Costco v. Omega

For a couple of years now, I've taken the position on this blog that the U.S. copyright laws are antiquated and need to be overhauled.

I believe a case coming before the Supreme Court this fall will further support that position.

The Court has agreed to hear the case of Costco Wholesale v. Omega, S.A. in the upcoming session. Although this case involves Omega watches, it could have huge implications for both the publishing industry and U.S. labor market.

The case involves what is known as the "first-sale doctrine," sometimes called the "first sale rule" or "exhaustion rule."

The first-sale doctrine addresses whether the copyright holder can dictate what happens to a product once s/he has sold it. The rule was first established by the Supreme Court on June 1, 1908 in the case of Bobbs-Merrill Company v. Isidor Straus and Nathan Straus DBA R.H. Macy & Company. You can read the full text of the decision here on FindLaw, but I'll summarize it.

Bobbs-Merrill Publishing Company sold Hallie Erminie Rives' novel The Castaway with a notice inside it saying: "The price of this book at retail is $1 net. No dealer is licensed to sell it at a less price, and a sale at a less price will be treated as an infringement of the copyright."

Disregarding that notice, R.H. Macy & Company bought a supply of the novel (paying $1 for 10% of them and 60 cents for the remaining 90%) and sold them all for 89 cents a copy. Bobbs-Merrill sued and the case went all the way to the Supreme Court.

The Supreme Court in its decision said:

... one who has sold a copyrighted article, without restriction, has parted with all right to control the sale of it. The purchaser of a book, once sold by authority of the owner of the copyright, may sell it again, although he could not publish a new edition of it.

Notice that the Court said this only applies when the copyright holder has sold the article without restriction. If the copyright holder has a contract with the buyer wherein the buyer agrees to restrictions or if the copyright holder licenses the article, then restrictions may be applied.

This decision came to be called the first-sale doctrine.

Now let's flash forward to the Costco v. Omega case. This involves arbitrage, a term I learned when working for the stock brokerage house Smith Barney. Wikipedia defines arbitrage as:

the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

I'm sure you've heard of the practice by pharmaceutical companies of selling their drugs for different prices in different countries. Where a drug might be priced to sell for a very low price in Africa or Latin America, it could be priced much higher in the United States.

Many manufacturers engage in this geographical price discrimination. And, as a result, lots of distributors take advantage of this practice by buying a product in one country for a low price and selling it in another country at a profit. This is frequently called the "grey market" to distinguish it from the "black market." In the black market, goods are obtained illegally and resold. In the grey market, goods are obtained legally--although often unofficially--and resold. According to the Seattle Times here, this secondary market "represents $58 billion in products for the technology industry alone, which loses up to $10 billion a year in profits from it ..."

That brings us to the Costco v. Omega case. According to LexisNexis here:

The case originated when the Costco retail chain acquired genuine Swiss-produced Omega watches from foreign distributors and re-sold them in its US stores at below-market prices.

Note that these were watches manufactured overseas in Switzerland.

The Wall Street Journal picked up the story from that point here:

[Omega] couldn't complain that Costco was peddling fakes--the watches were authentic goods. Nor did U.S. trademark law give the Swiss company the power it needed to block the sales. And so Omega crafted a copyright strategy. They fashioned a small globe logo and copyrighted the device in the U.S. By engraving the tiny logo on the back of the watch, Omega could claim that it created a copyright in the watch as a whole, one that would give the company more control over when and where the watches are sold.

Omega eventually sued Costco, saying that the U.S. Copyright Act of 1976 prohibits importing copyrighted works without the copyright owner's permission. The Ninth Circuit Court of Appeals in San Francisco agreed with them. Costco appealed the case to the Supreme Court, saying the first-sale doctrine should apply to goods manufactured overseas as well as to goods manufactured in the U.S.

Now we get to the part that interests me. First of all, it's important to note that the decision in favor of Omega came out of the "Nutty Ninth" as that appeals court is sometimes called. In an article on April 23 of this year here, the New York Times reported:

Those who criticize the [Ninth Circuit] court say the best evidence for their argument is the Supreme Court, which overturns the decisions of the Ninth more often than those of any other circuit. According to the Administrative Office of the United States Courts in Washington, the Supreme Court reversed the Ninth 14 times of the 16 cases in the 2008-2009 term — an 88 percent reversal rate.

My first reaction to reading about the Costco v. Omega case was that a Supreme Court ruling in favor of Omega would only give more encouragement to U.S. manufacturers to move their plants overseas in order to evade the first-sale doctrine. Turns out that two groups who rarely agree with each other are both siding with me on this. The Electronic Frontier Foundation filing a brief as a friend-of-the-court said here:

This case threatens the ability of consumers and businesses alike to control and dispose of all lawfully acquired goods that contain a copyrighted work made outside the United States. In an increasingly interconnected world, where the manufacturing of tangible products and knowledge goods can be distributed easily and widely, consumers should be confident that they retain the same rights to their belongings regardless of where those goods or their labeling were produced.

And the Wall Street Journal was even more specific in its article:

Constrain the first-sale doctrine and you throw a wrench into the business of used-book stores, garage sales (including the electronic garage sale that is eBay), and any and every sort of secondhand shop. And yes, even public libraries might find themselves facing the challenge of figuring out which books on the stacks were first sold in the U.S., and which were first sold abroad.

Stay tuned ...