A century ago, the Supreme Court circumscribed copyright owner’s exclusive rights. In Bobbs-Merrill,2 it held that a copyright owner’s exclusive right to distribute copyrighted material does not include the power to control a purchaser’s subsequent disposition of the purchased copy3 Whatever benefit a copyright owner seeks it must be bargained for at the first sale. Congress codified this “first sale” principle 17 U.S.C. § 109(a).4
The first sale doctrine is the animating principle courts have relied upon in limiting the use of intellectual property law to prevent parallel imports. Under this doctrine unless title to the copy passes through a first sale by the copyright owner, subsequent sales do not confer good title.5
Since Bobbs-Merrill, producers have sought other legal mechanisms to maintain prices and exclusive marketing programs. But Congress has resisted efforts to alter the balance of competing interests reached in Bobbs-Merrill.6 Attempts include the use of trademark law,7 patent law,8 and legislation specifically controlling prices.9
Quality King is the Supreme Court’s most recent opinion to circumscribe these efforts. Specifically it limits the right of copyright holders to bar parallel imports of U.S.-manufactured copyright materials.
This paper reviews lower court decisions related to parallel trade in copyrighted materials since Quality King.10 Part II briefly defines parallel imports and price discrimination. Part III gives the facts, procedural history, and reasoning of Quality King. Part IV expands the discussion to include the copyright related parallel import cases decided since Quality King. Part V summarizes the state of copyright law with respect to parallel imports and the future of parallel imports.
II. Background: Price Discrimination & Parallel Imports
To understand the interests at issue in parallel trade, a brief discussion of price discrimination is warranted. Price discrimination is where a seller charges different prices to different buyers when the price difference cannot be explained by a difference in cost.11 Common examples include coupons, ladies nights, and last-minute airfares. In each of these examples the seller is able to charge a different price for the same goods or services.
Producers seek to sell their goods at the most profitable price. Transnational producers traditionally seek higher prices in developed nations like the United States or in European countries and offer their products at a lower price in developing countries such as Mexico or India.
Price discrimination is only effective when producers do not face price arbitrage. Arbitrage is the buying and selling of goods in different markets in order to take advantage of different prices for the same goods. The difference in prices is what makes parallel imports possible. Parallel imports, or gray-market goods, are non-counterfeit goods. They are goods that are purchased on a foreign market and resold in the domestic market.12
Producers dislike parallel imports because they undermine their ability to maintain higher domestic prices and exclusive marketing programs. The parallel imports typically compete against the non-imported goods at lower prices and through different channels of trade. Producers may rely on contract law13 to limit parallel imports but when contract law fails14 to prevent parallel imports producers often turn to trademark and copyright law.
With respect to copyrighted material there are two basic parallel import scenarios: The first is when the materials are produced in the U.S, exported and re-imported. This round-trip is the scenario at issue in Quality King.15 The second scenario is when the materials are produced abroad. This scenario was expressly not addressed in Quality King. Several species of the second scenario are relevant. First, a market allocation agreement. In this variation the copyrighted materials are manufactured in the U.S. and abroad. The copyright owner licenses the U.S. copyright to a U.S. distributor and the foreign copyright to second distributor with the understanding that each distributor may only distribute within their domestic market. If the foreign distributor begins distributing in the U.S., the materials are parallel imports.16 This is the hypothetical scenario discussed in Quality King and the actual facts of Pearson Educ., Inc. v. Jun Liao.17 In the second species, the U.S. copyright owner produces copyrighted materials outside the U.S. and bars the import of the materials. This is the scenario in Omega S.A. v. Costco Wholesale Corp.18 and the legality of which was left ambiguous in Quality King.
III. Quality King: Facts, Procedural History, & Supreme Court Holding
L’Anza sold hair care products to U.S. distributors similar to the castor oil for hair growth.19 These distributors, per a distribution agreement, sold the L’Anza products exclusively to barber shops and salons.20 L’Anza promoted these products in trade magazines and at salons.21 It also sold these U.S.-produced products in foreign markets for prices 35%-40% lower than the U.S. prices.22 L’Anza’s distribution agreements prevented distributors from reselling the products to unauthorized resellers. But through a chain of unknown events a shipment of L’Anza products found it way back to the U.S.
