In a stunning end (for now) to a long-running fight between Costco and Omega about Costco’s importation and sale of Omega watches in the U.S., the U.S. District Court for the Eastern District of California recently decided that Omega’s use of a copyright-protected engraving on its watches to prevent unauthorized sales in the U.S. was copyright misuse, thereby paving the way for Costco to continue to import and sell the watches in America. Omega S.A. v. Costco Wholesale Corp., No CV 04-05443 (E.D. Cal. Nov. 9, 2011). The copyright misuse doctrine renders a copyright unenforceable when it is used to “secure an exclusive right or limited monopoly not granted by the Copyright Office and which it is contrary to public policy to grant.” Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990). It is almost certain that Omega will appeal.
Almost a decade ago, watchmaker Omega noticed that Costco was selling its Swiss-made Seamaster watches in the U.S. despite the fact that Costco was not authorized to import or resell them. Since gray market importation of goods like watches is not itself unlawful, upon the suggestion of legal counsel, Omega decided to bring copyright law to bear. Section 602(a)(1) of the Copyright Act makes unlawful the “[i]mportation into the United States, without the authority of the owner of copyright . . . of copies . . . of a work that have been acquired outside the United States.” Omega engraved a copyright-protected design (albeit only one-eighth of an inch in size!) on the back of its watches, then sued Costco for importing the tiny works of authorship without authorization.
In the first round, Costco argued that the first-sale doctrine trumped § 601 and precluded Omega’s infringement claim. The trial court agreed. But in 2008, the Ninth Circuit Court of Appeals disagreed, holding for Omega that the first-sale doctrine does not apply to works manufactured outside of the U.S. The U.S. Supreme Court granted certiorari, and in December 2010, an evenly split Court affirmed Omega’s position that there was no first sale defense.
Fast forward to November 2011. The case returned to the Eastern District of California for further proceedings. On Costco’s motion for summary judgment, Judge Hatter held Omega’s use of the copyright in the miniscule engraving to prevent sales in the U.S. constituted copyright misuse: “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.” Copyright misuse is a defense, the Court observed, “the contours of which are still being defined,” and that its application was not limited to situations involving restrictive licensing agreements and antitrust tying agreements. Omega essentially admitted copyright misuse, Judge Hatter held, by acknowledging that the purpose of the engraved design was to control the import and sale of watches that were themselves not protected by copyright.