Supreme Indecision: Costco v. Omega Gums up the (Watch)Works

By Ethan Ackerman

In coming to a 4-4 procedural tie that defaults to upholding the ruling below, the Supreme Court let stand a 9th Circuit opinion territorially limiting the first sale defense’s applicability to domestically made goods. While still not an actual, controlling opinion from the Supreme Court, this default outcome lets the 9th Circuit opinion remain as controlling precedent there and exhausts any appeals for Costco and Omega in this case. It also leaves the 2nd Circuit with no real guidance in deciding the same issue itself in the pending textbook importation appeal.

The issue of “grey market” importation and reimportation is heavily controlled by the degree to which such importations are prohibited or permitted by the various types of IP protection. Trademarks, copyrights, and patents all have slightly different statutes, court cases, and even federal regulations controlling the contours of when they can be used to block unauthorized reimportation. Generally, each doctrine’s laws prohibit unauthorized importation, but also have controlling “first sale” exceptions in those laws. Important and intelligent people think about the scope of those exceptions a lot, and do excellent scholarship on those doctrines as well. Unhelpfully, those boundary lines don’t even match up from one area of protection to the others, resulting in a reimportation that may be illegal or legal depending on whether the work bears a trademark, or whether it is covered by a patent, or both.

Copyright law, over the whining and screaming of a protectionist Congress and the U.S. government, was kicked towards greater market openness by the 1998 Supreme Court decision in Quality King v. L’Anza, where the Supreme Court (re)imposed the first sale doctrine of Section 109 on Section 602′s near-prohibition on grey market re-imports.

Faced now with the slightly different factual circumstances of a grey market import (rather than re-import) the 9th Circuit in Omega v. Costco slunk back to its pre-Quality King precedents and held that the limitation in Section 109 applying the section only to “works lawfully made under this title” meant ‘works lawfully made in the United States.’ To hold otherwise, the 9th Circuit implied, would be to impermissibly extend the reach of U.S. copyright law extraterritorially. Embarrassingly for the 9th Circuit, Costco and the U.S. Solicitor General both (politely) mocked such ideas in their briefs before the Supreme Court, with the Solicitor demurely stating that “the court of appeals appears to have overstated the matter.” This author would demurely state that analyzing overseas conduct to determine compliance with the conditions of section 109 is no more an “extraterritorial application of the Copyright Act” than analyzing overseas conduct to determine compliance with the conditions of section 104 is.

With the looming prospect of control-seeking (and rationally price maximizing) manufacturers rushing to manufacture goods abroad to achieve an important control they would lose if they manufactured domestically, U.S. retailers and foreign manufacturers rushed to the Court with a considerable number of opposing and supporting amicus briefs. IP public interest groups like the EFF and Public Knowledge also weighed in, highlighting the statutory and precedential inconsistency in the 9th Circuit decision and emphasizing the absurd outcomes that would follow if the decision were upheld.

In response to Costco’s petition to the Supreme Court, then-Solicitor General and now Supreme Court Justice Elena Kagan made an argument for the government in 2009 that ultimately precluded her participation in this case and resulted in the 4-4 procedural default. What was the government’s argument this time anyway? In Quality King, the government had argued that Section 602 trumped 109, which it asserted was not applicable in any cases of imported works. As Solicitor General Kagan’s brief delicately acknowledged, “The Court rejected that contention” in Quality King. This time around, the government again argued in favor of the continued applicability of 602 over 109, on the (somewhat narrower) theory that 109 isn’t applicable to this case of imported works. When the Supreme Court held in Quality King that the location of first sale didn’t matter, the Solicitor now responds in Costco that maybe the location of first manufacture does. [author's note - This is actually a great example of one of the canons of Supreme Court argument construction in action - if the Court rejects your broad theory, adopt a narrower one that still applies in your case.]

To see how much is riding on Justice (not Solicitor) Kagan’s opinion in the future, and just what not having it here means for the law in this area going forward, Public Knowledge’s Anjali Bhat does an excellent backgrounder on the case and its impacts.

[Eric's note: Venkat and I soon will blog the MDY v. Blizzard case, which further compounds some of our confusion on these topics.]