Costco Dodges Luxury Watch Copyright Suit

(CN) - Since Omega sold its luxury Swiss watches to foreign distributors, it cannot sue over inventory Costco bought on the "gray market," the 9th Circuit ruled Tuesday.

Swiss watchmaker Omega S.A., a subsidiary of the Swatch Group Ltd., began selling the Seamaster, a high-end watch engraved with Omega's copyrighted globe design in late 2003.

Though Omega discussed the possibility of Costco Wholesale Corp. carrying some of its watches that year, Costco never became an authorized Omega retailer.

The next year, however, Costco bought 117 Seamaster watches on the so-called "gray market" from ENE Ltd., a New York company that had bought the watches from unidentified customers of some Omega-authorized foreign distributors.

Costco then sold 43 of the watches to its members in California.

Omega later sued Costco for importing copyrighted work without permission, but a federal judge in Los Angeles ultimately awarded the wholesaler summary judgment.

The 9th Circuit reversed, however, finding that the first-sale doctrine, which lets the buyer of a copyrighted item sell the item, applies only to goods made and sold in this country.

After the equally divided Supreme Court affirmed in 2010, the District Court again awarded Costco summary judgment, and nearly $397,000 in attorneys' fees, finding that Omega used its copyright to illegally expand its monopoly.

A three-judge panel of the 9th Circuit affirmed those lower court decisions Tuesday.

"Omega concedes that it authorized a first sale of the watches in a foreign jurisdiction," Senior Judge Dorothy Nelson wrote for the court in Pasadena. "Omega's right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco's subsequent sale of the watches did not constitute copyright infringement. Thus, application of the first sale doctrine disposes of Omega's claim, resolves this case in Costco's favor, and conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market."

In upholding the award of attorneys' fees, the court cited findings that each weighed in Costco's favor.

Omega's use of "a barely perceptible copyrighted design to the back of some of its watches ... did not provide - and did not seek to provide - creative works to the general public,'" Nelson wrote, quoting the underlying opinion.

"Instead, 'Omega sought to exert control over its watches, control which it believed it could not otherwise exert,'" she added. "Thus, the court concluded, it should have been clear to Omega that copyright law neither condoned nor protected its actions, and the imposition of fees would thus further the purpose of the Copyright Act. This conclusion was not error."

Concurring, Judge Kim McLane Wardlaw noted the "novel issue" of whether Omega attempts to control imports and restrict competition constitutes copyright misuse.

"The watchmaker's anticompetitive acts promoted neither the broad public availability of the arts nor the public welfare," Wardlaw wrote. "Instead, they eliminated price competition in the retail market for Omega watches and deprived consumers of the opportunity to purchase discounted gray market Omega watches from Costco. Omega misused its copyright by engraving the globe design on the underside of its watches, and attempting to use copyright law to eliminate intrabrand competition from Costco in the retail watch market. Because the district court correctly held that Omega misused its copyright in the Globe Design by attempting to leverage its limited monopoly over the design to control the importation and sale of Seamaster watches, I would affirm the district court on the issue of copyright misuse."

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