Supreme Court Indicates Interest in International Exhaustion Case

Costco Wholesale Corp. v. Omega, S.A. (Supreme Court 2009)

The Supreme Court has asked the Solicitor General to file a brief expressing the Obama Administration’s view on this pending international copyright exhaustion case. The law of exhaustion in copyright and patents run roughly parallel, and the outcome of this case will likely alter US patent law as well.

Under the first sale doctrine (aka exhaustion), once a copyright (or patent) owner has made an authorized sale of a protected product, the owner no longer has rights in that particular copy.  This allows the authorized purchaser to re-sell the particular product. 

Omega sells its watches for a higher price in the US than it does elsewhere. The discount retailler Costco purchased genuine Omega watches from overseas (through an importer) and began to sell them in its US stores.  The question on appeal is whether Omega’s authorized foreign sale exhausted its US copyright.

Under the Copyright Act’s first-sale doctrine, 17 U.S.C. § 109(a), the owner of any particular copy “lawfully made under this title” may resell that good without the authority of the copyright holder. In Quality King Distribs., Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135, 138 (1998), this Court posed the question presented as “whether the ‘first sale’ doctrine endorsed in § 109(a) is applicable to imported copies.” In the decision below, the Ninth Circuit held that Quality King (which answered that question af-firmatively) is limited to its facts, which involved goods manufactured in the United States, sold abroad, and then re-imported. The question pre-sented here is:

Whether the Ninth Circuit correctly held that the first-sale doctrine does not apply to imported goods manufactured abroad.

In Fuji Photo Film Co. v. ITC, 474 F.3d 1281 (Fed. Cir. 2007), the Federal Circuit held that US patent rights are only exhausted “through a first sale in the United States.” In that case, the Court recognized that “a different rule applies in copyright cases.”  However, at least one district court has held that the Supreme Court’s 2008 Quanta decision is inconsistent with this Federal Circuit precedent. See LG Electronics, Inc. v. Hitachi, 2009 WL 667232 (N.D.Cal. 2009)

If it takes the case, the Supreme Court is likely to link the parallel patent and copyright doctrines.

One of my former students (Shourin Sen) has been following the case on his copyright focused site: Exclusive Rights.

Comments

[Mike]

From a policy point of view, I do not understand why it should matter WHERE the sale was made.

There is something to be said for allowing a lawfully acquired tangible good to be sold by its then-current owner.

[Jules]

Interesting article. Without getting into the details, it really seems Costco is on the right side of this one... from a capitalist perspective.

[Jules]

So Costco might say, "what if I take these Omega watches I bought, and sell them at a price lower than the price of Omega's production, thereby forcing Omega to lose profit".

Hey, it might put Omega out of business, but at the same time, Costco attracts customers into its store and they buy tons of other stuff in addition to the watches.

Fighting dirty. As Judge Mills Lane would say, "I'll allow it".

[A plurality of thresholding units]

If you create an arbitrage situation involving your product, you should expect other folks to take advantage of it. The content industry had to get Congress to pass a law (DMCA) and implement a technology (DVD region coding) to protect their arbitrage. You'd think they'd have just relied on suing DVD importers if the law was already on their side pre-DMCA.

[anon]

Mike, what if the you bought the work (e.g., 1,000 copies of some novel) protected by copyright from Belgian Bob - who owns the rights in Belgium.

Now you sell the work (e.g., the 1,000 copies of the novel) in the US, where American Adam, who happens to be the author, owns the rights.

Is Adam out of luck?

[6]

"Mike, what if the you bought the work (e.g., 1,000 copies of some novel) protected by copyright from Belgian Bob - who owns the rights in Belgium."

How did Belgium bob get ahold of the rights in Belgium unless American Adam unwisely sold them to him?

In response to your question I will say: yes, it seems so.

An even better question is: What about countries that have no copyright laws at all? Ooooo snap.

[EG]

The first sale doctrine of 17 USC 109(a) shouldn't apply for the very reasons set out in the 9th Circuit opinion. First and most significantly, a holding that 17 USC 109(a) applies to copies of a work made abroad and then imported into the US will collide head on with the presumption against a US statute being interpreted to have an extraterritorial effect; even SCOTUS is reluctant to do that, as shown by the recent Microsoft v AT&T case. Second, the prohibition in 17 USC 602 against importation of copies made abroad would be rendered virtually nugatory. Unless you treat copyright as having no territorial borders (i.e., because of the Berne Convention), applying 17 USC 109(a) to this situation has all kinds of problem.