Quality King, a U.S. distributor, purchased this gray-market shipment of Lanza products from a distributor in Malta.23 Quality King then sold the L’Anza products at lower prices to retailer unauthorized by L’Anza.24 These sales undermined L’Anza’s pricing and exclusive marketing program.
L’Anza owned copyrights for the labels on their packaging.25 Based on these copyrights L’Anza sued Quality King under 17 U.S.C. § 602(a) claiming the importation of copyrighted material without authorization infringed.26 Quality King staked its defense on the first sale doctrine. It argued that § 109(a) is a complete defense to any copyright infringement claim. Neither the district court or the Court of Appeals were persuaded. Both found for L’Anza. The district court reasoned that Congress intended to protect domestic copyright holders by preventing competition from its own products.27 It held that only domestic sales trigger the first sale doctrine and when products are sold to a foreign distributor the sale is not considered a U.S. sale for purposes of the first sale doctrine.28
The court of appeals affirmed. It agreed that the purpose of § 602(a) is to prevent copyright owners from losing control over domestic distribution.29 The court described the downward pressure on prices as “just the evil that Congress sought to prevent in adopting § 602(a).”30 The court was concerned that parallel trade deprived copyright owners of “the ‘full value’ to which they were entitled…even though the imported copies may have been the subject of a valid first sale.”31 The court held that the first sale doctrine did not apply to to legally made copies imported into the U.S. without the authority of the the copyright owner.32
The Supreme Court disagreed. Focusing on the language of §§ 109(a), 106(3), and 602(a) it found that § 602(a)’s bar on importation was an infringement of the § 106(3) right to distribute.33 Further, it reasoned that all the rights granted in § 106 “are limited by the provisions of §§ 107 through 120.”34 Applying this reasoning to the question of “whether the ‘first sale’ doctrine endorsed in section 109(a) is applicable to imported copies,” the court unanimously held that once a copyright owner places an item in the stream of commerce by selling it he has exhausted his exclusive right to distribute.35
Justice Ginsburg joined the majority opinion and filed a two sentence concurrence: “This case involves a ’round trip’ journey, travel of the copies in question from the United States to places abroad, then back again. I join the Court’s opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad.”36 Her concurrence presaged or precipitated the next legal frontier for producers seeking to curtail parallel imports.
IV. Parallel Import Decisions After Quality king
Few round-trip parallel import cases have been brought in the decade since Quality King was decided. Most cases citing to Quality King rely on it for its explanation of the first sale doctrine.37 Cases raising Justice Ginsburg’s question have been primary decided on summary judgment at the district court level. Only one case, Omega v. Costco.,38 has been heard on appeal. The post-Quality King cases include plaintiffs seeking to protect the value of their copyrighted works and plaintiffs using copyright law to protect pricing and exclusive distribution programs. Most of these turn on questions of law so the factual records are often less than full.
The following summaries illustrate the parallel import scenarios, legal reasoning, and outcome of the relevant cases decided since Quality King.
Pearson Educ., Inc. v. Jun Liao39
Pearson owns copyrights in textbooks in both the U.S. and foreign jurisdictions. The U.S. editions are manufactured in the U.S. and the foreign editions are manufactured outside of the United States. The foreign manufactured editions are intended by Pearson for sale exclusively outside the U.S. Liao purchased foreign editions of the textbooks and resold them in the U.S. This is not a round-trip parallel import. It is analogous to the hypothetical market allocation agreement postulated in Quality King.
Pearson sued for infringement under § 106, the exclusive right to distribute and prevailed on a motion for summary judgment. The decision turned on where the materials were manufactured. The outcome accords with Quality King but the reasoning relied on the pre-Quality King decision in BMG Music v. Perez.40 BMG held that the first sale doctrine does not provide a defense to infringement under § 602 for goods manufactured abroad. The court concluded “that application of the first sale defense to all cases would vitiate section 602(a).”41
Omega S.A. v. Costco Wholesale Corp.42
Omega, a Swatch brand, manufactures watches in Switzerland and sells them through authorized dealers.43 Costco was not authorized to deal in Omega watches.44 Omega sold a shipment of Swiss-made watches to a foreign distributor. Through third-party sales, the shipment made its way to a U.S. distributor. This distributor sold the shipment to Costco, who sold the watches in its retail stores. Because the watcher were manufactured in Switzerland they are not a round-trip parallel imports.
