Supreme Court Hears Arguments in Costco Copyright Case

Image take from Costco's brief, showing the copyrighted Omega Globe in question in perspective.

Yesterday the United States Supreme Court heard oral arguments in the case of Costco Wholesale Corporation v. Omega S.A.  The case is a copyright dispute that adds one layer of additional facts not considered by the Supreme Court in their 1998 ruling in Quality King Distribs., Inc. v. L’anza Research Int’l, Inc.

The dispute arose because Omega, S.A., sought to prevent the petitioner, Costco Wholesale Corporation, from reselling genuine watches originally sold by Omega to authorized foreign distributors. Omega, a Swiss company that manufactures watches in Switzerland, did not authorize the importation of the watches by Costco, despite the fact that Costco legally purchased the watches abroad. Thus, the question in this case will be whether copyrighted materials made abroad and legally purchased abroad can be imported without the express permission of the copyright owner. In other words, does the first sale doctrine extinguish the rights of the copyright holder when the goods are made abroad and sold abroad.

The United States Court of Appeals for the Ninth Circuit upheld Omega’s interpretation of the U.S. Copyright Act, holding that the Act grants U.S. copyright holders complete control over the resale, redistribution and importation into the United States of any copyrighted works they manufacture abroad, even after the holder sells those works to others.   See  Omega S.A. v. Costco Wholesale Corporation (9th Cir. 2008).  The Ninth Circuit found the first sale doctrine inapplicable, which seems to conflict the with Supreme Court’s holding in Quality King, which held that the first sale doctrine is applicable to imported copies. Specifically, The Supreme Court explained in Quality King:

The owner of goods lawfully made under the Act is entitled to the protection of the first sale doctrine in an action in a United States court even if the first sale occurred abroad. Such protection does not require the extraterritorial application of the Act.

Thus, much of the argument was devoted to determining the meaning of the phrase “lawfully made under this Title.” Furthermore, and perhaps as a tangent to the real question of interpreting the aforementioned phrase, considerable time was spent on exactly when does U.S. copyright law attach to the creation of goods made abroad. In its brief Omega explained:

The Copyright Act does not grant a copyright owner the right to reproduce copies outside the United States; Omega’s right to reproduce copies of its work in Switzerland is governed by Swiss law, not U.S. law. Nor did Omega exercise any of the exclusive rights granted under the Copyright Act by selling the copies abroad for distribution outside the United States.

Of course, what this position misses is the fact that Omega did attache a tiny symbol that indicated that it registered the watches under the Copyright Act, which obviously was intended to derive the benefits of U.S. copyright laws, most likely to attempt to prevent the very importation that happened here in this case.

Arguing on behalf of the Petitioner, Costco, was Roy Englert, who was up first. He started his presentation by explaining that this case is exceptionally similar to Quality King v. L’anza, with only one difference. He explained:

This case is a repeat of Quality King v. L’anza with only one pertinent difference. Both cases involve goods not authorized for importation into the United States. Both cases involve arguments that the first sale doctrine must be narrowly construed, thus the Copyright Act’s importation ban, section 602(a), be given less than its supposedly intended scope. The only difference is place of manufacture of the goods. Quality King involved U.S. manufactured goods; this case involves goods made in Switzerland.

After this it will be extraordinarily difficult for any observer to follow along with the questions and answers between the Court and Mr. Englert. Any fair reading of the questions asked of him can easily demonstrate that they were as clear as mud, particularly with respect to Justice Breyer. Justice Breyer always likes to ask long winded questions full of hypotheticals, but with his false starts, stops and changes of direction I can’t imagine anyone really understood what the question was or what the answer was pertaining to. The exchanges with Justice Sotomayor were likewise confusing, and other Justices, such as Justices Kennedy and Scalia would jump in mid-stream and further create a horribly disjointed record.

Having said this, what seemed clear was that Justice Scalia was not buying Mr. Englert’s argument. The following exchange demonstrates that, as well as exactly how the disjointed nature of the back and forth was complicating any real understanding of the questions and answers.

JUSTICE SCALIA: Where do you get that in the text? I mean, that’s lovely, and you’re saying that what Justice Breyer suggests makes perfect sense except for dictum and legislative history. Does your position make any sense with regard to text?

MR. ENGLERT: Yes, absolutely, Your Honor.

JUSTICE SCALIA: Where? Where is that limitation in the text?

MR. ENGLERT: The other side’s effort to read 602 broadly has no support in the text after Quality King, but -­

JUSTICE SCALIA: I’m talking about your -­

MR. ENGLERT: I understand.

JUSTICE SCALIA: — your limitation on exclusive rights abroad versus nonexclusive rights abroad. Where can you possibly find that in the text?

