Gray market goods and items that are legitimately branded but which are produced and placed on the market with the rights owners’ approval. They are resold outside their preferred distribution channels.
Omega watches sell for much less in Europe than the U.S. so some are resold and imported into the U.S. where they compete with the more expensive versions available through Omega’s authorised distribution channels.
To put an end to gray market distribution of its watches in the US Omega inscribed a tiny copyrighted design on the back of its watches which were targeted for sale in Europe. When it discovered Costco selling these watches in the US it sued Costco for copyright infringement.
Costco Wholesale Corp. v. Omega SA is now before the Supreme Court.
Naturally consumers are attracted to gray market products as they are obviously less expensive than identical products sold through other distribution channels, whilst businesses argue that gray market goods undercut goods selling for higher prices.
The legal principles which will be considered in the Costco Wholesale Corp v Omega SA case are extremely important as it will have an impact on the global economy.
Omega isn’t the first company to use copyright law as a mechanism to combat the sale of gray market goods. A number of businesses use copyright law as a means of preventing gray market goods from entering the United States.
Costco’s legal argument is that it has a right to sell Omega watches as s109(a) of the Copyright Act codifies the first sale doctrine, which provides that upon the first authorized sale of a copy of a copyrighted work, the copyright owner loses all rights to control further distribution of that copy. So the copyright owner loses control of all downstream sales of their work and the purchaser of a copy can resell, lend or otherwise physically transfer the copy to another person.
The application of the first sale doctrine has resulted in the vibrant markets for used books, CDs, DVDs, computer games and other items.
If the US Supreme Court finds that the first sale doctrine applies to the watches Costco imports, Costco won’t be found liable for infringement.
The disagreement is over whether or not watches manufactured and initially sold overseas are subject to the U.S. first sale doctrine.
s109(a) of the Copyright Act states that the first sale doctrine applies only to copies “lawfully made under this title.” Omega says because the designs inscribed on the back of their watches were made outside US borders, these copies can’t be said to be lawfully made under the Copyright Act, and are therefore not within the reach of the first sale doctrine.
Costco counters by stating that as the copies were made by the US copyright owner they come within s109(a) being “lawfully made under this title” and are protected by the first sale doctrine.
The District Court felt that to apply the US Copyright Act to goods made overseas would be to apply the act extraterritorially. However there have been some District Court judgements which have concluded that copies made overseas with the approval of U.S. copyright owners were “lawfully made under this title” within the meaning of s109(a) of the Copyright Act.