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Omega v. Costco Decision Makes Clear That Copyright Neither Condones Nor Protects Anticompetitive Actions

· January 20, 2015

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We’re taking part in Copyright Week, a series of actions and discussions supporting key principles that should guide copyright policy. Every day this week, various groups are taking on different elements of the law, and addressing what’s at stake, and what we need to do to make sure that copyright promotes creativity and innovation.

Today the U.S. Court of Appeals for the Ninth Circuit issued a decision making clear that copyright owners should not attempt to limit the first sale rights of users.

The decision is the latest installment in the litigation between Omega and Costco, which began in 2004. Costco, the discount retailer, sold luxury Omega watches without the authorization of the Swiss watchmaker. In an effort to prevent Costco from importing and selling its watches, Omega began engraving an “Omega Globe” logo on the back of its watches. When Costco started importing and selling the watches bearing the logo, Omega sued Costco for infringing the importation right under the Copyright Act. Costco responded that the importation right was a subset of the distribution right, and that the first sale doctrine provided it with an exception to the distribution right. The first sale doctrine provides that the distribution right with respect to any particular copy of a work extinguishes with the first authorized sale of that copy. The district court granted summary judgment in favor of Costco on the basis of the first sale doctrine. The Ninth Circuit reversed. It noted that the first sale doctrine applied only to copies “lawfully made under this title,” and interpreted that phrase to mean manufactured in the United States. Because the watches were manufactured in Switzerland, they were not “lawfully made under this title,” and the first sale doctrine did not apply.

Costco appealed to the Supreme Court. With Justice Kagan recusing herself, the Supreme Court in 2010 reached a 4-4 tie. This meant that the Ninth Circuit decision was affirmed for purposes of the Ninth Circuit, but was not binding precedent in the other circuits.

On remand, the district court once again granted summary judgment to Costco, this time on a copyright misuse theory. It found that Omega misused its copyright in the logo to expand its limited monopoly impermissibly to prevent the importation of the non-copyrightable watches. The Ninth Circuit also awarded Costco $396,000 in attorneys’ fees.

Omega appealed the misuse finding and the fee award to the Ninth Circuit. While the case was pending before the Ninth Circuit, the Supreme Court handed down its decision in Kirtsaeng v. Wiley. In that 2013 decision, the Supreme Court held that the phrase “lawfully made under this title” meant lawfully made in a manner consistent with the copyright laws of the United States. In other words, the first sale doctrine applied to noninfringing copies, regardless of where they were manufactured. Under this “international exhaustion” principle, Kirtsaeng was permitted to import textbooks lawfully printed in Thailand.

In today’s decision, the Ninth Circuit applied the Kirtsaeng holding to the facts before it, and found that the first sale doctrine offered Costco a defense to the Omega’s infringement claim. “Application of the first sale doctrine disposes of Omega’s claim, resolves this case in Costco’s favor, and conclusively reaffirms that copyright owners cannot use their rights to fix resale prices in the downstream market.”

With respect to attorneys’ fees, the Ninth Circuit recognized that district courts have great latitude to exercise equitable discretion in the fee context. The Ninth Circuit found that the district court did not abuse its discretion in awarding attorneys’ fees to Costco. The Ninth Circuit noted that the district court had observed that Omega had not sought to provide creative works to the general public. Rather, Omega sought to exert control over the distribution of its watches. The Ninth Circuit held that the district court had not erred when it concluded that “it should have been clear to Omega that copyright law neither condoned nor protected its actions, and the imposition of fees would thus further the purpose of the Copyright Act.”

In a strong concurring opinion, Judge Wardlaw argued that the panel should have affirmed the district court’s copyright misuse finding rather than decide the case on the basis of Kirtsaeng. Judge Wardman agreed with the district court that “Omega impermissibly used the defensive shield of copyright as an offensive sword.”

In the closing paragraph of her concurrence, Judge Wardlaw stated that Omega’s attempt to expand the scope of its statutory monopoly by misusing its copyright in its logo would upset the balance the copyright law establishes between rewarding creative work and promoting the broad public availability of literature, music, and the other arts. Omega’s “anticompetitive acts promoted neither the broad public availability of the arts nor the public welfare.” Rather, they were designed to eliminate price competition in the retail market for Omega watches and deprive consumers of the opportunity to purchase discounted gray market Omega watches from Costco.

Judge Wardlaw’s concurring opinion provides copyright owners with fair warning that they should not attempt to expand the scope of their statutory monopoly in a manner that eliminates legitimate competition.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.