MR. ENGLERT: You cannot.

JUSTICE SCALIA: Oh. Well, that’s the end of it for me.

MR. ENGLERT: Let us -­

JUSTICE BREYER: I have to say, I didn’t even see it in the legislative history. I didn’t think they made a big deal about jobbers. I like history here. Go back to 1792.

JUSTICE GINSBURG: Mr. Englert, also talk about what, if anything, 602(a)(1) does, then. It seems 602(a)(2) is dealing with infringing goods, with pirated goods. So given the first sale doctrine as you construe it, what does 602(a)(1) protect?

As you can see, Englert’s argument in chief seemed more like 9 on 1. It was hard to imagine he was scoring any points at all, and it seems that he definitely lost Justice Scalia, at least until the others started arguing.  When those who followed Mr. Englert took their turn it became clear that their arguments found no support in the text either, required a tortured belief that Congress intended to provided favored status to goods manufactured outside the United States and were based on a legislative history that consisted of witness statements and no statements whatsoever by Members of Congress.  The last point regarding legislative history prompted Justice Breyer to point out that even he would draw the line when trying to figure out what Congress meant without any statements by Members of Congress, which lead to laughter in the gallery.  Justice Scalia quickly quipped: “Let me write that down,” which lead to further laughter.

After the very hot Supreme Court peppered Mr. Englert throughout, it was next time for Attorney Aaron Panner, who argued on behalf of the Respondent Omega S.A. Omega’s argument could probably be best summarized by the following explanation, which occurred in an exchange with Justice Scalia:

all that happened here is that the copies were manufactured in Switzerland and sold in Switzerland for distribution abroad. That does not implicate U.S. copyright law at all. U.S. copyright law provides the copyright owner with certain rights to exclude. It has no right to exclude the making of a copy, whatever you want to say the making means, in Switzerland. And it is for that reason that the Ninth Circuit correctly determined that the copies at issue here were not lawfully made under this title.

This exchange lead to Justice Scalia continuing to probe whether the work could be lawfully made under the Copyright Act even if it were made abroad. This lead to the following exchange:

MR. PANNER: If it were made, for example, pursuant to a license that allowed for distribution in the United States, there would be an affirmative exercise of the exclusive right that the copyright holder has under section 106(3) with respect to that particular copy. And so it makes perfect sense to say that that copy is lawfully made under this title, because you need to look to U.S. law to determine whether the making of that copy — even though it took place overseas, for example — was governed by — was lawful as determined by the rights that are granted -­

JUSTICE SCALIA: Is isn’t the making that is rendered lawful. It’s the importation into the United States that is rendered lawful by the agreement that you are relying upon.

MR. PANNER: Well, Your Honor, the — the making — the question is whether it was lawfully made under this title. If it was made for distribution in the United States, it could only be lawfully made for distribution in the United States if the appropriate rights were granted by the owner of those rights.

Panner ended his argument by explaining:

It’s hornbook law that — that the first sale doctrine does not provide a defense in circumstances where a — a — a copyrighted article is manufactured or reproduced abroad.

Finally, the position of the United States government, acting as amicus curiae, was presented orally by Deputy Solicitor General Malcolm Stewart. Right out of the gate Stewart explained the government position by saying:

[B]ecause the Copyright Act doesn’t apply abroad, in order for a copy to be made subject to Title 17, it would have to be created in the United States.

Anticipating that Justice Scalia, based on his earlier questions, would have a problem with this meaning because if that is what it means why didn’t Congress just say “lawfully made in the United States” rather than “lawfully made under this Title,” Stewart went on to explain:

I think our interpretation of the statute still gives it a slightly different meaning from the alternative “lawfully made in the United States,” because at least in theory, it would be possible for the creation of a copy to entail a violation of environmental laws, workplace safety laws, minimum wage laws, et cetera. And it wouldn’t be accurate to characterize a copy made in that way as lawfully made in the United States, but it would be made — it would be lawfully made under this title, because it would be made subject to and in a manner consistent with the requirements of the Copyright Act.

What troubled the Justices throughout, particularly Justice Alito, was the proffered simplistic definition of “lawfully made under this Title” being interpreted as “lawfully made in the United States” would mean that Congress intended to grand favored status to those things manufactured abroad, which simply makes no sense. In this regard the following exchange between Justice Alito and Mr. Stewart are illustrative of the concerns of the Court:

JUSTICE ALITO: Well, what is your answer to the argument that if “lawfully made under this title” means basically made in the United States, that provides a great incentive to manufacture goods abroad and that can’t possibly be what Congress intended?

MR. STEWART: Well, I think there are — I think we would say a couple of things. The question has been raised whether this gives favored status to a foreign manufactured goods. And in one sense our reading — from — from the perspective of the copyright owner, it’s true, that this creates something of potential incentive to manufacture abroad.

