On November 8, 2010, the U.S. Supreme Court heard argument in a case that will clarify the first sale doctrine and the rights of copyright holders. In Omega, S.A. v. Costco Wholesale Corp.,1 the Ninth Circuit held that the first sale doctrine under U.S. copyright law did not apply to goods that were manufactured abroad. The Supreme Court granted certiorari on April 19, 2010.2

Background

In Omega, the Ninth Circuit had concluded that Section 602(a) of the Copyright Act prohibited the unauthorized resale into the United States of copyrighted works (Omega watches) that were manufactured abroad, notwithstanding the exhaustion principles that immunizes resale of copyrighted works “lawfully made under” U.S. copyright laws through Section 109’s first sale doctrine.

The Supreme Court in Quality King Distributors, Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998), previously held that the first sale doctrine took precedence over Section 602(a)’s prohibition against importation of copyright works in the context of U.S.-manufactured copyrighted works that are sold abroad and re-imported into the United States. Distinguishing Quality King, the Ninth Circuit in Omega held that the first sale doctrine did not apply to foreign-manufactured copyrighted works because such works are not lawfully made “under” U.S. law.

Supreme Court Argument

Oral argument focused primarily on the meaning of Section 109’s “lawfully made under this title” and how Sections 109 and 602 co-exist. Counsel for Costco argued there is a distinction between when a copyright owner creates exclusive distribution rights abroad versus non-exclusive distribution rights abroad, and that the first sale doctrine applies in the latter situation. Justice Kennedy appeared to support this reasoning. Justice Scalia and Justice Alioto, however, dismissed Costco’s position as having no support in the text of the Copyright Act. Disputing the concept that distribution rights set by “millions” of contracts should control, Justice Breyer suggested the distinction made by Costco was unnecessary since the first sale doctrine could apply in either situation whenever a sale or transfer is made.

Counsel for Omega argued that “made” under the first sale doctrine includes not only the making of a copy, but “the addition of any necessary intellectual property rights that would permit distribution in the United States.” Justice Alito took issue with this “qualification” as “outside the text, just as Costco is outside the text with the qualification that they had.” Justice Scalia also challenged Omega’s interpretation as not supported by the text of the Act. Relying on the American Library Association’s amicus brief, Justice Kennedy added that “made” refers to “the first time that U.S. copyright law lawfully could apply,” thus supporting Omega’s argument that Section 602 (a) allows a copyright owner to prohibit the importation of copyrighted works.

As amicus curiae supporting Omega, the government argued that “lawfully made under this title” means copies would have to be created in the United States for the first sale doctrine to apply. The government conceded that its interpretation would provide an incentive for copyright owners to manufacture goods abroad, but that such foreign-manufactured goods would be disfavored by importers as more difficult to get into the U.S.

Conclusion

It remains to be seen how the Supreme Court will rule and no clear front-runner emerged during oral argument. Further, only five of the Quality King justices – Justices Breyer, Ginsberg, Kennedy, Scalia, and Thomas – are still on the Court. Another wrinkle is that Justice Kagan recused herself because of her previous role in the case as Solicitor General recommending that the Court not grant cert. A 4-4 tie is therefore possible. If that happens, the Ninth Circuit ruling in favor of Omega will stand, but no Supreme Court precedent will be established.

A decision is expected by spring.