Gray market goods are typically defined as authentic items sold by an unauthorized retailer. This often means that the goods are imported and sold outside the normal distribution channels, without the brand owner’s consent. As a consumer, you may have seen gray market products (high-end or luxury items offered at steep discounts) in your local bulk retailer or discount warehouse shopping stores.
In Omega S.A. v. Costco Wholesale Corp., Case Nos. 11-57137, 12-56342 (9th Cir. Jan. 20, 2015), the Ninth Circuit Court of Appeals recently decided a dispute arising from Costco’s unauthorized sale of Omega watches to its members in California. Omega manufactures luxury watches in Switzerland and distributes them around the world through its network of authorized distributors and dealers. In 2003, Omega copyrighted its “Omega Globe Design” and began selling its Seamaster watches bearing this copyrighted symbol. That same year, Costco and Omega discussed the possibility of Costco carrying Omega watches but the parties never came to any agreement, and Costco was not authorized to sell Omega watches.
Regardless, in 2004, Costco purchased 117 Seamaster watches bearing the Omega Globe symbol on the gray market. On its second round of appeal, the Ninth Circuit upheld the lower court’s decision in favor of Costco. Here, Costco obtained the watches as follows: Omega sold the watches to one of its authorized distributors abroad. Unidentified parties then bought the watches and sold them to a company in New York. Costco acquired the 117 Seamaster watches from this New York company and proceeded to sell 43 watches to its members.
The Ninth Circuit’s decision was based primarily on the first sale doctrine under a recent United States Supreme Court decision, Kirstaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013). Under the first sale doctrine “once a copyright owner consents to the sale of particular copies of work, that same copyright owner cannot later claim infringement for distribution of those copies.
In Kirstaeng, the Supreme Court determined that the first sale doctrine applies to copyrighted work made abroad in a lawful manner. Based on Kirstaeng, the Ninth Circuit explained, “Omega’s right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement.” Omega at 7 (citing Kirstaeng, 133 S.Ct. at 1366). The Court conclusively ruled, “copyright holders cannot use their rights to fix resale prices in the downstream market.” Omega at 7.
Although Omega authorized the initial sale of its watches, it never approved the importation of the watches into the U.S. or Costco’s ultimate sale of the watches to its customers, and yet, the Ninth Circuit found in Costco’s favor under the first sale doctrine because the first sale was authorized by Omega. The Ninth Circuit’s decision could have much wider implications to the import of gray market goods into the U.S.; however, the saga continues. On February 9, 2015, Omega filed a Petition for Panel Rehearing and Rehearing En Banc and only time will tell whether Omega will obtain any relief from the Ninth Circuit’s ruling.
The Ninth Circuit’s opinion can be found here.
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