted design to the reverse side of its watches to take advantage of copyright law's importation limitations. In other words, Omega used the defensive shield of copyright law as an offensive sword.

The Ninth Circuit adopted the Fourth Circuit's definition of copyright misuse.... The Fourth Circuit held that copyright misuse occurs when "copyright is being used in a manner violative of the public policy embodied in the grant of copyright.".... The Ninth Circuit later clarified that "the misuse defense prevents copyright holders from leveraging their limited monopoly to allow them to control areas outside of their monopoly."...

Here, Omega concedes that a purpose of copyrighted Omega Globe Design was to control the importation and sale of its watches containing the design, as the watches could not be copyrighted. Accordingly, Omega misused its copyright of the Omega Globe Design by leveraging its limited monopoly in being able to control the importation of that design to control the importation of its Seamaster watches.

It's nice to see copyright misuse actually being used in court... and even nicer to see it succeed (so far). It would be nicer, still, if more courts actually started to use that Fourth Circuit definition of copyright misuse: "violative of the public policy embodied in the grant of copyright." Considering how many copyright cases these days would qualify as copyright misuse under those terms, it's a shame that the courts haven't declared copyright misuse more frequently.

Filed Under: copyright, copyright misuse, first sale, grey markets, watches
Companies: costco, omega

Supreme Court Ruling: You May Not Be Able To Legally Sell A Product First Made Outside The US

from the this-is-bad dept

Earlier this year, we covered a rather important copyright case in the Supreme Court, between watchmaker Omega and retailing giant Costco. The crux of the issue was that Costco bought a bunch of Omega watches that were not meant for sale in the US, imported them, and started selling them in the US for less than Omega was selling other watches here. Your basic principles of "you bought it, you can resell it" seemed to apply, but Omega had a nasty copyright trick up it's sleeve. It had put a little 0.5 cm "globe" design on the underside of the watches -- where no one would see it, and then claimed copyright on the design. Thus, they claimed that Costco's attempt to resell the watches was copyright infringement. Of course, US copyright law has a right of first sale (the same "you bought it, you can resell it" concept), but Omega's lawyers craftily sought out a loophole in US copyright law.

The Copyright Act's section that deals with first sale rights (section 109(a) for those playing along with the home game) notes that it only applies to copies "lawfully made under this title." Omega's lawyers argued that the design on the watches does not count because the watchers were made outside of the US, and thus not covered by US copyright law and thus the design was not lawfully made under US copyright law.

The Ninth Circuit appeals court -- which certainly has a history of wacky rulings -- agreed with Omega's interpretation of the law and the case was appealed to the Supreme Court. The court deadlocked on the issue today, coming to a 4-4 tie (with Justice Kagan not taking part, since she had filed an amicus brief in the case as Solicitor General), meaning that the 9th Circuit ruling stands and copyrighted products first made outside the US may no longer have a right of first sale.

In other words, be careful if you buy a book that was first published outside the US. Technically, you may no longer have a legal right to sell it -- or even to lend it to to others, which is why librarians were reasonably worried about this decision.

If there's any sort of silver lining to all of this, the fact that the Justices deadlocked, rather than coming to a full decision means that it's not a precedential ruling and a different case could allow them to decide differently later on. Though, if you were wondering, when Kagan filed the amicus brief as Solicitor General... she sided with Omega, and said the Supreme Court should not take the case, since the 9th Circuit's ruling was just fine.

Filed Under: copyright, first sale, supreme court
Companies: costco, omega

Libraries Worried About Potential Supreme Court Ruling Concerning Legality Of Selling Imported Omega Watches

from the greymarket-libraries dept

Earlier this year we discussed an important upcoming Supreme Court case between Omega (the watch company) and Costco over whether or not it can be considered copyright infringement to resell legally purchased watches that were bought overseas. The concept sounds crazy, right? What does reselling foreign watches have to do with copyright? Well, the details are a bit complicated, but basically lots of companies hate the concept of first sale rights (the ability to resell something you've legally bought) and have tried all sorts of tricks to try and block those rights. In this case, Omega inscribed a tiny globe on the back of its watches (where no one will ever see it) solely for the purpose of copyrighting that design and using it to try to stop resale. Of course, once again, the first sale doctrine does allow for resale, but here's where Omega got sneaky. It pointed out that the first sale doctrine technically only applies to copies that are "lawfully made under this title." Omega's argument is that because the copyrighted globe design was made outside of the US, the copy was not made under US law... and thus (voila!) there are no first sale rights on any copyrighted product made outside of the US.

Amazingly, the court agreed. Even more amazing? The Obama administration argues that the court decided correctly, in part because the recent ProIP Act (which gave us our friendly IP Czar) ever so slightly changed the rules on importing and exporting copyrighted goods... removing first sale rights from foreign goods.

The implications, if this is true, are immensely problematic. A coalition of libraries has now filed a detailed amicus brief in the case (pdf) noting what a massive problem it would be if the lower court ruling is upheld:

Over 200 million books in U.S. libraries have foreign publishers. Moreover, many books published by U.S. publishers were actually manufactured by printers in other countries. Although some books indicate on their copyright page where they were printed, many do not. Libraries, therefore, have no way of knowing whether these books comply with the Ninth Circuit's rule. Without the certainty of the protection of the first sale doctrine, librarians will have to confront the difficult policy decision of whether to continue to circulate these materials in their collections in the face of potential copyright infringement liability. For future acquisitions, libraries would be able to adjust to the Ninth Circuit's narrowing of Section 109(a) only by bearing the significant cost of obtaining a "lending license" whenever they acquired a copy that was not clearly manufactured in the United States.

How ridiculous is it that copyright law -- which was originally put in place "for the encouragement of learning," might now make it much more difficult to encourage learning through libraries.

Now, some will obviously state that this is a problem for Congress, not the courts, to fix. And, to some extent that is true. But the Supreme Court is also supposed to make sure that the laws that Congress has put in place are interpreted in line with the Constitution. In this case, copyright law is being so abused as to clearly have nothing to do with its intended purpose, and thus the court can and should note that this interpretation of copyright law is clearly outside the bounds of what Congress could have possibly meant.

Filed Under: copyright, first sale, foreign works, libraries, supreme court
Companies: costco, omega

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

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

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.

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