Do Copyrighted Goods Have To Be Manufactured In The U.S. To Provide the Seller with the Protection of The “First Sale Doctrine”?

One of the exclusive rights belonging to a copyright holder is the ability to control or change the ownership of a given work. However, the “doctrine of first sale” – which is codified in the U.S. Copyright Act – imposes a limitation on how long the copyright holder can control the distribution rights of the work. 17 U.S.C. § 109(a). In other words, the doctrine of first sale means that the distribution rights of a copyright holder end once that work has been lawfully transferred to some other party.

But do works have to be manufactured in the United States in order to implicate the first sale doctrine? That question was considered by the United States Court of Appeals for the Ninth Circuit in 2008. Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008).

Omega was a watch manufacturer based in Switzerland that sold its product around the globe. “Omega Globe Design” was engraved on the underside of each watch. The mark was copyrighted in the United States. Omega sold its watches to authorized distributors in other countries. Third parties bought the watches and sold them to ENE Limited (“ENE”), a New York company. Costco then bought the watches from ENE and sold them to its customers in California. Though Omega had authorized the initial sale to foreign distributors, it did not authorize the watches being imported into the United States or the sale of the watches by American companies.

Omega said that Costco obtained the watches through the “gray market.” In doing so, Omega claimed that Costco infringed on its copyright. Costco filed a cross-motion. Its argument was that, under the first sale doctrine, the initial sale of Omega watches to foreign distributors precluded any claim of copyright infringement in connection with subsequent, unauthorized sales. A lower court ruled in favor of Costco. Omega appealed.

In considering the appeal, the Omega Court considered three specific sections of the Copyright Act. Section 602(a) states that “[i]mportation into the United States … of [a copyrighted] work that [has] been acquired outside the United States [without consent of the copyright holder or its representative] is an infringement of the exclusive right to distribute copies…under section 106, actionable under section 501.” Id. at 602(a). In other words, copyright owners possess the exclusive right to import and distribute copies of their copyrighted work to the public by sale or some other transfer of ownership. See Id. sections 107 through 122.

At first blush, this appears to contradict the “first sale doctrine” under section 109(a) of the same statute. That doctrine states that once a copyrighted item is sold, the new owner “of a particular copy…lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” Id. 109(a).

The Court was asked to determine how to reconcile these two legal concepts. In making its decision, the lower court focused on whether the goods were manufactured in the United States. It referred to the U.S. Supreme Court decision in Quality King Distributors, Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998) allowed the sale of goods manufactured in the United States. However, , unlike in Quality King, the products at issue in Omega were not manufactured in the United States.

Thus, the Court determined that the first sale doctrine did not apply to the sale of Omega watches to foreign distributors of foreign manufactured goods. The Court interpreted Section 109(a)’s reference to works “lawfully made under this title” to mean works that are actually made in the United States. Because Omega’s watches were made outside of the United States – and thus not “lawfully made under this title” – the Court held that the first sale doctrine did not apply.

“[T]he application of Section 109(a) to foreign-made copies would impermissibly apply the Copyright Act extraterritorially in a way that the application of the statute after foreign sales does not,” the Court held. Id. The Court determined that to treat the goods in Omega the same as the goods in Quality King “would mean that a copyright owner’s foreign manufacturing constitutes lawful reproduction under…Section 106(1) even though the statute does not clearly provide for extraterritorial application.” Id.

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