Only time will tell whether the Ninth Circuit finds that adding a copyrighted image to a product to restrict import and sale misuses the copyright. The Ninth Circuit came close to holding that adding a copyrighted image to a product to restrict import and sale misuses the copyright in Omega S.A. v. Costco Wholesale Corp., — F.3d —- (2015). Close, because it affirmed the district court’s grant of summary judgment founded on misuse of copyright, but not actually because copyright misuse was not the basis of the Ninth Circuit’s decision. An understanding of the history of the case and of changes to copyright law during the case is essential to the story.
First the law. The Copyright Act provides a copyright owner with exclusive rights to, among other things, distribute the owner’s work. 17 U.S.C. §106(3). The Copyright Act precludes importing into the United States a copyrighted work acquired outside the U.S. 17 U.S.C. §602(a). However, Section 109(a) creates an exception to this rule:
Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord 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 or phonorecord. . .
17 U.S.C. §109(c) (emphasis added). This is known as the “first sale doctrine” and it allows a purchaser of a copy of a book to resell that copy without risk of infringing the owner’s copyright.
And now the courts’ interpretations. Issues arose when courts were confronted with copyright claims against resellers who purchased a copy of a copyrighted item that had been manufactured and first sold outside of the U.S., then imported into the U.S. and resold. The problem was caused by the conflict between the no import rule in section 602 and the first sale doctrine in section 109(a). Federal courts reconciled these seemingly contradictory provisions in various ways. Some courts, including the Ninth Circuit, relied on the term “lawfully made under this title” to reach the conclusion that it was infringement to purchase a copyright protected product manufactured and first sold outside the U.S., import it into the U.S., and then resell it. Omega S.A. v. Costco Wholesale Corporation., 541 F.3d 982, (9th Cir. 2008), abrogated by Kirtsaeng v. John Wiley & Sons, Inc., U.S. , 133 S.Ct. 1351, 185 L.Ed.2d 392 (2013). One rationale was that the phrase in Section 109(a) “lawfully made under this title” granted first sale protection only to works made and first sold in the U.S, because to extend it to items made elsewhere would give the Copyright Act extraterritorial reach and it would render Section 602 “virtually meaningless.” Id. at 986.
In Omega, the plaintiff watchmaker was concerned about sales of its watches through the grey market. Omega authorized entities to manufacture its watches outside the United States and contractually limited the sale of the watches to areas outside the United States. In contravention of these restrictions, some businesses would purchase the watches outside the United States and then import them to the United States and resell them. This upset Omega and its distributors because it enabled the importers to sell the watches at prices below what Omega’s licensed distributors could charge. Omega worked out a strategy designed to preclude the resell in the United States. Omega added a copyrighted globe image to the back of its watches which were manufactured outside the United States. It reasoned that if anyone purchased the watches outside the United States and then imported them and resold them, the reseller would violate the section 602 no-import rule. When Costco sold some of Omega’s watches in the United States that had been manufactured in Europe with the copyrighted globe, Omega sued, claiming copyright infringement. The trial court disagreed, and granted summary judgment to Costco, holding that the section 109(c) first sale doctrine exonerated Costco.
The Ninth Circuit reversed, citing its interpretation that the first sale doctrine does not apply to copyrighted copies made and first sold outside the United States and then imported and resold in the United States. Absent the first sale doctrine, section 602 imposes liability on the seller of imported copyrighted goods. In the decision, the Ninth Circuit mentioned an exception to its holding: the Ninth Circuit applied the first sale doctrine to products manufactured outside the U.S. but first sold in the U.S. because to disallow the resale of those products would give greater protection to copyrighted products manufactured outside the U.S., and the courts did not want that result. Id. An equally divided Supreme Court affirmed the decision. Costco Wholesale Corp. v. Omega, S.A., 562 U.S. 40, 131 S.Ct. 565, 178 L.Ed.2d 470 (2010) (per curiam).
Other federal courts, including the Third Circuit Court of Appeals, interpreted the statutes differently, finding that limiting the first sale doctrine to copies made inside the U.S. “does not fit comfortably within the scheme of the Copyright Act.” Sebastian Int’l, Inc. v. Consumer Contacts (PTY) Ltd., 847 F.2d 1093, 1098, n. 1 (3rd Cir. 1988).
Two years ago the Supreme Court resolved the question, holding that the first sale doctrine applies to copies lawfully made outside the U.S., without regard to where they are first sold. Kirtsaeng v. John Wiley & Sons, Inc., U.S. , 133 S.Ct. 1351, 185 L.Ed.2d 392 (2013). The Court felt that there was no way to split the application of the phrase “lawfully made under this title” to copies manufactured outside the U.S. based on when they were first sold: “As a matter of English, it would seem that those five words either do cover copies lawfully made abroad or they do not.” The Supreme Court had many other reasons as well, but the result was that now it is clear that the first sale doctrine applies to all copies of works lawfully made (with the owner’s authorization) outside the U.S. with the owners authorization, wherever they are first sold.
In the interim, Omega had been remanded to the trial court for further proceedings. This time Costco sought summary judgment arguing that Omega’s strategy was a misuse of its copyright.
“Copyright misuse is a judicially crafted affirmative defense to copyright infringement” designed to combat the impermissible extension of a copyright’s limited monopoly. . . ¶ The copyright misuse doctrine forbids the use of the copyright to secure an exclusive right or limited monopoly not granted by the Copyright Office. The defense is often applied when a defendant can prove either: (1) a violation of the antitrust laws; (2) that the copyright owner otherwise illegally extended its monopoly; or (3) that the copyright owner violated the public policies underlying the copyright laws.
Omega, supra, __ F.3d at ___ (concurring opn Wardlaw, J.).
The trial court found that Omega had copyrighted the globe design and stamped it on its watches (which by themselves were not copyrightable) to control the importation and distribution of Omega watches into the United States, and had even told its authorized dealers that it was suing Costco to stem the tide of unauthorized importation of its watches into the United States. The trial court held that Omega had misused its copyright and granted Costco’s summary judgment.
And so Omega came back to the Ninth Circuit. Last month, the Ninth Circuit affirmed the trial court’s summary judgment. Oddly, the Ninth Circuit relied on Kirtsaeng’s holding that the first sale doctrine precluded liability, even though that was not the basis of the trial court’s order. The concurring opinion by Judge Wardlaw noted that fact and in a well-reasoned opinion stated that she would have affirmed the trial court’s ruling that Omega misused its copyright. That is the most intriguing part of the Omega opinion.
Since it was only a concurring opinion, we will need to wait for another case to find out the Ninth Circuit’s position on the issue. Stay tuned for future updates.