Many Shades of Grey: Omega v Costco and its Implications on Parallel Imports

On January 20, 2015 the US Court of Appeals for the 9th Circuit upheld Costco’s sale of Omega watches in the US, following the 2013 US Supreme Court decision in  Kirtsaeng v John Wiley & Sons. Both decisions uphold the principle of international exhaustion and hold that the first sale doctrine applies to goods manufactured abroad. The ruling in this case reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market.

As IPKat notes and as Judge Wardlaw in this case states “Costco sells a wide range of luxury goods, including Dom Pérignon Champagne, Waterford crystal, Dolce & Gabbana handbags”(p. 9). We may soon see more luxury goods in discounter’s aisles, alongside gallons of laundry detergent and giant cans of tomato soup”!

Shamnad has blogged about this issue here, here and here.

First sale and parallel imports

The ‘first sale doctrine’ is a limitation on the copyright holder’s exclusive right of distribution. This basically means that once a copyright holder sells his copyrighted work, he cannot thereafter control its resale/distribution and therefore cannot later claim infringement for distribution of those copies. Therefore, first sale leads to an ‘exhaustion’ of the copyright holder’s right of distribution.

The concept of ‘parallel import’ flows from the first sale doctrine.  A parallel import is a lawful import of a copyrighted work without the permission of the copyright holder thereby creating a trade channel that runs parallel to the copyright holder’s authorized trade channel. It is usually called a ‘grey market’ import.  Such imports are not ‘black’ because the goods are genuine and have been lawfully purchased and IP owners claim that these imports are not ‘white’ because they haven’t authorized the import.

If a country recognizes national exhaustion (i.e. the right of the copyright holder is exhausted only in relation to the country where he makes the first sale) then parallel imports are considered illegal. But if a country recognizes the principle of international exhaustion (i.e. the right of the copyright holder is exhausted in relation to the whole world the moment the first sale is made) then parallel imports are considered legal.

Omega v Costco, 2015

Omega is a Swiss manufacturer of luxury watches. Omega distributes its watches through authorized distributors throughout the world, including the USA. The watch in question, in this case, was Omega’s highend ‘Seamaster’ watch. Though the watch itself could not be protected by copyright, Omega obtained copyright for an engraving of the Omega Globe Design on the Seamaster watch, in 2003.

Costco is one of America’s largest retailers and it sells everything from pallets to toilet paper to pizza slices.

In 2003, Costco and Omega attempted to negotiate an agreement that would allow Costco to sell Omega’s watches. However, no agreement was reached and Costco never became an authorized Omega dealer.

In 2004, Costco purchased 117 Seamaster watches (bearing the Omega Globe) from the ‘grey market’. Since Costco bought these watches from the grey market, it was able to sell genuine Omega Seamaster watches for 35% less than Omega’s retail price. A parallel import allows retailers to sell products at a discount through arbitrage. As the court explained, if Omega’s watches were sold at a lesser price in Morocco than in the United States, and Costco imports these watches from Morocco at the Moroccan price, it can undercut the Omega’s authorized U.S. distributor thereby creating a ‘parallel trade’ channel. It must be kept in mind that the import and sale of watches by Costco are not ‘black market imports’ because the initial sale (in Morocco) was authorized by Omega.

Omega sued Costco for copyright infringement based on Costco’s importation of Omega Seamaster watches without its permission. The 9th Circuit bench, in the 2015 decision (following Kirtsaeng v. John Wiley & Sons), held that the first sale doctrine barred Omega’s claim because Omega’s right to control distribution and importation of those 117 Seamaster watches expired after the authorized first sale of the watches in a foreign jurisdiction.

Case history

Omega had sued Costco for copyright infringement, importation of copyright work without the copyright holder’s permission before the district court. The district court concluded that the first sale doctrine was a complete defense to Omega’s claim and hence summary judgement was granted to Costco. However, this was reversed on appeal by the 9th circuit in 2008 because at that time the law in the US (before Kirtsaeng v. John Wiley & Sons) was that the first sale doctrine did not apply to foreign-made goods first sold abroad and then imported into the United States without the copyright owner’s permission. In 2010, the Supreme Court granted certiorari, and an equally divided Court summarily affirmed. But the case was remanded to the district court again which then rendered the above 2015 judgement.

Indian position

The TRIPS, under Article 6, allows states to decide their regime of exhaustion i.e. a country can chose to follow a national exhaustion regime, an international exhaustion regime or a regional exhaustion regime. While recent US court decisions support parallel imports and international exhaustion,  this issue still remains a ‘grey’ area in India.  The Copyright Act itself does not prohibit parallel imports. However, certain cases have held such imports to be illegal (read Pranesh Prakash’s article here). In order to provide clarity to this issue and to ensure better access to low cost and latest edition books to students, a proviso to Section 2(m) of the Copyright Act that would legalize parallel imports in India was proposed to be introduced in the Copyright Amendment Bill 2010. The proviso read as follows:

“[P]rovided that a copy of a work published in any country outside India with the permission of the author of the work and imported from that country into India shall not be deemed to be an infringing copy”.

However, this proposal was dropped when the Bill was tabled in Parliament (see Shamnad’s post here). A government committee headed by Prof Chadha of the NCAER was constituted to consider whether or not India should follow an international exhaustion regime. Its report dated January 2014 (here and here), considers the views of publishers, customers and other stakeholders in relation to the issue of parallel import of books. It urges the stakeholders to come to an amicable solution to the problem of parallel imports. However, in case this fails, the report suggests the inclusion of the proviso to Section 2(m) with requisite safeguards.

Legalizing parallel imports, especially for developing countries, will go a long way in enabling access to books and knowledge. It remains to be seen whether India will change these laws from grey to white.

Aparajita Lath

Aparajita graduated from the WB National University of Juridical Sciences, Kolkata. She was formerly an editor of the NUJS Law Review. She is a lawyer based in Bangalore. All views expressed by her on the blog are her personal views.

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