Omega adds an interesting twist to this case. Engraved on the back of the watches was a one-half centimeter “Omega Globe,” a simple design consisting principally of three Greek “Omega” symbols inside a circle.45 The Omega Globe is registered as a copyright with the United States Copyright Office.46 The highest ranking representative of Omega’s U.S. affiliate testified that the Omega Globe was not designed or used for any creative purpose.47 Omega used it specifically to control the importation of Omega watches and “to prevent unauthorized dealership.”48
Omega sued Costco alleging infringement under §§ 106(3) and 602(a). Both parties moved for summary judgment. Costco claimed the first sale doctrine barred any claim of infringement. The district court accepted this defense and ruled in favor of Costco.
Omega appealed.49 It argued that Quality King does not overrule Ninth Circuit precedents50 that hold the first sale doctrine is only available as a defense where the disputed works were “either made or previously sold in the United States with the authority of the copyright owner.”51 Costco argued that holding is inconsistent with the the plain language of the statute and its legislative history.52 Most compelling, in the court’s eyes, is Costco’s contention that under this interpretation copyright owners have an incentive to produce their copyrighted materials abroad. This absurd result, Costco argued, militates against a first sale doctrine that turns on the location of manufacture and for a doctrine that turns on the location of the first sale.53
Despite the potential of this absurd result, the Ninth rejected Costco’s argument and held “that Quality King did not invalidate our general rule that § 109(a) can provide a defense against §§ 106(3) and 602(a) claims only insofar as the claims involve domestically made copies of U.S.-copyrighted works.”54
Swatch S.A. v. New City Inc.55
This case is similar to the Omega case in that it involves watches and the same plaintiff. The watches at issue were manufactured and first sold abroad. Like Omega, this too was not a round-trip case. New City Inc. a U.S. reseller acquired a shipment of Swatch watches not authorized for importation into the U.S. The watches were then sold without Swatch’s consent.56 Swatch sued for infringement under § 602(a) and prevailed on a motion for summary judgment.57
New city, argued “that the first sale doctrine set forth in § 109(a) bars all claims of copyright infringement against lawful owners who resell copyrighted works — regardless of the importation protection provision of § 602(a).”58 The court rejected New City’s reading of Quality King as overly broad.59 Where the goods were manufactured, the court noted, distinguishes Swatch from Quality King. It explained that “[h]ad the goods not been manufactured domestically, § 109(a) would not have applied.”60
O’Well Novelty Co. v. Offenbacher, Inc.61
O’Well, a Taiwanese exporter, hired a Chinese artist to create sculptures of lighthouses. O’Well directed a Taiwanese manufacturer, Chiu Yi, to produce the sculptures.62 O’Well owned part of Chiu Yi.63 O’Well sold the sculptures to Offenbacher. When O’Well could not keep up with demand. Offenbacher began buying virtually identical sculptures from Taiwan Novelty Co., who was buying them from Chiu Yi. This too is not a round-trip scenario.
O’Well, to prevent the sales by Taiwan Novelty to Offenbacher, registered copyrights in the sculptures and sued, claiming Offenbacher violated O’Well’s § 106 distribution right and § 602(a) importation right.64 O’Well moved for summary judgment.
The court analyzed whether the first sale doctrine applied by asking whether the sale of the sculptures by Chiu Yi to Taiwan Novelty was authorized by the copyright owner—O’Well.65 “[I]f the [statues] were legitimately acquired, Taiwan Novelty is free to sell [them] to any party it wishes and those parties are free to distribute them further.”66 The ultimate of this case is unknown. Questions of fact remained so the court did not grant the motion for summary judgment, but the the court’s interpretation of § 109 is clear—as long as the first sale was authorized, without respect to where it occurred, then the first sale doctrine applies.67 This only case to be decided not on the location of manufacture but instead on whether the copyright holder authorized the sale.
The lower courts have attempted to answer the question raised and left open in Ginsburg’s concurrence—whether copyrighted material manufactured abroad may trigger the first sale doctrine. Not surprisingly the answer to this question is unclear. The scant case law and factual records tend towards the notion that only U.S. manufacture materials first sold in the U.S. trigger the § 109(a) first sale doctrine. Copyrighted materials manufacture abroad do not. Leading commentators generally agree. William Patry, Melville and David Nimmer all agree that § 602(a) give copyright owner the right to exclude parallel imports.68
But the Supreme Court has a history of circumscribing intellectual property rights with respect to parallel imports. And the court is not the only entity that may answer the question. Congress may settle the question by amending the statutes. Or the question may be answered on the international stage. Tensions caused by the disparity in prices charged in developed and developing nations could prompt changes in exhaustion policies.
