In a recent decision, the Ninth Circuit ruled for discount retailer Costco in a copyright dispute involving the importation and sale of “gray market” Omega watches. In Omega S.A. v. Costco Wholesale Corp., Case Nos. 11–57137, 12–56342 (9th Cir. Jan. 20, 2015), the Ninth Circuit held that Costco’s sale of Omega watches was permissible under the first sale doctrine, which protects the resale of a lawfully produced copyrighted work.

The dispute arose in 2004, when Costco began offering Omega’s bestselling “Seamaster” watches for sale to its members, which it obtained on the gray market. Gray market goods are brand-name products lawfully manufactured abroad that are then imported into the United States and sold by third parties without the consent of the brand owner. Omega originally sold the watches to authorized foreign distributors, who in turn sold them to unidentified third parties. A New York company, ENE Limited, purchased the watches from the unidentified third parties and resold them to Costco. Costco sold 43 of the watches to its discount club members at a significantly below-market retail price.

Omega sued Costco for copyright infringement, and the district court granted summary judgment in Costco’s favor, applying the first sale doctrine. The Ninth Circuit reversed, holding that the first sale doctrine did not apply to copyrighted works manufactured or first sold abroad, and a divided Supreme Court affirmed.

On remand, the district court again ruled in Costco’s favor, but on the alternative ground that Omega had misused its copyright in the Omega Globe design. The Seamaster watch is itself not copyrightable, but features the copyrighted Omega Globe symbol on the back of the watch’s face. Omega conceded that the Globe symbol was engraved on the Seamaster watches as part of a legal strategy to use copyright protection to increase control over the importation and sale of Omega watches.

Omega again appealed to the Ninth Circuit, and while the appeal was pending, the Supreme Court decided Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013). In Kirtsaeng, the Supreme Court held that the first sale doctrine applied to protect the resale of copyrighted works regardless of whether the item was manufactured or first sold abroad. Applying Kirtsaeng, the Ninth Circuit abrogated its earlier decision, holding that because Omega authorized the first sale of the watches to its foreign distributors, Costco did not violate Omega’s copyrights. “[A]pplication of the first sale doctrine disposes of Omega’s claim, resolves the case in Costco’s favor, and conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market.” Slip op. at 7.

In a sharply worded concurring opinion, Judge Kim McLane Wardlaw opined that she would have found for Costco on the district court’s copyright misuse rationale. Judge Wardlaw reasoned that copyright law imposes limits on Omega’s right to control distribution of its copyrighted works, and Omega admitted that it was using copyright protection to limit competition by unauthorized retailers. “Omega misused its copyright when it used its intellectual property protection to obtain a copyright-like monopoly over uncopyrightable Seamaster watches.” Slip op. at 13. Judge Wardlaw admonished that Omega could have sought redress through other avenues, such as terminating agreements with distributors that sold Omega watches to unauthorized retailers.

The expanded first sale doctrine could have significant implications for companies seeking to restrict the flow of luxury goods to the gray market.