[A2k] IP-Watch: US Weighs Copyright As Barrier To Grey Market Imports

[Thiru Balasubramaniam]

http://www.ip-watch.org/weblog/2009/12/23/us-weighs-copyright-as-barrier-to=
-grey-market-imports/

23 December 2009
US Weighs Copyright As Barrier To Grey Market Imports
By Steven Seidenberg for Intellectual Property Watch @ 2:47 pm

It=92s an unconventional use of copyright law. But if Omega SA wins its
case before the US Supreme Court, the famous Swiss watch company will
have established a powerful new weapon against grey market goods in
that country.

Grey market goods are legitimate branded products that are put onto
the market with rights owners=92 authorisation and eventually resold
outside authorised distribution channels. Typically, goods intended to
be sold at a relatively low price in one geographic area wind up
resold in another area, where authorised distribution channels sell
the branded goods at a significantly higher price.

Because grey market goods undercut sales of higher priced (and higher
profit) goods, they are a boon to consumers, but they take a big bite
out of many companies=92 bottom lines. In 2007, grey market goods racked
up $58 billion USD in sales just in the US IT market, and this cost IT
companies $10 billion USD in profits, according to a December 2008
survey [pdf] by KPMG and the Alliance for Gray Market and Counterfeit
Abatement.

Brand name companies have traditionally used trademark law to stop the
importation of grey market goods, because countries often treated
sales of trademarked goods outside their borders differently from
sales inside their borders. Upon the first authorised sale of a
branded item within the country, the trademark owner=92s rights became
exhausted; the mark owner lost its right to control further
distribution of the item in the country. The purchaser could resell
the item nationwide without fear of committing trademark infringement.

However, if the initial authorised sale occurred in a foreign country,
that sale was not covered by the domestic nation=92s first sale doctrine
and thus did not exhaust trademark rights domestically. If such a
foreign-sold item was resold and imported domestically, the importer
would be liable for trademark infringement.

Some countries still apply the first sale doctrine only within their
borders. Many countries, however, have extended this doctrine beyond
their borders, so importing grey market goods into these nations often
no longer constitutes trademark infringement.

The United States, for instance, largely applies the first sale
doctrine to authorised sales worldwide. Once a branded item has been
sold anywhere on earth, with the approval of the trademark=92s owner,
the mark owner has exhausted its right to control further distribution
of that item. Thus the trademark owner cannot stop grey market resale
of the item in the US.

There=92s a caveat, however. A trademark owner can stop the importation
of grey market items that are =93materially different=94 from trademarked
goods marketed in the US with the mark owner=92s approval. As a result,
brand companies have used a variety of means to differentiate products
intended for the US and non-US markets. They have argued that grey
market goods are materially different from authorised US goods because
they have, for instance, different warranties, different packaging, or
different inserts contained in the packaging (written in different
languages). These arguments are sometimes accepted by US courts, but
not always.

Japan similarly recognizes worldwide exhaustion of trademark rights,
according to Ethan Horwitz, an IP attorney in the New York office of
King & Spalding and author of a five-volume treatise, World Trademark
Law & Practice. Grey market goods imported into Japan do not infringe
under the country=92s trademark law so long as the trademark on the
goods was applied with the mark owner=92s authorisation, the goods
originate from the trademark owner (or its authorised licensee), and
the goods are not qualitatively different than the goods that the mark
owner authorises for sale in Japan.

The situation in the EU is a bit more muddled. There is clearly
Community-wide exhaustion, according to Alexander Klett, an IP
attorney in the Munich office of Reed Smith. If a trademarked item is
initially brought onto the market by a sale in an EU member state,
this exhausts the trademark rights everywhere in the EU (assuming the
sale was authorised by the mark owner). Thus, a product initially sold
in Italy can be resold in Spain without any fear of trademark
infringement.

However, if a trademarked item is initially put on the market outside
the EU area, it is unclear whether importing this item into the EU
without authorisation of the trademark owner would constitute
infringement. =93There=92s been a lot of case law over the years going
back and forth on this,=94 Horwitz said.

New Tactic: Copyright

Because trademark law often cannot stop the import of grey market
goods, a growing number of brand owners are trying a new tactic. They
are using copyright law to protect their markets in the US. (This
tactic doesn=92t work well in Europe because the EU lacks a single,
harmonised approach to copyright law, according to Klett.)

Consider the method used by Omega SA. The watchmaker inscribed a tiny,
0.5 cm globe design on the underside of its watches. This design is
invisible when the watches are worn, so individuals are unlikely to
purchase Omega=92s high end watches in order to obtain copies of this
inconspicuous design. Because this design is copyrighted, however, it
may enable Omega to stop the import of grey market watches into the US.

Section 106(3) of the US Copyright Act grants copyright owners the
right to control the distribution of copies of their works. This
includes the right to control imports of copies of their works,
according to Section 602(a) of the statute. So if someone imports a
copy without authorisation, they are guilty of copyright infringement.
And that is precisely what Omega has alleged against Costco Wholesale
Corp., a major discount retailer with stores throughout the US.

Omega makes its watches in Switzerland and sells them in Europe at
prices well below its authorised US prices. Some watches that were
initially sold in Europe and intended for that market were resold to
Costco, which imported them into the US. Omega objected and sued
Costco in 2004 for infringement.

Costco asserted that importing the watches does not infringe because
of Section 109(a) of the Copyright Act. This statute codifies the
copyright first sale doctrine, which is similar to the one in
trademark law: upon the first sale of a copy of a copyrighted work,
the copyright owner loses its right to control any further
distribution of that particular copy. The copyright owner=92s right of
distribution has been extinguished, so the purchaser can resell, lend
or give away the copy without committing copyright infringement.

There is, however, one significant difference between the first sale
doctrines in US copyright and trademark law. Copyright law has an
added qualification. Its first sale doctrine, Section 109(a), applies
only to copies =93lawfully made under this title.=94

Omega argued that because the copies of its watch design were made
outside the US, they were not made under US copyright law and were
thus not covered by the first sale doctrine. Costco argued that
because the copies were made by the US copyright owner, they should be
considered =93lawfully made=94 under US copyright law.

The 9th Circuit US Court of Appeals agreed with Omega=92s interpretation
of the statute. The court ruled [pdf] in 2008 that applying the first
sale doctrine to goods made overseas =93would impermissibly apply the
Copyright Act extraterritorially.=94

Costco has asked the US Supreme Court to review this decision. That
court in October asked the US Department of Justice to file a brief on
the case. Many observers see this as a sign that the court may take
the case.

If the 9th Circuit ruling is left in place, it would be a huge win for
companies that wish to stop grey market goods from being imported into
the US. It would, similarly, be a big blow to consumers and to many
businesses that import or sell grey market goods in the US. Moreover,
according to some experts, it would be a misuse of copyright law.

=93[U]sing copyright to prop up geographic price discrimination is
bogus,=94 said Eric Goldman, who teaches IP law at Santa Clara
University in California. =93From an economic standpoint, I don=92t have
any problem with price discrimination, but =85 using copyright to stop
the transport of goods - which people aren=92t buying because of their
copyrighted aspects - makes no sense to me.=94

Steven Seidenberg may be reached at info@ip-watch.ch.

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


Tel: +41 22 791 6727
Mobile: +41 76 508 0997