Following a Supreme Court deadlock, Costco beats Omega on remand by invoking the equitable doctrine of "copyright misuse"

Posted by Charles Colman

While Omega S.A. v. Costco Wholesale Corporation may not be the fashion law case of the year (or of immediately apparent relevance to anyone but intellectual property lawyers), a dispositive decision in Costco's favor, handed down last week by a California federal district court, could signal the blossoming of a little-used, but potentially powerful, equitable defense known as "copyright misuse."  So, non-IP lawyers, kindly suck it up and pay attention -- or don't... but don't say I didn't warn you!


As regular readers of this blog know, most apparel and fashion accessories, like other material the federal courts have deemed to be "useful articles," are ineligible for copyright protection.  That prohibition doesn't include jewelry, but it does include watches, much to luxury watch purveyor Omega's chagrin.  As a result, Omega found itself unable to control the unauthorized importation of authentic watches that ended up in "undesirable" sales outlets like discount store Costco, selling at roughly 60% of regular retail prices.


Beginning in 2003, Omega cleverly "decided to affix a new copyrighted design to the reverse side of its watches to take advantage of the copyright law's importation limitations" (to quote from the District Court's November 9th decision; emphasis added.)  Then, in 2004, it sued Costco for unauthorized importation of copyrighted material -- not the watches, per se, but rather the "Globe Design" on their reverse side:



While the design might have had aesthetic value of its own, Omega conceded during the litigation that at least one "purpose of the copyrighted Omega Globe Design was to control the importation and sale of its watches containing the design, as the watches could not be copyrighted."


The litigation trudged along throughout the mid- and late-aughts, first working its way from the District Court to the Ninth Circuit Court of Appeals, then from the Ninth Circuit to the U.S. Supreme Court.  SCOTUS agreed to hear the case in order to resolve a rather arcane legal question concerning the meaning and interaction of the Copyright Act's provisions on works "lawfully made under this title" (specifically, does that include goods first manufactured abroad?), unauthorized importation, and the so-called "first-sale" doctrine.  (Alas, we'll have to save that discussion for another day.)  But after the Justices tied, 4-4 (with Justice Kagan having recused herself), the case was remanded to the District Court, and each side moved for summary judgment.


Costco's motion for summary judgment was premised in part on a legal doctrine called "copyright misuse," which the Ninth Circuit described in 2010 as "an equitable defense to copyright infringement, the contours of which are still being defined."  Costco's argument was, in essence, that (to quote the district court) "Omega misused its copyright of the Omega Globe Design by leveraging its limited monopoly [over that design, in the form of copyright protection, to] control the importation of that design to control the importation of its Seamaster watches."


The District Court acknowledged that judicial decisions applying the copyright misuse defense had previously "been limited to situations involving antitrust tying agreements and restrictive licensing agreements," but in the Court's view, this did not mean "copyright misuse could not exist in other situations."  Indeed, as the District Court opined, the Ninth Circuit had "deliberately chose[n] a broad rule for copyright misuse so that the rule could be applied to new situations as they arose."  The Court ruled that this was one such situation, meaning that Omega could no longer pursue its claims for copyright infringement.


Surprisingly, the District Court's decision finding that Omega had engaged in copyright misuse is only four pages long; courts typically write at much greater length when expressly expanding an existing legal doctrine.  But the brief opinion won't be the last word on the subject.  The parties have already spent a fortune on this litigation, and the District Court's decision is so potentially detrimental to Omega's efforts to "price-differentiate" based on region, that Omega will almost certainly appeal the recent decision to the Ninth Circuit, which will undoubtedly pontificate on the application of the copyright misuse doctrine to these facts at much greater length.  [See update below.]

No, this isn't Louboutin v. YSL, but it could turn out to be a quietly groundbreaking decision, whose adoption -- or rejection -- by other courts should be closely monitored by companies in fashion (and other industries in which non-copyrightable goods are manufactured abroad and distribution channels are currently controlled via too-clever-for-their-own-good copyright hooks.)  Check back with LAW OF FASHION ® to see how all of this pans out.

[UPDATE: The District Court's ruling on copyright misuse is now on appeal, though we shouldn't expect a Ninth Circuit ruling for months. Meanwhile, SCOTUS has granted cert in a case that should resolve key questions about the "first-sale doctrine" left unanswered by the deadlocked Court in Omega.]


[This post is for entertainment and informational purposes only, and does not constitute legal advice or create an attorney-client relationship among any individuals or entities.  Any views expressed in this post or at the linked web pages are those of the writer on a particular date, and should not necessarily be attributed to this writer, his law firm, or its clients.]