Ominous Copyright Ruling Stands

The right to resell is undermined.
by Wendy McElroy
The Freeman
Dec. 21, 2010

A stunning but little-noticed Supreme Court ruling signals that the face of business and the boundaries of ownership could soon change dramatically. The December 13 ruling in Costco Wholesale Corp. v. Omega S.A. is little-noticed because as a 4-to-4 decision, with one Justice recused, it merely affirmed a lower-court decision without setting a national precedent. What it signals is how all but one Justice would rule on the “first-sale” doctrine within copyright law.

Omega is a Swiss watch manufacturer. Costco is an American retailer known for selling brand-name goods at deep discount. Its business model includes the common arbitrage practice of “parallel importation” by which a commodity selling more cheaply abroad than domestically is imported and marked up by an unauthorized seller. A New York-based supplier imported Omega watches and resold them to Costco. Although each step of acquisition was legal, Omega sued because Costco was not “authorized” to distribute its copyrighted logo.

The suit challenged the legal doctrine of “first-sale,” recognized in 1908 by the Supreme Court in Bobbs-Merrill Co. v. Straus and codified in the Copyright Act of 1976. Under this doctrine the buyer of a copyrighted work can dispose of it without permission of the copyright holder. For example, you can sell used books without permission from authors or publishers. Because there is a low threshold for copyright registration, first-sale applies to a vast array of products, from breakfast cereals to kitchen appliances, from beauty aids to vitamins. It also applies to foreign parts used in assembling otherwise American goods.

In February 2007 a federal district court in California granted Costco’s motion for summary judgment vacating Omega’s preliminary injunction. Omega appealed to the Ninth Circuit Court, where a three-judge panel reversed the lower court and ruled that the first-sale defense applies only to items made and distributed within the United States and not to foreign goods. This is the ruling the Supreme Court affirmed. Costco now returns to the lower courts where the case has been remanded for further proceedings.

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