Under the Wipo Copyright Treaty, signatory nations are free to establish their own exhaustion regimes. If consumer concern over disparate pricing grows, so to will support for regional or international exhaustion.
Another phenomena, digital distribution of copyrighted material, may push nations towards international exhaustion, or perhaps so blur the distinction between domestic and foreign manufacture that domestic exhaustion based on manufacture is untenable. Consider a French movie sold on a U.S. website and downloaded from a U.K.-based server. Where was the copy manufactured? The answer does not come easily. But the answer may be irrelevant. Digital distribution with its DRM and click-through end user licenses agreement may obviate the question altogether and allow copyright owners to achieve what they could not in the century since Bobbs-Merrill—perfect price control. When copyrighted material is licensed instead of sold the license its may dictate what the licensee may do with the material.69
In short until the law in this area is settled by the court, the legislature, or by treaty the location of manufacture is probably the dispositive factor when determine whether a copyright owner may bar parallel imports.70
Appendix A: Parallel Import
Factors, likely outcomes, and relevant case law.
|Initial sale in U.S.||Initial sale abroad|
|Materials Manufactured in U.S.||First sales doctrine applies. See Bobbs-Merril. Note: there is no importation.||First sales doctrine applies. See Quality King.|
|Materials Manufactured abroad||First sales doctrine applies. But See Patry.||Split of authority. Omega, (first sale doctrine does not apply); O’Well Novelty, (when the copyright owner authorizes the initial sale then the doctrine applies.)|
1 Quality King Distribs. v. L’Anza Research Int’l, 523 U.S. 135 (1998).
2 Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908). Bobbs-Merrill, a book publisher, sought to control the resale price of its books by including a notice in the books proscribing sale of the book for less than $1. Macy’s (Straus) sold the book for $.89 and Bobbs-Merrill sued.
3 Quality King, 523 U.S. at 140-42.
4 “Notwithstanding the provisions of section 106 (3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. § 109(a).
5 Novell, Inc. v Unicom Sales Inc., 2004 U.S. Dist. LEXIS 16861 at *13 (N.D. Cal. 2004).
6 Action Tapes, Inc. v. Mattson, 462 F.3d 1010, 1012 (8th Cir. 2006)
7 K Mart Corp. v. Cartier Inc., 486 U.S. 281 (1988) (“A Customs Service regulation, 19 C.F.R. § 133.21(c) (1987) provides an “authorized-use” exception, which permits importation of gray-market goods where the articles of foreign manufacture bear a recorded trademark or trade name applied under authorization of the U.S. owner.”)
8 BBS Kraftfahrzeugtechnik AG and BBS Japan, Inc. v. Rasimex Japan, Inc., Supreme Court Heisei 7 (o) No. 1988 (July 1, 1997), J. of S. Ct., No. 1198 (July 15, 1997) (Japan doesn’t recognize international exhaustion, but the outcome treats the parties as though international exhaustion is recognized); Fuji Photo Film Co. v. ITC, 474 F.3d 1281, (Fed. Cir. 2007) (patent rights were exhausted with respect to goods first sold in the U.S., but were not exhausted with respect to the goods first sold abroad.)
9 See generally the Miller-Tydings Act of 1937, 15 U.S.C. § 1 (legalized retail price maintenance, allowing manufacturers to maintain minimum prices for the sale of their goods); the McGuire Act of 1952, 15 U.S.C. § 45(a) (provides that contracts prescribing minimum or stipulated prices for the resale of a trademarked commodity shall be exempted from the operation of the Federal Anti-Trust Laws). Both were repealed by the Consumer Goods Pricing Act of 1975.
10 523 U.S. 135 (1998).
