For My Friends at Costco

For those of you not following my increasingly rare tweets (www.twitter.com/customslawblog), I should note that one of my favorite issues is headed to the Supreme Court. That issue is whether it is permissible to purchase branded merchandise abroad and import it without the consent (in this case) of the copyright holder. More commonly, these cases revolve around trademarks and whether the product is materially different from the authorized U.S. product. This, however, is a copyright case. In either case, what we are talking about here is called parallel importation or the gray market.

This case will clarify a gap left in the prior Supreme Court decision on the topic, which was Quality King v. L'Anza. In that case, a U.S. company sold hair-care products to a distributor in the U.K., who sold them to someone in Malta (of all places). Someone found the goods there at a bargain price and re-imported them to the U.S. where they were sold at discount shops.

L'Anza, seeking to protect its upscale market from bargain store competition, invoked the Copyright Act provision giving it the sole right to the sale and distribution of the work. In case you are wondering how this applies to shampoo, note that copyright law applies to tangible works of authorship, even if only minimally creative. So, the logo on a bottle (or the cleverly designed bottle itself) can be protected by copyright.

A specific provision of the law states that:

Importation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies under section 106, actionable under section 501. . .

On its face, this would appear to say that the unauthorized importer has a problem.

But, there is another part of the Copyright Act that says:

the owner of a particular copy. . .lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. . . .

What this seems to say is that once the copyright holder sells the work, the new owner can freely sell (or otherwise distribute) that copy of the work. That explains Netflix, used book stores, and libraries. By the way, note my rare use bold face. This does not allow someone who buys a work to make a copy and distribute the copy. Got that? This is not the get-out-of-jail-free card for digital file sharing.

The Supreme Court looked at those two pieces of the law and held that L'Anza had sold its products to the U.K. distributor. At that point, (1) it was fully compensated for the value of the goods and (2) it lost control of the goods. Thus, Quality King was permitted to re-import the goods over the objections of the copyright holder.

While that seemed to resolve the issue, there was one small straw onto which some copyright holders might grasp. What, they asked, happens if the sale takes place outside the U.S. and the U.S. copyright holder is not compensated for the sale? This might take place where, for example, the copyright holder is the U.S. licensee of a European luxury brand and the imported goods were sold by the European company, not the U.S. company.

That is close enough for my purposes to the situation in Costco v. Omega, which involves expensive Omega watches imported through unauthorized channels by Costco under the authority of the L'Anza decision. Omega sued and the Ninth Circuit distinguished the L'Anza decision on the grounds that the all important "first sale" had not occurred in the U.S. Costco appealed to the Supreme Court. Supporters are lining up on both sides, with the Obama Administration supporting the Ninth Circuit decision.

If the Ninth Circuit is affirmed, all sorts of interesting ramifications result. According to some of the arguments presented, if the case is not reversed, libraries and used book stores will need to know where books were first sold to determine whether they have the right to distribute them. Another possibility is that companies will see an incentive to produce outside the U.S. as a means of establishing tighter controls on the U.S. market. Another possibility is that companies will toss copyrighted logos onto products simply to use as leverage to keep the goods out of the U.S. None of this strikes me as a good result in the age of increasingly open global markets. Thus, this will be an interesting case to watch (hilarious pun intended).