Perhaps as alarming as the United States government advocating a position that they know will give incentive to manufacture abroad is the fact that when such manufacture is accomplished abroad the Department of Justice does not believe there are any first sale doctrine protections upon importation into the United States and the seller could place whatever conditions they want on downstream use. On this point Mr. Stewart explained:

I do also want to address the question of what happens in the circumstance where Omega manufactures watches abroad, but then voluntarily imports them into the United States, sells them here; can it place restrictions on resale because I think it’s an important policy question and here again we get to the same point in the end as the Respondents do, but we have a somewhat different textual route to get there.

Our view is that in that circumstance section 109(a) still would not apply, because even though the goods were imported into the United States, they were made abroad, and that’s what counts for determining whether they were lawfully made under this title. But section 109(a) is simply a safe harbor. It doesn’t prohibit anything. Section 109(a) says if your conduct falls within these contours then what you are doing is legal, whether or not it would otherwise violate the copyright act.

Later, Justice Breyer cited the amicus brief filed by the American Intellectual Property Law Association with respect to the roots of the first sale doctrine. Justice Breyer explained: “my guess is that the first sale doctrine applies just as much to goods that come from abroad as to goods that are here at home.” Which seems to me to be the only reasonable interpretation, and a point that was not at all adequately addressed by Mr. Stewart. In fairness to Mr. Stewart, this observation of Justice Breyer did come at the end of a somewhat long and not very obvious question, but it hung unaddressed.

The rebuttal of Mr. Englert seemed far more persuasive, perhaps because he was allowed to make his case without interruption. Englert explained the flaw in the Respondent’s and Government’s position by pointing out:

In the briefs in this case you will not find anyone making any policy argument as to what Congress could have had in mind to favor foreign-manufactured goods.

He went on to later explain:

So what does the House report on section 109 tell us? It tells us that lawfully made under this title was intended to expand the category of covered works beyond just those made by the copyright owner, or with the authorization of the copyright owner. But under Omega’s and the government’s position, that phrase is used to contract the scope of the first sale doctrine in derogation of the common law, imposing a restraint on alienation for foreign-made goods that is not imposed on U.S.-made goods.

With respect to the policy incentives that it creates it’s undeniable that it creates an incentive for outsourcing of manufacture. The government admitted that in its cert stage brief, and again, in its brief in this Court. Obviously if Congress wants to create an incentive for outsourcing, that’s probably within its power as long as it can be said somehow to advance science and the useful arts; but there is simply not a shred of evidence in text or legislative history that Congress intended to encourage outsourcing; quite the contrary…

[W]e know that the 1976 Congress wanted to favor the domestic printing industry, not to disfavor it; and yet their interpretation of 602 and 109 would disfavor domestic printing industry and any domestic manufacturing industry.

Assuming Mr. Englert’s articulation of what the 1976 Congress intended to do is accurate, this should spell defeat for Omega despite having amicus assistance from the Department of Justice.

Handicapping the Supreme Court is always difficult, and based on this oral argument transcript it will be exceptionally difficult this time.  It seemed that the Supreme Court did not like Costco’s position, at least until it heard the positions Omega, and that of the U.S. federal government.  In reading the oral argument transcript by the end of Omega’s presentation I was leaning toward Costco, and by the end of the U.S. government position I had decided that Costco must win this case, but I don’t have a vote.  The cloistered Justices likely won’t issue a decision for months, so let the speculation begin.

I will observer, however, that the position offered by the United States seems extreme, and it seems to conflict with what the Supreme Court ruled in Quality King.  To say that foreign manufactured goods are afforded more rights than U.S. manufactured goods seems absurd on its face, particularly when trying to figure out what Congress meant by the text of the relevant statutes.  It seems bizarre to have the Department of Justice argue that a copyright owner can circumvent first sale protections simply because the goods were manufactured outside the United States.  Eroding the rights of U.S. citizens and U.S. corporations because something was manufactured outside the United States simply cannot be the law, and it shouldn’t be the articulated position of the United States government.  If it were the law then soon there would be no first sale rights and copyright owners could control downstream uses and sales of copyrighted goods without consequence.

In a world where virtually everything is made abroad no first sale rights for goods manufactured abroad is bad policy and bad law.  So either the Supreme Court does the reasonable thing — never a guarantee — or we will need Congress to step up to the plate and overrule the Court.

For more information see:

• Supreme Court Oral Argument Transcript
• Briefs filed by the Parties and Amicus Briefs
• 17 USC 109 (re: first sale doctrine)
• Chapter 6 of Title 17 of the US Code (re: importation)
• Costco v. Omega: Parallel Importation And Its Implications