Monday’s oral argument in Costco v. Omega featured a Court thinking out loud about what role of copyright law should play in regulating the import of copyrighted goods that have been manufactured with the permission of the copyright owner in another country and then re-sold as "gray-market" goods in the United States.     The Supreme Court in Quality King v. L'Anza (1998) had previously determined that the first-sale doctrine, which is codified in Section 109 of the Copyright Act and which "provides that the owner of a particular copy or phonorecord lawfully made under this title . . . can sell or otherwise dispose of the possession of that copy or phonorecord" could be applied to "round-trip" works — that is, goods that had been previously manufactured in the United States, sold in another country, and then re-imported into the United States.

The factual circumstances in Costco differed in one key respect from Quality King in that the goods were manufactured and distributed entirely in a foreign country (here, Switzerland) and then imported into the United States.    The Court seemed to be pre-occupied with two issues through the oral argument:  the meaning of the term "lawfully made"; and the relationship between Section 109 and Section 602(a)(2) of the Copyright Act, which provides that "importation into the United States or exportation from the United States, without the authority of the owner of copyright under this title, of copies or phonorecords . . . is an infringement of the exclusive right to distribute copies or phonorecords."   No argument exists that, under Section 602(a)(2), that the first-sale doctrine would not apply to imported copyrighted works that had been manufactured without the authority of a copyrighted owner; less clear is what happens if the copyrighted works were created abroad under the authority of the copyrighted owner, but then re-imported without permission of the copyrighted owner in the United States.

Roy T. Englert, Jr., representing Costco, argued that Costco was a "repeat" of Qaulity King, in that both involved "goods not authorized for importation" and a claim that "the first-sale doctrine must narrowly construed" to limit the scope of Section 602(a).      Before Englert could address the meaning of "lawfully made" under Section 109, however, Justice Sotomayor quickly jumped in to note that Costco's briefs had offered inconsistent definitions of the term, observing that Costco's main brief suggested that "lawfully made" meant "anything that was made with Omega's consent or authority" while its reply brief suggested that the first-sale doctrine applied only when the copyrighted owner had provided for non-exclusive distribution of the copyrighted work.    After Englert replied that the narrower reading was suggested by the legislative history, as well as the reading of the same provision in Quality King, which implied that Section 602(a)(2) applied when an author gives exclusive territorial rights to a American and British publisher, and the British publisher imported a copy into the United States (thus, perhaps, acting without the authorization of the copyright owner), Justice Breyer suggested that this qualified reading was not necessary.   According to Breyer, it appears that the first-sale doctrine has always applied where "there was a transfer or sale" and thus, the first-sale doctrine might apply even under those circumstances.  While Justice Kennedy seemed to support this qualified reading, Justice Scalia appeared skeptical, noting that it did not appear to have any textual support for a limit in those instances where exclusive rights existed abroad.

Justice Ginsburg, alluding to her concurrence in Quality King, which would have limited its scope to "round-trip" goods, then asked Englert to address how his construction of the first-sale doctrine would distinguish Section 602(a)(2) from Section 602(a)(1).   Englert emphasized that Secton 602(a)(2) added exports, as well as providing a private cause of action that did not exist within the context of Section 602(a)(1).    Justice Ginsburg would return to this point, as she later asked how Section 602(a) co-existed with the first sale doctrine, with a particular focus on its extra-territorial application.    Englert contended that these concerns over extraterritoriality were not warranted, as the treatises relied on the dictum in Justice Ginsburg's concurrence that related to limits on the place of manufacture.

Englert next turned to the definition of "lawfully made" under Section 109, which he contended meant "lawfully made according to the standards of the U.S. Copyright Act anywhere in the world."     Such a reading, he claimed, was intended to act as a choice-of-law provision.    Justice Scalia used this opportunity to return to his claim that a textual reading of Section 109 did not support a distinction between exclusive and non-exclusive rights, and he reiterated his skepticism of that particular reading in the legislative history.    Justice Breyer expressed skepticism as to the support of the qualified reading in the legislative history.  Indeed, in a moment that prompted some laughter, Justice Breyer stated that "[e]ven I draw the line somewhere" in terms of the use of legislative history; Justice Scalia responded:  "[l]et me write that down."