11 FTC v. A. E. Staley Mfg., 324 U.S. 746, 757 (U.S. 1945)
12 The terms gray-market and parallel imports are also used to describe trademark or patented goods.
13 2-8 Nimmer on Copyright § 8.11. “Contract law has proven inadequate to redress this situation, given that relief is available only against parties with actual knowledge of territorial limitations in the contract between the original grantor and grantee.” Citing Johnson & Johnson Prods., Inc. v. Dal Int’l Trading Co., 798 F.2d 100 (3rd Cir. 1986).
14 Id. “Having lost in other fields of law, manufacturers are now realizing that copyright may furnish a supplemental vehicle for protection.”
15 Quality King, 523 U.S. at 154.
16 This is a scenario described by Report of the Register of Copyrights quoted in Quality King. 523 U.S. 135, 147-148 (U.S. 1998).
17 2008 U.S. Dist. LEXIS 39222 (S.D.N.Y. May 13, 2008).
18 541 F.3d 982, (9th Cir. 2008).
19 Quality King, 523 U.S. at 138.
21 Id. at 139
23 Id. The court could not determine the precise chain of sales, but there was no dispute that the “goods were manufactured by L’Anza and first sold by L’Anza to a foreign purchaser.”
25 Id. at 138.
26 L’Anza Research Intern., Inc. v. Quality King Distributors, Inc., 1995 WL 908331 (C.D.Cal.,1995)
27 Id. at 3.
28 Id. at 4.
29 L’Anza Research Intern., Inc. v. Quality King Distributors, Inc., 98 F.3d 1109, 1117 (C.A. 9 (Cal.),1996)
32 Id. at 1120.
33 Quality King, 523 U.S. at 144.
35 Id. at 138, 152.
36 Id. at 154.
37 For an amusing read on pro se copyright litigation consider Kettenburg v. Univ. of Louisville, 2005 U.S. Dist. LEXIS 12170 (W.D. Ky. June 16, 2005). The opinion cites to a Quality King footnote, explaining the VARA.
38 541 F.3d 982, (9th Cir. 2008)
39 2008 U.S. Dist. LEXIS 39222 (S.D.N.Y. May 13, 2008)
40 BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991)
41 Id. at 10.
42 541 F.3d 982, (9th Cir. Cal. 2008)
43 Id. at 983.
44 Id. at 984.
45 Appellee’s Answer at 5, 2007 WL 4985835, December 17, 2007.
47 Appellee’s Answer, 2007 WL 4985835 (C.A.9) (2007).
49 Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. Cal. 2008).
50 BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991) (“The words ‘lawfully made under this title’ in § 109(a) grant first sale protection only to copies legally made and sold in the United States.”); Parfums Givenchy v. C & C Beauty Sales, 832 F. Supp. 1378 (C.D. Cal. 1993).(“The first sale doctrine cannot apply to actions such as an action for infringement under 17 U.S.C.S. § 602(a). 17 U.S.C.S. §§ 106(3), 109(a), and 602(a) all rest on the principle that the copyright owner is entitled to realize the full value of each copy or phonorecord upon its disposition. Applying the first sale doctrine to actions for unauthorized importation of goods manufactured and first sold abroad would violate this principle and defeat Congress’s intent, in enacting § 602(a), to expand importation protection for copyright owners so as to avoid circumvention of the distribution right.”) aff’d sub nom. Parfums Givenchy v. Drug Emporium, 38 F.3d 477 (9th Cir. 1994) (“Sales abroad of foreign manufactured United States copyrighted materials do not terminate the United States copyright holder’s exclusive distribution rights in the United States under 17 U.S.C.S. §§ 106, 602(a).”)
51 Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982, 983 (9th Cir. Cal. 2008)
52 Id. at 989.
53 Appellee’s Answer, 2007 WL 4985835 (C.A.9) (2007).
54 Id. at 985.
55 454 F. Supp. 2d 1245, (S.D. Fla. 2006)
56 Id. at 1248.
58 Id. at 1253.
59 Id. at 1253
60 Id. at 1254.
61 49 U.S.P.Q.2d (BNA) 1576 (D. Md. Sept. 22, 1998)
62 Id. at 3.
63 Id. at 25.
64 Id. at 12.
65 Id. at 25.
66 Id. at 24.
67 Id. at 23.
68 See Patry on Copyright § 13:46; Nimmer on Copyright § 8.11;
69 See Bobbs-Merrill, 210 U.S. 339.
70 See Appendix A for a table of illustrating the likely outcomes and relevant case law.