By  on November 9, 2010

WASHINGTON — The Supreme Court on Monday heard arguments in the debate over the ability of discounters and off-price retailers to buy imported luxury products from middlemen and sell them at lower prices versus a foreign manufacturer’s right to control the distribution and resale of its products.

The high court heard an appeal by Costco Wholesale Corp., which is challenging the right of Omega SA, as a foreign manufacturer, to use copyright law to control the distribution and resale of the Swiss watchmakers’ imported products. The case centers on a provision under U.S. copyright law known as the “first-sale doctrine.” Under that doctrine, any individual or company that owns a copy of a product lawfully made under the statute can sell or dispose of the copy without the authority of the copyright owner. A manufacturer’s rights to distribution of a product ends upon the first authorized sale it makes.

In 2004, Costco purchased 117 Seamaster style Omega watches from a U.S. distributor, which bought them from authorized Omega foreign distributors in Egypt and Paraguay.

Omega filed suit against Costco in 2004 after the warehouse club sold 43 of the Seamaster Omega watches in its stores, at steep discounts, alleging Coscto’s acquisition and sale of the watches constituted copyright infringement. Costco charged that Omega created a laser-engraved emblem for the back of its watches and applied for a copyright in the U.S. for the sole purpose of invoking the Copyright Act to “restrict the resale of its products.”

In 2008, the Ninth Circuit Court of Appeals ruled in favor of Omega and held that the “first-sale” defense only applied to those items made and distributed in the U.S., and not items such as Omega’s watches that were originally made and distributed outside the U.S. The Supreme Court ruled in the 1998 Quality King Distributors Inc. v. L’anza Research International Inc. case that the first-sale doctrine does apply to goods made in the U.S., exported abroad and reimported to the U.S. The specific question in the Costco case is whether it makes a difference whether the goods are manufactured abroad.

During arguments Monday, Supreme Court justices questioned the arguments made by both sides, with some justices indicating that neither side put forth arguments supported by the text of copyright law.

“Drawing the line between the U.S. manufacturer and the foreign manufacturer makes no sense,” said Costco’s lawyer, Roy Englert Jr.

Aaron Panner, Omega’s attorney, said, “First of all, this doctrine has existed for nearly 30 years. It’s hornbook law that the first-sale doctrine does not provide a defense in circumstances where a copyrighted article is manufactured or reproduced abroad.”

Justice Ruth Bader Ginsburg asked Panner to respond to Englert’s argument about “what earthly sense would it make to prefer goods that are manufactured abroad over those manufactured in the United States.”

Justice Sonia Sotomayor challenged Panner to tell her where in the Quality King case the decision “turned on where the goods were made.” Sotomayor argued that the Quality King case, and therefore the application of the first-sale rule, was not predicated on where the goods were manufactured but whether the owner sells the copy.

The U.S. Solicitor General’s office supported Omega in the case and argued for upholding the Ninth Circuit Court of Appeals’ decision.

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