Publishers Win An Unusual Victory In Costco v. Omega

A 4-4 split decision issued today by the Supreme Court will leave intact a lower-court ruling that favors luxury watchmaker Omega in a copyright dispute with Costco-and will also help content companies looking to gain a longer copyright on goods, like DVDs and books, manufactured and sold abroad.

(Only eight justices voted on this case since Elena Kagan, who filed an amicus brief in the case while she was solicitor general, recused herself).

Here’s the back story: Costco was re-selling Omega Seamaster watches that it had purchased from wholesalers abroad, undercutting Omega’s U.S. suggested retail price by about $700. Omega sued for copyright infringement, saying it had the exclusive right to distribute and sell those watches in the U.S., but Costco responded that it was protected by the “first sale” doctrine, which allows the re-sale, lending, or gifting of copyrighted items that have been sold once. Omega lost at district court, but won on appeal; since the Supreme Court split here, Omega’s win on appeal will now stand.

The music and movie industries, as well as publishers, supported Omega in this case, because the rule will also apply to copyrighted items like CDs, DVDs, or books that are manufactured and sold abroad. That means that now-at least in some cases-copyright owners will be able to shut down unauthorized importers or re-sellers of their goods.

That will help content owners who want to keep prices of creative goods like DVDs and books in the developed world high, because they’ll be able to shut down import and resale by stores like Costco-or other, smaller retailers-who want to buy cheaper goods abroad and pass on the savings to their U.S. customers.

The film, publishing, and software industries pushed for this result, arguing that the ability to control import and distribution allows them to set prices in national markets separately-for example, charging much more for a DVD or piece of software sold in the U.S. than in China. But if those copyrighted goods could be imported by anyone and re-sold in the U.S., their right of distribution-and their ability to profit in different markets-would be undercut. Copyright owners sometimes call these unauthorized re-sale markets the “gray market.”

The media industry briefs were opposed by retailers, consumer groups, and libraries, who argued that allowing a victory for Omega would create a situation where goods manufactured and sold abroad would enjoy a perpetual copyright that wouldn’t be limited by the “first sale” doctrine. The first sale doctrine is one of the most important limits on copyright, and essentially says that copyright owners don’t get to control distribution of their goods after they sell them once. That allows libraries to lend books and video-rental stores to rent or sell DVDs without interference by the copyright owners.

The groups supporting Costco argued that a victory for Omega would be a huge burden to re-sellers and libraries, who might be forced to research the origins of a particular copyrighted good before selling it or lending it out. Retailers argued they should be allowed to import goods however they liked, in the case of legitimate, non-pirated items that had already been sold once at a price of the copyright owner’s choosing.

While Omega has won a victory, because of the 4-4 split, it’s a more limited one than it might have otherwise been. The 4-4 result means that the appeals court ruling favoring Omega over Costco will be upheld, but the ruling won’t be binding on all judges nationwide-which would have been the case if one side had won on a 5-4 vote, for example. Instead, Omega’s victory will be binding only in the 9th Circuit, where it was heard.

The 9th Circuit is the largest of the 13 U.S. appellate courts; it covers the whole of the western U.S., and nearly 20 percent of the nation’s population. Other circuits may reach different results-including the New York-based 2nd Circuit, where textbook publishers have some active litigation in which they’re trying to prevent re-sale of textbooks manufactured and sold abroad.

The 4-4 split is an unusual result in general; it achieves the same result that would have occurred had the Supreme Court not taken the case at all. Only four justices are needed to vote to take a particular case; that suggests that perhaps those same four justices voted for Costco, but were unable to get a fifth vote, leaving Omega’s lower-court victory intact. The Supreme Court typically issues 4-4 split decisions anonymously, without revealing which justices voted for which side, and it continued that tradition in this case.

This case will now go back down to the district court to be tried, since Costco still has defenses and counter-claims to be tried beyond its defense under the “first sale” doctrine. But the Supreme Court’s inability to reach a majority on this issue leaves a lack of clarity for importers and re-sellers dealing in copyrighted works. We may be headed towards an unusual situation in which buying a (non-pirated) DVD from China or Taiwan over eBay (NSDQ: EBAY), and then re-selling it, is illegal in some U.S. states while at least arguably legal in others.

In an interesting twist, the watches themselves in this case aren’t actually protected by copyright. The court record shows that Omega began stamping a small copyrighted design on the back of its watches in 2003, specifically to allow it to bring copyright suits in U.S. courts.