You bought it, you can re-sell it: Costco can keep selling gray market Omega watches at a discount without copyright liability

Happy Copyright Week to you all! In a nice little coincidence, on the day that the Electronic Frontier Foundation designated "You Bought it, You Own It" day, the 9th Circuit has finally brought down the curtain on the decade-long dispute between Omega, the watch manufacturer, and Costco, the discount retailer and decided that Costco can continue to sell Omega watches at a discount because, in effect, they bought them, and they own them, and can dispose of them however they wish.

The background to the suit is pretty simple. Costco bought a bunch of Omega Seamaster watches overseas on the so-called "gray market"—i.e. from an authorized Omega distributor. The watches, intended for sale in Europe, were priced low enough so that a third party, ENE Limited, could purchase them abroad and sell them to Costco, which could offer them to US customers at a price significantly below the price at which Omega-authorized distributors in the US offered them for sale. Omega, admittedly trying to block this very thing, had inscribed a tiny globe on the back of the watch (where no one would ever really see it); they then brought suit against Costco, asserting that the retailer was "distributing copies" of a copyrighted work—the tiny globe—to the public without its (Omega's) permission.

Omega, in the first round of litigation, initially prevailed—both in the 9th Circuit and in the Supreme Court (which affirmed the 9th Circuit judgment in Omega's favor by a 4-4 vote, with Justice Kagan recused). Although ordinarily the "You Bought It, You Own It and Can Do What You Wish With It" argument prevails as a defense to copyright infringement—the so-called "first sale" doctrine, which lets you, say, but 50 copies of a copyright-protected book and then re-sell them (or give them away) without liability—the 9th Circuit originally sided with Omega because it interpreted the first sale doctrine as being inapplicable to copies manufactured abroad.

The case then went back to the district court for a determination of damages—but in the meantime, the Court decided the case of Kirtsaeng v. John Wiley, which held (correctly—see my earlier blog posting here) that the place of manufacture is irrelevant for purposes of determining whether or not the first sale doctrine applies.

Kirtsaeng's view of the law, the 9th Circuit has now held, disposes of the case (in Costco's favor); they bought and owned the copies of the copyrighted works—the tiny globe designs, which just happened to be attached to watches—and can resell those copyrighted works at whatever price they chose.

What makes the case interesting (at least to copyright nerds) is, first off, the strange little retroactivity element in the final disposition. The court had already held that the sale of these very watches constituted copyright infringement—a holding affirmed by the Supreme Court. While Kirtsaeng obviously undercut the rationale for that earlier decision, it's a little tricky for the 9th Circuit to apply the Kirtsaeng holding here, where the "law of the case" would seem to be contrary. It's one thing to say that Kirtsaeng applies retroactively (to distributions occurring in 2004 and 2005)—but quite another to say that it applies where the Supreme Court has already issued a judgment that the sale of this particular set of copyrighted works was an infringing distribution.

Judge Wardlaw, concurring here in the judgment against Omega, picks up on this, and notes that the question of the applicability of the first sale doctrine is not properly presented in this case; she would ground the judgment against Omega here on the ground that Omega's actions constituted "copyright misuse."

It's a pretty powerful argument—after all, Omega's case really had absolutely nothing to do with "protecting its copyrights" and everything to do with stamping out competition. The watches themselves are not copyright-protected works (because of another copyright doctrine, the "useful article" doctrine, which largely does away with copyright protection for "utilitarian" objects).

Because the watches are not the proper subject of copyright protection, Omega does not argue that Costco infringed copyrights protecting its watches, the argument upon which the majority rests its opinion. Instead, it argues that Costco infringed its limited monopoly over the copyrighted Globe Design, which was engraved on the watches that Costco sold.

Inherent in granting a copyright owner the exclusive right to reproduce his works is the risk that he will abuse the limited monopoly his copyright provides by restricting competition in a market that is beyond the scope of his copyright. An owner's attempt to impermissibly expand his lawful protection from competition contravenes not only the policy of the copyright laws, but also the central purpose of the antitrust laws

Omega misused its copyright "by leveraging its limited monopoly in being able to control the importation of [the Globe Design] to control the importation of its Seamaster watches."

In other words, Omega attempted to use the copyrighted Globe Design to decrease competition in the U.S. importation and distribution of its watches by it and its authorized dealers-an obvious leveraging of a copyright to control an area outside its limited monopoly on the design…. Omega concedes that it designed and secured copyright protection for the Globe Design for the purpose of using copyright law to restrict the unauthorized sale of Omega watches in the United States. Costco was one such unauthorized retailer that threatened Omega's distributor relationships because it sold genuine Omega watches at prices lower than authorized Omega dealers were willing or able to offer….

She ends her concurrence with some pretty ringing language about the purpose of copyright, and why Omega's actions fall outside that purpose:

"The limited scope of the copyright holder's statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts." Omega's attempt to expand the scope of its statutory monopoly by misusing its copyright in the Globe Design upset this balance. The watchmaker's anti-competitive acts promoted neither the broad public availability of the arts nor the public welfare. Instead, they eliminated price competition in the retail market for Omega watches and deprived consumers of the opportunity to purchase discounted gray market Omega watches from Costco. Omega misused its copyright by engraving the Globe Design on the underside of its watches, and attempting to use copyright law to eliminate intrabrand competition from Costco in the retail watch market. Because the district court correctly held that Omega misused its copyright in the Globe Design by attempting to leverage its limited monopoly over the design to control the importation and sale of Seamaster watches, I would affirm the district court on the issue of copyright misuse.