USCA Ninth Circuit, September 3, 2008

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In this case the court determined that despite the U. S. Supreme Court’s decision in Quality King Distributors, Inc. v. L'anza Research International, Inc., 523 U.S. 135 (1998), it is still the law of the Ninth Circuit that the first sale doctrine is not a valid defense to an infringement claim for an unauthorized sale of a copyrighted work, when the copies containing the work were manufactured and first sold overseas. Costco sold in its U.S. stores authentic Omega watches (containing a copyrighted design) that had been manufactured and first sold outside the U.S. Omega had not authorized Costco to sell the watches in its stores and it sued Costco for copyright infringement. Costco asserted the “first sale” doctrine as a defense, and the district court granted summary judgment for Costco. The Ninth Circuit reversed and remanded.

The issues before the court hinged on three sections of the Copyright Act. Section 602(a) provides: “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.”

Section 106(3) establishes distribution as one of the exclusive rights of copyright owners: “Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights . . . to distribute copies . . . of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.”

Section 109(a) codifies the first sale doctrine: “Notwithstanding the provisions of section 106(3), 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 . . . .”

Omega argued that the first sale doctrine did not apply in this case because the watches were manufactured and first sold overseas and thus were not “lawfully made under” the Copyright Act, as required by the language of § 109(a). Costco argued that, although several Ninth Circuit decisions supported Omega’s argument (BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991), Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d 477 (9th Cir. 1994), and Denbicare U.S.A. Inc. v. Toys "R" Us, Inc., 84 F.3d 1143 (9th Cir. 1996)), the U.S. Supreme Court effectively overruled those cases in Quality King Distributors, Inc. v. L'anza Research International, Inc., 523 U.S. 135 (1998).

The court stated that Omega's position was clearly correct under pre-Quality King Ninth Circuit precedent. Before Quality King, the Ninth Circuit had construed 17 U.S.C. § 109(a) to provide no defense to an infringement action under §§ 106(3) and 602(a) that involved (1) foreign-made, nonpiratical copies of a U.S.-copyrighted work, (2) unless those same copies had already been sold in the U.S. with the copyright owner's authority.

In the instant case, the court held that “the first portion of this construction is not ‘clearly irreconcilable’ with Quality King, and that it remains the law of this circuit.” According to the Ninth Circuit, Quality King did not directly overrule BMG Music, Drug Emporium, and Denbicare because Quality King involved "round trip" importation. In Quality King, a product with a U.S.-copyrighted label was manufactured inside the United States, exported to an authorized foreign distributor, sold to unidentified third parties overseas, shipped back into the United States without the copyright owner's permission, and then sold in California by unauthorized retailers. The Supreme Court held that § 109(a) can provide a defense to an action under § 602(a) in this context, but the court did not address the effect of § 109(a) on claims involving unauthorized importation of copies made abroad. The Ninth Circuit concluded that the first sale doctrine is unavailable as a defense to the claims under §§ 106(3) and 602(a) because there is no genuine dispute that Omega manufactured the watches in Switzerland.