The right to resell is undermined.
December 21, 2010
Omega is a Swiss watch manufacturer. Costco is an American retailer known for selling brand-name goods at deep discount. Â Its business model includes the common arbitrage practice of â€œparallel importationâ€ by which a commodity selling more cheaply abroad than domestically is imported and marked up by an unauthorized seller. A New York-based supplier imported Omega watches and resold them to Costco. Although each step of acquisition was legal, Omega sued because Costco wasÂ not â€œauthorizedâ€ to distribute its copyrighted logo.
The suit challenged the legal doctrine of â€œfirst-sale,â€ recognized in 1908 by the Supreme Court in Bobbs-Merrill Co. v. Straus and codified in the Copyright Act of 1976. Under this doctrine the buyer of a copyrighted work can dispose of it without permission of the copyright holder. For example, you can sell used books without permission from authors or publishers. Because there is a low threshold for copyright registration, first-sale applies to a vast array of products, from breakfast cereals to kitchen appliances, from beauty aids to vitamins. It also applies to foreign parts used in assembling otherwise American goods.
In February 2007 a federal district court in California granted Costcoâ€™s motion for summary judgment vacating Omegaâ€™s preliminary injunction. Omega appealed to the Ninth Circuit Court, where a three-judge panel reversed the lower court and ruled that the first-sale defense applies only to items made and distributed within the United States and not to foreign goods. This is the ruling the Supreme Court affirmed. Costco now returns to the lower courts where the case has been remanded for further proceedings.
The Tie-Breaking Justice
The Supreme Court Justice who recused herself is Elena Kagan. There is reason to think she would have voted against first-sale. Â In its ruling the Ninth Circuit argued that applying first-sale to foreign goods would violate a presumption against imposing U.S. law in an extraterritorial manner. Costco countered that preventing a foreign company from controlling distribution within the U.S. did not involve extraterritoriality. However, Kagan, as solicitor general for the Obama administration, submitted a friend-of-the-court filing (pdf) that raised extraterritoriality concerns, stating that the â€œCopyright Act does not apply outside the United States.â€
In short, if another foreign manufacturer takes a similar case to the Supreme Court, a 5-4 vote against first-sale for foreign goods is highly probable. Then, as the Ninth Circuit stated, a foreign manufacturer would be able to â€œexercise distribution rights after even the tenth sale in the United Statesâ€¦.â€
Among the likely effects of the ruling:
- a huge array of goods will lose first-sale exemption;
- some American manufacturers will relocate abroad to enjoy lucrative copyright and distribution advantages;
- domestic manufacturers will be vulnerable to â€œdownstream restraintsâ€ due to foreign components in their products;
- possible lawsuits and fines will encourage manufacturers to â€œBuy American,â€ raising costs to consumers;
- the practice of protecting otherwise unremarkable foreign goods by attaching a copyrighted logo or label will proliferate;
- Parallel importing will cease or be severely restricted, making American retailers less profitable and goods more expensive;
- American consumers will lose the legally clear right to sell or loan personal goods that were produced in other countries or contain foreign parts.
The stakes are not trivial. In 2009, according to the U.S. Department of Commerce, American businesses imported $1.6 trillion in foreign-made goods. But the stakes are more than economic. The denial of first-sale to foreign goods also upsets hundreds of years of common-law tradition determining an individualâ€™s control of his personal property.
Nevertheless, with such a rich plum of possibility hanging over the Supreme Court, it is difficult to believe that another foreign manufacturer will not attempt to secure the benefits signaled by Costco Wholesale Corp. v. Omega S.A.
Freeman contributing editor Wendy McElroy is an author and the editor of ifeminists.com.