Omega S.A. v. Costco Wholesale Corp.

In a short majority opinion, the U.S. Court of Appeals for the Ninth Circuit concluded that once a copyright claimant conceded that it authorized a first sale of the watches in a foreign jurisdiction, the first sale doctrine barred its copyright claims against a downstream retailer for selling those watches it bought on the gray market. Applying Kirtsaeng, the 9th Circuit affirmed the district court’s grant of summary judgment to Costco.  In a lengthy concurrence, Judge Wardlaw agreed in the result but disagreed with the legal basis for the majority opinion.  He would have relied instead on copyright misuse.  Omega S.A. v. Costco Wholesale Corp., Case No. 11-57137 (9th Cir., Jan. 20, 2015) (Nelson, J.) (Wardlaw, J., concurring).

In 2003, Omega obtained a copyright for a Globe Design that it engraves on the back of its Seamaster watches and began selling its watches worldwide.  Costco purchased 117 watches bearing the Globe Design on the “gray market,” but only sold 43 of them before Omega sued for copyright infringement.

After the district court granted Costco summary judgment based on the equitable defense of copyright misuse, Omega appealed.

Section 602 of the Copyright Act makes unauthorized importation of copyrighted goods into the United States a violation of the owner’s exclusive right to distribute.  Trying to take advantage of §602, Omega asserted that it affixed the Globe Design to its watches.  The district court concluded that “[b]y affixing a barely perceptible copyrighted design to the back of some of its watches, Omega did not provide—and did not seek to provide—creative works to the general public.”  The district court concluded this was a misuse of Omega’s limited monopoly over its copyrighted Globe Design.

However, on appeal the panel majority did not rely on copyright misuse.  Rather, because Omega had conceded that it authorized a first sale of the watches in a foreign jurisdiction, the panel majority, citing Kirtsaeng, concluded that Omega’s copyright distribution and importation rights expired.  In other words, because the first sale was authorized, the 9th Circuit explained that third parties were free to import and resell the goods without consent of the copyright owner.  Here, Costco purchased the watches from a vendor who bought them from unidentified third parties who legitimately bought them from Omega in a foreign market.

In his concurrence, Judge Wardlaw argued that the majority erroneously concluded that the Omega watches were properly the subject of copyright protection at all.  As explained by Wardlaw, the first-sale doctrine applies only where the distributed copy is of an item that is a proper subject of copyright protection.  Here, since Omega’s watches are “useful articles” that are not typically copyrightable, the concurrence argues they are not the proper subject of copyright protection in the first place.  Further, Wardlaw notes that Omega did not argue infringement of its watches; rather it argued infringement of its distribution rights of the copyrighted Globe Design.

The doctrine of copyright misuse “forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office.”  Judge Wardlaw concluded that Omega essentially admitted that it used its copyright to restrict unauthorized retailers from selling genuine Omega watches procured from the gray market and to thereby control U.S. imports, all in an effort to decrease competition against its authorized dealers.  In fact, Omega conceded that the “whole purpose” of creating the Globe Design was to prevent unauthorized retailers from selling its watches.  In Judge Wardlaw’s view, the fact that Costco members could no longer buy genuine Omega watches at a discount reflects the anti-competitive impact of Omega’s copyright misuse.

Practice Note:  Copyright protection is limited.  Affixing a copyrighted design on a “useful article” may be insufficient to confer copyright protection especially where the acknowledged purpose behind the design was motivated by a desire to limit competition and to control importation of non-counterfeit goods into the U.S.