Copyrights Used to Stop Grey Market Goods—The Good and the Bad
(as published in Inside Counsel)
What This Means to You
- Companies that wish to sell goods at different price points or of varying quality in discrete national markets should:
- Consider having the products manufactured abroad; and
- Ensure the element protected by copyright is integral to the product.
- The technique of including a tiny, meaningless design on goods that are not otherwise protected by copyright may not help and in fact backfire.
Creating effective tools to stop the importation of grey market goods has been a challenge for property owners. Copyright law has been adopted by many to provide some basis to preclude the importation of otherwise legitimate goods that the copyright owner had earmarked for a different territory. Recent cases, however, have hinted at restrictions to possible techniques that had been a hope for some to mitigate the marketplace competition. The decisions are drawing a bright line based on the location of manufacture to determine whether U.S. copyright defenses apply.
Stop importation through copyright law
In a recent opinion out of the 2nd Circuit (John Wiley & Sons v. Kirtsaeng), the court agreed with another appeals court on its interpretation of the First Sale Doctrine, allowing John Wiley & Sons to prohibit the importation of copyright books. The important fact of this case, particularly to distinguish from recent cases, is that the goods were manufactured abroad. The mere desire of the owner to have the goods sold in foreign markets was not relevant, but rather location of manufacture.
The case is important because it validates the 9th Circuit’s approach to the application of the First Sale Doctrine after the Supreme Court failed to do so by splitting evenly in Costco Wholesale Corp. v. Omega. Four justices would have allowed importation and four would not, with Justice Kagan recusing herself.
Established in 1908, the First Sale Doctrine is a defense which provides that a copyright owner’s control of its works is generally exhausted after the first sale of each work. Once a book is purchased, the person who owns the copyright in the book may not prevent the purchaser from selling that book to a friend. On its face, this doctrine clashes with a section of the Copyright Act that bans the importation into the U.S. of copyright works acquired abroad.
Cases applying the first sale doctrine
In Quality King Distributors, Inc. v. L’anza Research International, the Supreme Court held that, when goods were manufactured in the U.S. but sold abroad, the First Sale Doctrine prevented copyright holders from barring re-importation of goods designated for discrete foreign markets. In other words, goods made in the U.S. and sold in Japan could come back. Once U.S. copyright protection was exhausted on a particular item, it could be transferred as desired by the owner of that item.
In Costco, the 9th Circuit held that goods manufactured abroad were not manufactured “under [the U.S. Copyright Act]” for the purposes of the First Sale Doctrine; therefore, the doctrine could not serve as a defense to infringement as it had in Quality King.
In Costco, distributors purchased Omega’s foreign-manufactured Seamaster watches abroad, where they were sold cheaply, and sold them in the U.S. as expensive luxury items. Because the watch may not otherwise have been found to contain a copyright feature, Omega etched a tiny design on the underside of the watch face and registered the copyright for that design in the U.S. to block importation of the foreign manufactured watches.
With the John Wiley decision, it now appears that the two most respected federal circuits in the field of intellectual property agree that the First Sale Doctrine cannot be used as a defense to unauthorized importers of foreign-manufactured goods.
Are copyright techniques going too far?
Theoretically, John Wiley and Costco dealt with identical issues, but on remand in the Costco case, the Eastern District of California issued an opinion on Nov. 9, 2011 stating that the stamping of a copyright design on the back of a watch face to prevent importation of a watch design not otherwise protected by copyright was copyright misuse by the copyright owner.
This decision should not affect the 9th Circuit’s First Sale Doctrine analysis in Costco, but it does raise a possible limit on what a manufacturer can do to prevent importation of goods designated for foreign markets. At a minimum, manufacturers should not expect success by using a tiny, unimportant design on goods that are not otherwise protected by copyright for the sole purpose of preventing importation.
To be safe, companies that wish to sell goods at different price points or of varying quality in discrete national markets would be wise to have the products manufactured abroad and should make sure that the element protected by copyright is integral to the product appearance and something that could influence the consumer’s purchase decision. According to the 9th and 2nd Circuits, doing so allows a company to keep those goods from being resold back into the U.S.