Supreme Court Hears|Costco Copyright Case

WASHINGTON (CN) - The Supreme Court justices on Monday considered whether the first-sale doctrine, which allows the buyer of a copyrighted item to use or sell the item, applies to goods made and sold outside the United States.

Swiss watchmaker Omega filed suit against Costco Wholesale Corp., saying the wholesaler infringed on its copyright by selling Omega watches obtained from third parties who imported them into the United States. Costco said its sales were warranted by the first-sale doctrine.

A federal court in California granted Costco's motion for summary judgment, but the 9th Circuit reversed, saying the first-sale doctrine only applied to goods made and sold in the United States.

The first-sale doctrine states that the owner of a copy of a copyrighted work "lawfully made under this title" is allowed to sell the work without the authority of the copyright owner.

The justices seemed concerned that ruling for Omega would favor outsourcing and wondered if Congress would pass a statute favoring foreign goods.

"[W]hat earthly sense would it make to prefer goods that are manufactured abroad over those manufactured in the United States?" Justice Ruth Bader Ginsburg asked.

Aaron Panner, arguing for Omega, said there was no preference.

Panner and Deputy Solicitor General Malcolm Stewart, arguing for the government in support of Omega, said "lawfully made" implied that a product, at the point it was created, was intended to be sold in the United States.

Justice Samuel Alito asked Stewart what his response was to the argument that, if "lawfully made" basically meant made in the United States, that law incentivizes manufacturing goods abroad, which "couldn't possibly" be what Congress intended.

Stewart acknowledged that the statute created something of a "potential incentive," but argued that it was still more difficult to import foreign-made goods than to import goods that were made in the United States, sent abroad, and then resold in the United States.

Roy Englert, arguing for Costco, said the claim that there was no preference for foreign-made goods was not true, as it was "undeniable that [the statute] creates an incentive for outsourcing."

Justices Stephen Breyer, Samuel Alito and Antonin Scalia complained that both sides were reading "outside the text."

Breyer asked what exactly in the statute protected a foreign publisher, for example, from selling copies of a work to a distributor who then resold them in the United States.

Englert said there was nothing explicitly in the statute, but rather the idea was present in statements made by witnesses before Congress.

"I understand the industry wanted it," Breyer said. "But is there anything in there that suggests that this is what Congress wanted to do, members of Congress? Even I draw the line somewhere."

Englert argued that once copyright owners divided their rights abroad, the goods could be sold without permission.

"Where can you possibly find that in the text?" Scalia asked.

"You cannot," Englert said.

"Well, that's the end of it for me," Scalia said.

Panner argued that the fact that the watches were made in Switzerland means they did not implicate U.S. copyright law at all and were not "lawfully made under this title."

He argued that the phrase means that when a product is initially created, it includes intellectual property rights that would allow it to be sold in the United States.

Alito pointed out that this qualification put Panner, like Englert, outside the text.

Scalia questioned why "lawfully made under this title" means "made in the United States," saying if lawmakers meant to say that, they could have.

"That's just not in the text," Scalia said. "I mean, like the other side, in order to make your theory of the text appear reasonable, you have to bring in a skyhook with a limitation that finds no basis in the text."

Justice Elena Kagan recused herself from the case due to her work as solicitor general.

The case is Costco Wholesale Corp. v. Omega, 08-1423.

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