Even if SCOTUS goes the "borderless" route with copyright, that doesn't mean it would necessarily apply to patents. Patents are definitely territorial creatures, as the Microsoft v AT&T case again makes clear. Again, allowing a "first sale" doctrine to apply to a patented item made outside the US and then imported into the US would again collide with the presumption against territoriality, and would again make the prohibition against importation under 35 USC 271 virtually nugatory for patented items made abroad.

[anon]

6,

So we'll be asking a US court to examine both Belgian Bob's copyright and/or license (under Belgian laws) and contract (again, under Belgian law) to determine whether to invoke the FSD?

This won't be easy.

And good point re: no CR laws at all. Which expands to, as I'm sure you've noted, to "what about countries that have insufficient CR laws" or some such.

It seems to me that we could be looking at a situation, if we're not careful, where N. Korea or whoever nationalizes their own country's copyright, then sells a gazillion copies that can be freely imported into the US.

That might make some folks happy, but not authors and artists.

[breadcrumbs]

Jules,

"So Costco might say, "what if I take these Omega watches I bought, and sell them at a price lower than the price of Omega's production, thereby forcing Omega to lose profit"."

If Costco has bought the watch from Omega, presumably at the price that Omega wants to sell it, then Omega will not lose profit no matter how low Costco resells the watch.

Costco will be the one losing profit. But like you point out, getting people in the stores by selling watches at a loss may yet still end up with a net gain. This loss-leader concept is not new.

It would be new if somehow Costco could force its loss back onto its supplier.

[Just an ordinary inventor(TM)]

Dear Prof. Crouch et al.,

I’m not past your first sentence in this article yet:

“The Supreme Court has asked the Solicitor General to file a brief expressing the Obama Administration’s view on this pending international copyright exhaustion case.”

I thought Congress was responsible for IP legislation (et al. legislation).

I hope these aren’t dumb questions, but,

minimally, why isn’t the Supreme Court interested in Congressional views on this pending international copyright exhaustion case?,

and why doesn’t the Supreme Court feel up to the(ir) job without asking for views from an other branch(s) of our government?

[Jules]

breadcrumbs: "If Costco has bought the watch from Omega, presumably at the price that Omega wants to sell it, then Omega will not lose profit no matter how low Costco resells the watch."

Good point. I should have chosen my words more carefully. What I meant to say was Costco would be taking future business away from Omega.

What I really like about the watch selection at Costco is they have all kinds of watches from $50 to $5000+ all displayed next to each other. So if someone sees a $5000 Omega watch, but a $4000 watch right next to it that they like better, then Costco has just taken away even more business from Omega.

JAOI: "I hope these aren’t dumb questions"

No questions are dumb. I found those aspects of the article fascinating as well.

[TJ]

Dennis, I'm not sure you are correctly stating the issues presented. It is absolutely settled that a foreign sale exhausts a U.S. copyright.

The question being presented in the Costco case is whether the sale of a foreign *made* work is an exhaustion. Where the sale occurs is basically irrelevant.

The reason this arises is that in a prior case called Quality King, the copyright holder made the work in the United States, first sold the work in Malta, and then the infringer reimported the work from Malta to the U.S. The Supreme Court held that the foreign sale exhausted copyright. But, as above, Quality King can be distinguished on the basis that the copy was made in the United States. Thus, whether exhaustion depends on the location of manufacture remains an open question.

[Humorless Democrat]

Good points EG and TJ. The SC's Quality King decision (copyright) and the CAFC's Fuji Photo decision (patent) are consistent: a first sale of a good manufactured in the USA, even if exported abroad and the first sale is made there, exhausts the holder's rights. But a good made and sold abroad - even if made under license from the rightholder - doesn't exhaust those rights. If made abroad under license, it's made under license per the laws of the foreign country; that says nothing about waiver of the rightsholder's rights in the USA. It's this distinction that allows rightsholders to price their goods (or licenses) differently in different jurisdictions.

[M. Slonecker]

Correct me if I am mistaken, but is not Omega a Swiss watchmaker? At least that is what is imprinted on the back of mine.

BTW, I stick with authorized US distributors. Nothing quite like an international warranty that requires a product to be sent to a foreign country for warranty repair.

[Ned Heller]

Indeed, there is no world patent, so exhaustion should never apply. However, there may be an implied license to import into a country protected by patents depending upon circumstances of the sale.

In contrast, copyright is virtually universal by treaty. There may be exhaustion.

[MaxDrei]

Where a particular product is "sold" is relatively easy to fix. But where it was "made" isn't so easy (and neither is it so easy, these days, to fix wherein the world any inventions it embodies were "made"). It's even getting more difficult to decide what is "international", at least in Europe, where trade relations between Belgian Bob and French Franck are not as "international" as between either of them and American Alex. So a steer from SCOTUS seems timely.

