Business & Commercial Newsletter
United States Supreme Court Leaves "Gray" Areas Unresolved in
Costco Parallel Imports Case
Have you ever wondered how certain retailers can offer genuine products at greatly discounted prices? Well, the answer is that these products may be from the "gray market." "Gray market" goods, sometimes called parallel imports, are "genuine products possessing a brand name protected by trademark or copyright" that are "typically manufactured abroad, and purchased and imported into the United States by third parties, thereby bypassing the [manufacturer's] authorized U.S. distribution channels." Omega v. Costco Wholesale Corp., 541 F.3d 982, 984 n.1 (9th Cir. 2008). Because of different pricing structures in other countries, gray market goods can often be sold at lower prices than traditionally distributed products purchased through an "authorized" U.S. distributor or retailer. The gray market poses a number of issues, as customers seek the lowest prices they can find, distributors seek to protect their role, and manufacturers try to balance these competing interests.
These issues recently came to a head in a case before the United States Supreme Court involving Costco and the Swiss watchmaker Omega. Costco obtained Omega watches from the "gray market" in the following manner: the watches were manufactured in Switzerland, sold to authorized distributors overseas, purchased by a third party who imported the watches to the United States -- outside of Omega's traditional U.S. distribution system -- and sold to a New York company that, in turn, sold the watches to Costco. Costco sold these Omega watches to its customers in California. Omega sued Costco for copyright infringement, alleging that Costco's acquisition and sale of the watches, which contained a globe design protected by U.S. copyright law, violated Omega's rights. In response, Costco argued that it was not liable to Omega for any violation of its rights because the "first sale doctrine" applied and barred any claims Omega had against it. The "first sale doctrine" holds that once an owner of a copyright consents to the sale of its product, the owner cannot then take issue with a later sale even if it is through unauthorized distributors.
So, what arguments were made by the parties and how did the United States Supreme Court come to rule on this issue? Costco argued to the United States District Court for the Central District of California that "under the first sale doctrine, Omega's initial foreign sale of the watches preclude[d] claims of infringing distribution and importation in connection with the subsequent, unauthorized sales." Omega argued, on the other hand, that the first sale doctrine "provide[d] no defense to the infringement claims because, although the Omega Globe Design was copyrighted in the United States, the watches bearing the design were manufactured and first sold overseas." The district court agreed with Costco.
Omega appealed the decision to the Ninth Circuit Court of Appeals which agreed with Omega finding that this defense applies where the product is "legally made and sold in the United States" and since the watches were manufactured and sold in Switzerland, the defense did not apply. Basically, the Ninth Circuit found that even though Omega sold to an authorized distributor overseas, that authorized sale does not preclude it from filing suit against Costco for selling its product outside of Omega's traditional U.S. distribution system. The reasoning of the Ninth Circuit was that if the rule applied to products manufactured and sold overseas it would 1) be an impermissible extension of the Copyright Act extraterritorially and 2) render the rule meaningless because importation is usually always preceded by at least one lawful foreign sale, which would exhaust the manufacturer's distribution rights.
This issue was then sent to the United States Supreme Court for review and the Supreme Court, "by an equally divided Court," agreed with the Ninth Circuit. Costco Wholesale Corp. v. Omega
, 131 S. Ct. 565 (2010). Because the Supreme Court affirmed by an equally divided Court, it essentially agreed with the decision of the Ninth Circuit but not its reasoning and, therefore, leaves doubt about the application of the first sale doctrine and whether this defense may be found later to apply where goods are manufactured and first sold abroad.
Certainly, this decision raises consumer awareness about the origin of a product and the reasons certain retailers can sell a product at discounted prices. It also raises awareness of the business owner about the "prior sales" of the products it sells to its end consumer. As a business owner, if you find yourself in either Costco or Omega's situation, GWB regularly assists clients in a wide range of intellectual property matters.