Background
Omega S.A., the Swiss watchmaker, engraved a small copyrighted “Omega Globe Design” on the back of each of its watches manufactured in Switzerland. Costco purchased genuine Omega watches through unauthorized gray market channels — watches manufactured and first sold abroad — and resold them in its U.S. stores at prices significantly below Omega’s authorized retail pricing. Omega sued Costco for copyright infringement, arguing that Costco’s unauthorized importation and resale of the watches violated Omega’s exclusive distribution rights under copyright law, since the Omega Globe Design was an embedded copyrighted work in each watch.
Costco defended under the first sale doctrine (§ 109 of the Copyright Act), which generally allows the owner of a lawfully made copy of a copyrighted work to sell or otherwise dispose of that copy without the copyright holder’s permission. Costco argued that because the watches were genuine Omega products, the copyright in the Omega Globe Design had been exhausted by the first sale and Omega could not prevent resale.
The Court’s Holding
The Ninth Circuit held that the first sale doctrine did not apply to foreign-manufactured copies. The court relied on Quality King Distributors v. L’Anza Research International (Supreme Court, 1998), which had held that the first sale doctrine applied to works “lawfully made under this title” — and interpreted “under this title” to mean copies manufactured in the United States, not copies manufactured abroad. Omega watches were manufactured in Switzerland; their first sale occurred abroad; therefore the first sale doctrine did not exhaust Omega’s U.S. import and distribution rights under this reading of the statute.
Judge Reinhardt dissented, arguing that the majority’s geographic limitation on the first sale doctrine produced an absurd result: copyright law becoming a vehicle for price discrimination and geographic market segmentation that Congress never intended. The Supreme Court affirmed the Ninth Circuit by an equally divided 4-4 vote (Justice Kagan recused herself), leaving the gray-market rule intact without a binding national precedent — a question later resolved in Kirtsaeng v. John Wiley (2013).
Key Takeaways
- Under the Ninth Circuit’s reading (later reversed nationally), the first sale doctrine applies only to copies “lawfully made” in the United States — copies manufactured abroad and first sold outside the United States may be subject to the copyright owner’s right to control U.S. importation and distribution.
- Copyright holders can use the first sale doctrine’s geographic limitation as leverage to prevent gray market importation of genuine goods containing copyrighted works, controlling parallel import pricing through copyright rather than contract or trademark.
- The Ninth Circuit rule was ultimately rejected by the Supreme Court in Kirtsaeng v. John Wiley & Sons (2013), which held 6-3 that the first sale doctrine applies to all lawfully made copies regardless of where they were manufactured — enabling gray market importation of genuine goods.
- The Omega v. Costco and Kirtsaeng line of cases illustrates how copyright law’s distribution right intersects with international trade and gray market pricing — with major implications for consumer electronics, luxury goods, and academic publishing markets.
Why It Matters
Omega v. Costco was the principal battleground in a multi-year dispute over whether U.S. copyright law could be used to enforce geographic price discrimination by preventing authorized gray market goods — genuine products first sold abroad at lower prices — from entering the U.S. market. The case drew together copyright law, international trade, and consumer protection concerns in a commercially significant dispute affecting virtually every global brand that manufactures its products outside the United States.
The Supreme Court’s 4-4 affirmance left the Ninth Circuit rule standing but without national binding effect — creating uncertainty that persisted until Kirtsaeng v. John Wiley (2013). After Kirtsaeng resolved the question in favor of global first-sale exhaustion, the strategic use of embedded copyright claims to block gray market goods was largely foreclosed, vindicating Costco’s position in the underlying commercial dispute.