Aaron M. Panner, arguing on behalf of Omega, faced considerable skepticism on the part of the Justices with regard to his claim that copies were not "lawfully made" in the United States because copies made abroad were "not subject to or governed by U.S. copyright law."    In response to prompting by Justice Alito, Panner suggested a broad reading of "made" that included the "creation of the physical copy," as well as the "addition of intellectual property rights that would permit distribution in the United States."    Although Justice Alito expressed guarded support for the first element of Panner's claim, he expressed skepticism as to the second element, noting that such a reading was not supported by the text.   Justice Kennedy then offered an alternative reading of "made" — namely, the first time that the copyright law of the United States would apply in any given circumstances.      Panner agreed with Justice Kennedy, noting that this reading was consistent with a reading of Section 602(a)(1) that would allow a U.S. copyright owner to exclude legitimate copies.

Once again, Justice Breyer and Justice Scalia responded to Panner's claims.   Justice Breyer noted that Section 602(a)(2) could be read to allow a U.S. copyright owner to exclude legitimate copies before sale; moreover, Panner's suggested reading would prove to be a limited one that allow a copyright owner to limit all works that entered into the country except for a number of limited exceptions.    In response, Panner suggested that Section 602(a)(2) was intended to permit a copyright owner to exclude legitimate copies overseas.  Further, he contended, Costco's reading would not only eliminate any practical effect for Section 602(a)(2) in limiting its scope to exclude legitimate copies, but it would also create formalities associated with the exercise of the substantive rights.   Justice Scalia then returned to his concerns over a textual analysis of Section 109, asking why the text of Section 109 referred to goods "lawfully made under this title" instead of "made in the United States."?   Panner responded that once again that Costco's interpretation of the term "lawfully made" to include both those copies made, as well as those copies distributed according to the relevant intellectual property right, is consistent with the text of Section 109.   Justice Scalia challenged that assertion, which in his view was "just not in [the] text."   This prompted Justice Sotomayor to join in Scalia's challenge, with a specific focus on whether such a reading would undermine the holding in Quality King.   At this point, several members, including Justices Scalia, Alito, Ginsburg, and Chief Justice Roberts all pushed Panner to describe the circumstances under which an item would be "lawfully made" under the relevant conditions of Omega's proposed test.   Panner responded that under his proposed test one such circumstance would be a case in which the foreign manufacturer had a license under the copyright laws of the United Sates to distribute a copyrighted work.

Malcolm L. Stewart, arguing on behalf of the United States, offered a different interpretation of the term "lawfully made" under Section 109: "lawfully made under this Title."  This reading, contended Stewart, necessarily limited the scope of the application of Section 109, since "in order for a copy to be made subject to Title 17, it would have to be created in the United States."    Furthermore, this reading would allow copyright owners to segment the markets for their respective works.     Justice Alito asked whether this argument would favor foreign manufactured goods.  Stewart noted that while this would create some incentive to manufacture goods abroad, this reading supported copyrighted owners' ability to engage in differential treatment of goods.

Such a reading, according to Stewart, was also consistent with the purpose of the Supreme Court's decision in Bobbs-Merrill Co.v. Straus (1908).   According to Stewart, Bobbs-Merrill indicates that the first-sale doctrine applies where the copyright owner has exercised his or her right to "vend" the copyrighted item by placing the item within the stream of commerce; if a copyright owner has not made the items in the first place in the United States, but rather creates and then sells them abroad, the copyright owner has not placed the items in the relevant stream of commerce, and therefore, has not invoked the right to "vend."     The Justices struggled with this interpretation.    In response to a question from Justice Kennedy about whether this reading would apply where there is a lawful import of a foreign-made good (since the item has been placed within the stream of commerce), Stewart replied that it would apply given the terms of Bobbs-Merrill, but not under Section 109 because the item has not been "made" within the meaning of the section.    This prompted Chief Justice Roberts to ask whether this would create a resort to the common law of copyright rather than the statutory text of Section 109, which would create a "confused" situation.     Justice Breyer then emphasized that Bobbs-Merrill should not be read to limit the application of the first-sale doctrine, but rather the specific holding of Bobbs-Merrill should be understood as attempting to preclude pre-emption of state law doctrine, which at the time applied the first-sale doctrine.

The complexity of the discussion at oral arguments suggests that the outcome in Costco is not a certain one.     The arguments ranged from the guarded support expressed by Justices Ginsburg and Kennedy for limiting the scope of Quality King to those cases involving "round-trip" copyrighted goods, to the outright skepticism expressed by Justices Breyer and Sotomayor with regard to any attempts to limit the scope of the "first-sale" doctrine within the context of copyright law.

Posted in Costco v. Omega, Featured, Merits Cases

Recommended Citation: Kali Murray, Argument recap: The Court considers an expanded first-sale doctrine in the import context, SCOTUSblog (Nov. 10, 2010, 11:26 AM), http://www.scotusblog.com/2010/11/argument-recap-the-court-considers-an-expanded-first-sale-doctrine-in-the-import-context/