Costco v. Omega: Supreme Court argument recap

Yesterday morning, the United States Supreme Court heard oral arguments (transcript here) in the case of Costco Wholesale Corporation v. Omega, S.A., a copyright dispute that Public Knowledge has had its eye on for some time (see our brief in the case and the accompanying blog post). The legal question at the heart of the argument is a seemingly esoteric question of statutory interpretation: namely, what the phrase "lawfully made under this title" means in the context of title 17, section 109 of the U.S. Code. In plain English, the question is whether copyright law's "first sale" doctrine--which is what permits you to give a video game as a birthday present, your local public library to lend out books, and the Redbox machine at the grocery store to rent out movies--applies to items manufactured outside of the United States.

Without the first sale doctrine, those acts of giving, lending, and renting copyrighted works would infringe upon the copyright holder's exclusive right of distribution. First sale essentially says that once the copyright holder has sold a particular copy of a copyrighted work, it doesn't get to control what happens to that copy further down the line. The facts behind this particular lawsuit, where Costco is being sued for reselling wristwatches without authorization, show that copyright law is being applied in situations far removed from the creative pursuits it's traditionally been associated with. As a result, however the Supreme Court decides, the potential ramifications will be quite far-reaching.

The requirement that first sale only applies to copies "lawfully made under [title 17]" means, for one thing, that it doesn't apply to piratical copies. The question presented yesterday was what else it doesn't apply to. Usually there are two sides to every story, and two cases argued before a court. Yesterday, though, I counted at least four different interpretations of the law being advocated. First, of course, were the two named parties in the case, each of which put forward an interpretation that would support its respective business model. Then the Deputy Solicitor General presented the official position of the US government on the matter. And all the while, Justice Breyer in particular was peppering everyone with questions that indicated he might have his own take.

Costco, which makes money by exploiting good deals on merchandise, wherever it can find them, argued (as briefed here) that the "lawfully made" language sets a standard, which can be met by manufacturing anywhere in the world as long as it's done in a fashion that follows the rules of US law. However, in order to avoid creating a conflict with some statements in the legislative history of copyright's import prohibition, they added a caveat, saying that first sale shouldn't apply when the copyright owner has granted someone an exclusive license to operate in a particular country. Copies produced abroad under such an exclusive license, they argued, shouldn't be subject to importation into the US. This caveat proved unpopular with the Justices, particularly after Costco's attorney admitted there was absolutely no basis for it in the text of the statute.

Omega, on the other hand, which makes money by segmenting its markets and engaging in price discrimination between countries, argued (as briefed here) that the "lawfully made" language refers to copies made within the territorial jurisdiction of the US. Taken literally, though, this would produce the absurd result that the copyright owner's control over foreign-manufactured copies would never expire, even after an authorized sale. (If you bought a foreign-printed book directly from the publisher's US office, then gave it to a friend, you'd be liable for copyright infringement.) To avoid this, they added a caveat as well, arguing that "made" doesn't just mean "manufactured", but also includes grants of authority. So when a copyright owner itself imports books or wristwatches or shampoo labels for distribution, they become "lawfully made" as soon as they hit American soil, though they weren't "lawfully made" at the time of manufacture. Omega's caveat was just as unpopular as Costco's, and for the same reason.

The United States proposed an interpretation very similar to Omega's, but without the caveat (as briefed here). The Deputy Solicitor General suggested that the absurd result of never-ending control over particular copies could be avoided by interpreting the exclusive right of distribution narrowly in addition to providing an explicit first-sale exemption for certain circumstances. Justice Breyer, meanwhile, seemed to favor an interpretation much like Costco's, but without their caveat.

In the end, based on the presentations and the questions asked at oral argument, it seems impossible to predict which way the Supreme Court will rule. Maybe one of the four interpretations outlined above will get the five votes necessary to get binding precedential effect, maybe it will be another interpretation entirely, or maybe the Court won't be able to agree on anything. Only two things are certain: first, the Supreme Court seemed extremely skeptical of the arguments of both Omega and Costco, because of their reliance on qualifications that couldn't be found in the text of the statute. Second, the Justices seemed to be taking the broad policy considerations of this dispute very seriously, recognizing that this case isn't just about parallel imports of luxury hard goods, but could affect schools, libraries, and everyday people as well.

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