Costco v. Omega and the Evolution of the First Sale Doctrine

(Photo by: B. Tse)

The First Sale Doctrine, without many people being aware of it, is one of the most prevalent and applicable sections of U.S. copyright law. The First Sale Doctrine, found in 17 U.S.C. § 109(a) of the 1976 U.S. Copyright Act, provides that “[t]he owner of a particular copy or phonorecord 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 or phonorecord.”

The application of the First Sale Doctrine affects our daily lives in fundamental ways, yet most people benefit from the doctrine without actually knowing what it is. For example, anyone engaged in buying or selling books on Amazon, or anyone attempting to find a new home for a vintage sports jersey on eBay, or anyone marketing a painting on Etsy can with relatively few constraints. Typically, the book, jersey or painting is sold, and while the host site may take a small commission, the seller reaps the monetary windfall. But, it should be known that without the First Sale Doctrine, a percentage of the sale of personal property, provided it is a copyrighted work, would have to go to the copyright owner. Still, most of us simply assume that we can discard personal property in any manner we see fit, yet without the First Sale Doctrine, our concept of personal property would drastically change. The ability to control, get rid of, or determine the fate of the objects you own seems fundamental, yet, without the First Sale Doctrine, controlling personal property would be subject to several limitations.

While it is easy to see how the First Sale Doctrine operates to protect buyers and sellers in the secondary market, the U.S. Supreme Court is currently hearing oral arguments by the Costco Corporation and the Omega watch-making company to determine whether the First Sale Doctrine applies to situations where goods manufactured internationally are sold on the gray market in the U.S. In Costco, Omega manufactured watches in Switzerland, and then sold them to Latin American dealers. The watches then were sold, through back channels, to the Costco corporation, who sold the watches below retail price, thus undercutting the price at which Omega typically sold their watches in the U.S.

The most relevant case law is Quality King Distribs., Inc. v. L’Anza Research Int’l, 523 U.S. 135 (1998), where the Court held that if works manufactured in the U.S. are exported internationally and are then imported back to the U.S., the buyer/importer is permitted to distribute the works at will, and the copyright holder’s rights (i.e., L’Anza’s) are not infringed. Despite this more recent development, however, the inception of the First Sale Doctrine is found in the 1908 case of Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), where the court held that copyright owners may not limit the sale or distribution of their works after their initial sale.

Costco adds more complications to the issue presented, mostly because it deals with works manufactured abroad. It will be determined, when the Court issues their opinion, whether the same rule of law will apply as was applied in Quality King. The current need is for a First Sale Doctrine that effectively governs the prevalence of the international manufacturing, import and export markets. The Court may either expand on Bobbs-Merrill — a case whose outcome predates our current global economy — or find that the Bobbs-Merrill Rule (while keeping Quality King in mind) is still applicable. In Quality King, the Court seemingly promoted a free market economy and a looser interpretation of the First Sale Doctrine. Yet, at the same time, it also approved of a system whereby U.S. companies are undercut in U.S. sales. Now, whether that promotes U.S. manufacturing and discourages international sales in the first place remains to be seen in Costco.

Perhaps the Court, in Quality King, was attempting to encourage U.S. companies to manufacture and sell their goods within the U.S. to benefit the American market. But, in the case of internationally manufactured goods, will the court find in favor of Costco and the argument that the American market is made stronger when goods are made more cheaply and readily available? This is why Quality King is somewhat perplexing; if the Court wanted to encourage U.S. manufacturing to compete with the European market and instead sell their goods in the U.S. in order to prevent gray market sales, why did they make it harder for L’Anza, an American company to make their goods available to a ready global market? Surely, allowing L’Anza to have more control over subsequent sales of their goods would have made them a stronger and more financially stable company, and it might follow that encouraging international sales could result in a surge of productivity by L’Anza and other similar companies.

The reasoning is by no means linear, and the effects of Quality King are neither straightforward nor fully realized. Therefore the Court’s consideration of the economic and legal ramifications of either extending or denying application of the First Sale Doctrine to grey market sales in the U.S. of internationally manufactured goods has the potential to shore up the limits of the doctrine itself. At present, the doctrine is pretty elastic; the statute itself is not specific, and seemingly embraces a policy of “you buy it, you own it.” The Court has the opportunity in Costco to place constraints on this aspect of the First Sale Doctrine, and it remains to be seen how the Court believes the doctrine should function in an undeniably global economy.