[Lionel Hutz]

Isn't there a primary difference bwteen copyright and patent law due to international treaties?

I am not a copyright expert, but I thought any party to the international treaty agreed to treat other treaty members copyrights the same as their own. Do you even have to register them?

With patents you have to file and go through an examination process and may end up with claims of differeing scope in each country.

[MaxDrei]

In patents we have the Paris Convention. I had thought it was to put foreign patent application filing events on an equal footing with domestic ones, regardless how one defines the prior art. Isn't that so? Am I not seeing enough?

In copyright, infringement needs copying. So, why is there any need for a Register? You know what you're copying, and whether you're copying, without needing any Register, no? Different countries have different ideas about how much copying, and what sort of copying, constitutes infringement. Am I seeing too much?

[Lionel Hutz]

Max, yes, but my point was a ptent holder doesn't automatically have protection like a copyright holder. The Paris Convention puts APPLICATIONS on an equal footing, not patents.

I can't go around the world asserting my US patent. I have to obtain a patent in each country. With copyright, I believe you can essntially go around the world and assert your copyright.

When I say "go around the world" I mean to other treaty members.

[MaxDrei]

Of course Lionel. But then I recall the effect of a WO publication of a world-wide application for patent, as filed. At least in Europe, it sets up a right (Art 67(1) EPC) to compensation for infringing acts anywhere in 600 million-inhabitant EPC-land, as from the WO publication date.

Incidentally, perhaps there's something in this idea, to ease pendency. Most Applicants at the EPO are quite content when the granting stage costs don't emerge for years and years. They know their competitors are all the while nervous and intimidated by the WO, and the possibility for Applicant to amend the claims on seeing a target product. And if they do see infringement before issue, well then they get to issue PDQ, using PACE, and maybe a GBM-ABZ for good measure, to hit Infringer early, and hard.

Sorry, readers, to be once again guilty of what you call "boosterism" (but what I call, fighting my corner).

[Just an ordinary inventor(TM)]

Dear Prof. Crouch,

Re:

“The Supreme Court has asked the Solicitor General to file a brief expressing the Obama Administration’s view on this pending international copyright exhaustion case.”

Is it common for the Supreme Court to seek the view of the Executive on pending legislation?

I thought Congress was responsible for IP legislation.

I pose the following serious questions:

Minimally, why isn’t the Supreme Court interested in Congressional views on this pending international copyright exhaustion case?,

and why doesn’t the Supreme Court feel up to the(ir) job without asking for views from an other branch(s) of our government?

[3Pac10]

I guess I was sleeping that day in Copyright class, but could someone explain how you get a copyright on a watch?

[Robert]

Ordinary Inventor: SCOTUS frequently asks for the Executive's views on cases that touch on issues that fall within the executive branch's purview. One such issue is international trade.

Others: US law can have extraterritorial effect if the non-US conduct is intended to affect commerce in the US. Judge Hand pointed this out in the Alcoa case. Furthermore, the law is clear that one can also be liable for induced infringement under 271(b), even if the acts that give rise to the inducement occur entirely outside of the US.

The two CAFC disposable cases are simply wrong. There is simply no way to square those cases with Keeler Folding Bed and the 2d Circuit's Curtiss Aeroplane case. It's still amazing to me that the CAFC could overrule 200 years of jurisprudence on exhaustion without even citing any relevant case law. (The cite to Boesch is wrong, as the CAFC completely distorts the holding of Boesch.)

[Chaon]

3Pac10, Omega engraved the watches with a small emblem and registered the emblem with the copyright office.

[EG]

"Others: US law can have extraterritorial effect if the non-US conduct is intended to affect commerce in the US."

Robert,

I didn't say US can't have extraterritorial effect. I said there's a presumption against extraterritorial effect. As SCOTUS said in Microsoft v AT&T, Congress must clearly express the intent that the statute have extraterritorial effect. I'm not sure Congress expressed that intent with regard 17 USC 109(a).

If I recall correctly, Alcoa is an anti-trust. That's a whole different animal when it comes to extraterritorial effect.

Your correct that courts outside the Federal Circuit have held that inducing activities under 271(b) can occur wholly outside the US. But the Federal Circuit's view on whether 271(b) applies to inducing activities occurring wholly outside the US is unclear from MEMC Electronic Materials, Inc. v. Mitsubishi Materials Silicon
Corp. which is their latest pronouncement on that issue.