Why Publishers Are Tracking The Costco v. Omega Supreme Court Case

The “first sale” doctrine in copyright law limits the rights of copyright holders to sue for infringement after they’ve sold their work-it allows for used and re-sale markets in books and DVDs, as well as library lending. In Costco v. Omega, a Supreme Court case argued earlier this week, the high court will decide whether the first sale doctrine applies to copyrighted goods sold abroad. So why is a case involving a retailer’s re-sale of luxury watches getting the attention of book publishers, the recording industry, and Hollywood? Because the case has everything to do with whether content industries will be able to control their international pricing.

As online markets like eBay (NSDQ: EBAY) grow-based in part on the re-sale of new and used goods-it’s getting easier for importers large and small to arbitrage a profit by buying goods abroad cheaply, bringing them into the U.S., and undercutting manufacturer’s preferred pricing.

Discount retailer Costco acquired a batch of 117 Omega Seamaster watches from foreign resellers in Egypt and Paraguay back in 2004, and then sold them in its U.S. stores-for about $700 less than Omega’s suggested price. Omega sued Costco for copyright infringement, saying that its exclusive right to distribute its copyrighted goods had been infringed; it lost in a U.S. District Court in Seattle, but won on appeal at the U.S. Court of Appeals for the 9th Circuit.

All along, Costco’s argument has been that it is protected by the first sale doctrine. The rights that come with a copyright don’t include the right to stop the legal importation of legitimate, non-pirated goods, Costco has argued.

But copyright holders have been vocal in their support for Omega’s position that “first sale” doesn’t apply abroad, and only they have the right to import copies of their goods. The Recording Industry Association of America and the Motion Picture Association of America filed a brief supporting Omega, as did the Association of American Publishers, which includes most U.S. book publishers.

In the MPAA/RIAA brief, the organizations’ lawyers argue that their ability to treat national markets separately is vital to the success of the motion picture and music industries. “Cultural and other differences across markets in different parts of the world make it necessary for motion picture companies to tailor theatrical releases and disc sales to the particulars of each market,” the brief states. “Producers, accordingly, adapt the timing, content, advertising, and other aspects of theater and home video releases to each market to maximize the prospect of commercial success… If companies’ ability to do so is undercut by unauthorized importation and the U.S. market is saturated with DVDs, Blu-Ray discs, and CDs that were not intended for U.S. distribution, movies and sound recordings would be less likely to achieve commercial success.”

The content industries are opposed by large retailers, consumer rights groups such as Public Knowledge and Public Citizen, as well as library groups. Those groups raise the specter that a finding for Omega could create a special class of copyrighted goods not limited by first sale-which would allow rightsholders to shut down stores selling used goods, or even libraries, with copyright infringement threats. The purpose of copyright law isn’t to support price discrimination among national markets, these groups argue.

Finally, they point out that finding that “first sale” doesn’t apply abroad would have the perverse incentive of encouraging copyright holders to enjoy a greater rights by moving their manufacturing operations abroad-something Congress couldn’t possibly have intended.

Omega is supported by the RIAA, MPAA, book publishers, the two major software industry trade groups, the intellectual property section of the American Bar Association, the American Watch Association, and the Department of Justice.

The justices asked tough questions of both sides at Monday’s oral arguments; observers of the arguments refrained from handicapping what the high court’s decision will be.

An interesting side note of this case is that watches aren’t actually eligible for copyright, because they are more functional than decorative. Omega admitted that it started stamping a small copyrighted icon-the “Omega globe design”-on the back of its watches in 2003, specifically so that it could sue for copyright infringement. The fact that the Supreme Court voted to take a copyright case in which the copyrighted “work” is of negligible value-where Omega has admitted to, essentially, gaming the system-probably doesn’t bode well for the watch company.


»  Amicus brief of RIAA / MPAA supporting Omega [PDF]

»  Amicus brief of Association of American Publishers supporting Omega [PDF]

»  Amicus brief of Public Knowledge, EFF and Library Groups supporting Costco [PDF]

»  Amicus brief of Google (NSDQ: GOOG), eBay, and computer industry groups supporting Costco [PDF]