The Supreme Court is set to hear oral arguments in Costco v. Omega on November 8, 2010.1 The issue before the court is a rather narrow one – and probably boring to a good deal of the public – but the stakes are high, and a wide variety of interests are keeping a close eye on the case.

Take a look at the lineup of industry groups who have submitted amicus briefs in the case:

In support of Costco

  • Retail Industry Leaders Association
  • National Association of Chain Drug Stores
  • Amazon.com
  • Gamestop Corp
  • Quality King Distributors
  • Sam’s West
  • Target Corp
  • Public Citizen
  • Entertainment Merchants Association
  • National Association of Recording Merchandisers
  • American Library Association
  • Association of College and Research Libraries
  • Association of Research Libraries
  • Public Knowledge
  • American Association of Law Libraries
  • American Free Trade Association
  • Electronic Frontier Foundation
  • Medical Library Association
  • Special Libraries Association
  • Ebay
  • Google
  • NetCoalition
  • Computer and Communications Industry Association
  • Internet Commerce Coalition
  • Intel Corp

In support of Omega

  • The United States of America
  • Association of American Publishers
  • Intellectual Property Owners Association
  • American Watch Association
  • Business Software Alliance
  • American Bar Association
  • Fujifilm
  • Seiko Epson
  • Epson America
  • Epson Portland
  • Software & Information Industry
  • Motion Picture Association of America
  • Recording Industry Association of America

Some pretty big names up in there. So what’s going on in Costco v. Omega? As Joe Mullin at Law.com points out, this case “doesn’t involve the kind of cutting-edge issues that copyright lawyers usually grapple with in the digital age.” Instead, it deals with getting a good deal on watches.

Omega manufactures and sells watches around the world. Like most companies in international markets, it engages in “geographical price discrimination.” Basically, it can’t sell the same watch in, say, Paraguay as it can in the US. So, a company like Omega will sell the same product at different prices in different markets, making less profit in some areas to gain market access and making up for it in markets that can support a higher price.

Costco and similar companies in the “secondary” market can take advantage of these different prices. If, after factoring in shipping and transportation, the cost to purchase legitimate products in another country is less than purchasing them in the US, they can buy the product in a country where it costs less and sell it in a country where it costs more.

The secondary market, also known as the “gray” market, is huge – generating tens, if not hundreds, of billions of dollars in all industry sectors worldwide.2 And hopefully you can see the tension here, between manufacturers who want to disseminate their products as widely as possible while turning a profit and retailers engaged in legitimate arbitrage and free trade.

Since these are not counterfeit products, trademark law provides little recourse to manufacturers to control such parallel imports. But can copyright law? That’s the question the Supreme Court is set to answer.

When is a ‘Sale’ a ‘First Sale’?

In the US, under the “first sale” doctrine, a copyright owner can not control further sale or use of a legitimate copy once it has been lawfully sold. The new owner obviously doesn’t have the right to make additional copies, but he is generally free to do what he wants with the copy he has. The sale is said to have “exhausted” the copyright owner’s right to control the copy.

Here’s where things get tricky. “Exhaustion” only applies to the extent a nation’s laws says it does.3 Some countries allow for international exhaustion, meaning an authorized sale anywhere in the world exhausts a copyright owner’s right to control. Other countries follow the principle of national exhaustion: Only an authorized sale within the national boundaries constitutes a “first sale”; an authorized sale outside the country doesn’t, meaning a copyright owner can prevent parallel imports. The Supreme Court must decide whether the Ninth Circuit was correct when it held that US copyright law follows the principle of national exhaustion, or whether US copyright law doesn’t allow copyright owners to prevent importation of authorized copies manufactured outside its borders.

One quick note: the temptation is to think international exhaustion is more beneficial to consumers. “Omega is just greedy, why shouldn’t I be able to get cheaper watches at Costco?” The reality is far more complex:

There is considerable debate concerning whether granting IPR holders the power to segregate markets is good or bad from various perspectives – economic, social, political and cultural. From the standpoint of those favouring open markets and competition, it may appear fundamentally inconsistent to permit intellectual property to serve as a mechanism to inhibit trade. Yet IPR holders argue that there are positive dimensions to market segregation, and corollary price discrimination.4

Hard Cases (Bad Law?)

Costco v. Omega is about the scope of the first sale doctrine as it relates to a copyright owner’s exclusive right of distribution concerning importation; both parties make extensive use of statutory interpretation canons, existing precedence, legislative history, and public policy to make their case. The case is not, as Forbes blog has stated, about the “power of a manufacturer to use copyright law – normally thought to protect creative works like books and movies – to ‘protect’ a tiny logo affixed to an expensive Swiss watch.”

We do normally think of copyright as protecting creative works, not “useful articles” such as watches. It strikes many as odd, then, that Omega can claim copyright protection for its watches by registering a copyright on its logo – and placing a tiny version of the logo on the back of the watch.

The Supreme Court has been “‘careful to caution against misuse or over-extension’ of trademark and related protections into areas traditionally occupied by patent or copyright.” The concern is that allowing copyright-esque claims to be heard under trademark law “would create a species of mutant copyright law that limits the public’s ‘federal right to ‘copy and to use’ ‘ expired copyrights’”, for example.5 But Omega has cleverly sidestepped this issue entirely by obtaining an ostensibly valid copyright on its logo, essentially turning something traditionally considered a trademark into a copyrighted work and bringing the dispute wholly within the confines of copyright law.

However worrisome this pretextual use of copyright law by manufacturers is, it is not the issue the Supreme Court is faced with. The question it is presented with treats Omega’s copyright as a given. The Ninth Circuit made no mention of the validity of Omega’s copyright, and as far as I can tell, the issue did not come up during the District Court proceedings. But the issue does raise concerns in the blogosphere. The conventional wisdom – Omega shouldn’t even have copyright protection in the first place, thus, it shouldn’t succeed in its actual claim.

And therein lies the problem. No matter how unsympathetic Omega is, or how improperly it has extended copyright law, the Supreme Court’s decision in this case will apply equally to the core copyright industries – book publishers, film studios, record labels, etc. The policy considerations for these industries differ in many ways from those of consumer goods manufacturers and resellers.

The amicus brief filed by the RIAA and MPAA devotes considerable time to discussing how market segmentation benefits both creators and consumers while ensuring wide dissemination of new works. The latter benefit is especially relevant to copyright policy, as dissemination is one of the inherent goals of the law.

These industries increasingly rely on foreign markets to recoup the costs of creation. Professional screenwriter William Martell notes (in one of his characteristically humorous and fascinating posts) that the average US film makes around 60-70% of its money outside the US and Canada.

I doubt the Court will fail to consider that any decision it makes will impact the core copyright industries. What I don’t doubt, though, is that as this case progresses we will see less discussion about the actual issue of the case and more discussion about Omega’s extension of copyright law - with the accompanying hue that Omega’s actions implicate all creators and industries who rely on copyright.

Footnotes

  1. Recordings of the arguments will be available by the end of the week at www.supremecourt.gov thanks to the Court’s new policy. []
  2. The Seattle Times cites $58 billion as the size of the secondary market in technology industry alone. []
  3. TRIPS – the international agreement on intellectual property that governs the majority of the world’s countries – leaves the point at which exhaustion occurs up to each individual nation. []
  4. UNCTAD-ICTSD, Resource Book on TRIPs and Development, Exhaustion of Rights. []
  5. Dastar Corp. v. Twentieth Century Fox Film Corp., 539 US 23, 34 (2003). []