United States Supreme Court to Rule on Fashion and Product Nemesis "Gray Market Goods"
April, 2010
Counterfeits are well known. Immigration and Customs Enforcement seized more than $260 million of counterfeit apparel, accessories and other goods in April. In 2009, apparel, footwear and handbags constituted 54% of all counterfeit goods. But increasingly fashion designers, manufacturers and retailers are now facing what is perhaps a greater danger: "gray market goods."
"Gray market goods" refer to genuine products made under the authority of the intellectual property owner, whereas pirated or counterfeit goods are made without a license or authorization and are "fake" goods. The authorized goods are sold outside the U.S. where a third party purchases the goods and imports them back into the U.S. Often the importer benefits from a price arbitrage: the goods are sold at a lower price outside the U.S. and the importer is able to sell them for a profit in the U.S. Gray market goods are a significant danger to designers and fashion companies because they can cause the price of the goods to fluctuate greatly within the U.S., negatively impacting brands' goodwill and established distribution networks.
Under the Copyright Act, a copyright owner has the exclusive right to import and distribute its works in the U.S. Thus, copyright owners claim infringement of these rights when a third party imports and sells gray market goods in the U.S. However, importers rely on the "first sale doctrine." Under Section 109 of the Copyright Act, a purchaser of a copyrighted work has the right to use, sell or otherwise dispose of that particular copy. In other words, the copyright exhausts upon the sale of the work. Importers argue that the copyright owner has been compensated for the goods and the importers have the right to resell those lawfully purchased goods.
Time Will Tell: Omega v. Costco
Who are these gray market importers? You might assume they are small operations buying cheap foreign goods and selling them on U.S. street corners. Actually, they can be stores like your neighborhood Costco selling expensive brand-name timepieces.
The U.S. Supreme Court has granted certiorari to hear Omega S.A. v. Costco Wholesale Corp., a Ninth Circuit Court of Appeals decision. Omega manufactures watches in Switzerland and sells them globally through a network of authorized distributors and retailers. The watches were lawfully sold to third parties overseas and Costco purchased these watches for resale in its California stores.
The watches have a small U.S. copyrighted "Omega Globe Design" on the underside of the watch. Omega sued Costco for copyright infringement based on Costco's importation of the copyrighted logo on the watches into the U.S. Costco raised the defense of the first sale doctrine. In its decision, the Ninth Circuit analyzed the U.S. Supreme Court case, Quality King Distributors v. L'Anza Research International, a case dealing with re-importation of shampoo with copyrighted labels. In Quality King, the Supreme Court held that the first sale doctrine protected the importer, however the Court based its opinion on the fact that the copyrighted shampoo labels were originally made in the U.S. and therefore covered under the U.S. Copyright Act. The Supreme Court expressly declined to opine as to what would happen if the goods were made outside the U.S.
In Omega, the Ninth Circuit ruled in favor of Omega finding that Costco was liable for copyright infringement. The Ninth Circuit held that Costco could not claim the first sale doctrine as a defense because the watches were made outside the U.S., not under the U.S. Copyright Act, and therefore the copyright had not exhausted in the globe design.
The U.S. Supreme Court will review Omega S.A. v. Costco Wholesale Corp. and in doing so revisit its decision in Quality King Distributors v. L'Anza Research International in what we can't help but phrase "lather, rinse, and repeat." Stay tuned.
For more information on "gray market goods" or for other legal fashion questions, please contact Erica Krikorian or Janet Kim Lin at (206) 292-8930.