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

Legal Issues

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