The Gray Blog

The Supreme Court has granted certiorari review of Costco Wholesale Corp. v. Omega, S.A., US No. 081423, a decision which held that the first sale doctrine does not apply to gray market products manufactured in a foreign country.  By this action, the Court is basically going to revisit its earlier decision in Quality King Distributors, Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998) which held along the same lines.  The Court’s decision to review comes despite the Solicitor General’s recommendation that it should not grant review.

The case under review arose from a suit by the Omega, SA, manufacturer of the well known watch by that name, against Costco Wholesale Corp. to block sales of genuine Omega watches manufactured in Switzerland, sold abroad and then shipped in the gray market to resellers in the US who sold them to Costco.  The Omega watches bear a copyrighted globe design on the underside of the watch.

Omega alleged violations of its distribution rights under 17 U.S.C. 106(3) and unauthorized importation of a copyrighted work(the globe design) in violation of 17 U.S.C. §602(a).   The district court granted summary judgment to Costco based on its defense under the first sale doctrine.

The Ninth Circuit reversed, holding that pursuant to L’Anza the first sale doctrine set forth in Section 109(a) does not apply to foreign-made copies of a U.S. copyrighted work, unless those same copies have already been sold in the United States with the copyright owner’s consent.

The case under review therefore raises a slightly different factual situation from L’Anza.  Unlike in  L’Anza which involved US made goods exported and then re-imported in the gray market, the decision under review involves foreign manufactured and sold goods which are were imported into the US for resale.  The fact that the goods are even more clearly not subject to protection under the L’Anza definition suggests that the Court may be ready to reconsider its earlier decision.

One interesting theory argued in the original case was the question of whether the manufacturer of a primarily non-copyrightable commercial product can imbue it with all of the elements of copyright protection by merely adding a design to the exterior.  Particularly where the consumer cannot be said to be purchasing the product because of the copyrighted work.  It was argued in the briefs that a compulsory royalty free  license may be created under such circumstances.  Stevens seem to mention this theory favorably in the decision.

We will be watching the case closely.

Within two weeks of an alleged leak we have another bigger and better document allegedly stepping through the internet terms of the highly secretive Anti-Counterfeiting Trade Agreement (ACTA).  The new document appears to be a European Union (EU) paper outlining the Internet and Civil Enforcement chapters, and setting forth proposals from the U.S. and responses from the EU, Japan, and other negotiating countries.  Highlights include:

• US advocacy of anti-circumvention controls and opposition from the EU, Japan and New Zealand.
• Arguments for internet service provider liability for knowing facilitation of infringement.
• US advocacy of global implementation of a Digital Millennium Copyright Act (DMCA) style enforcement protocol.
• Advocacy by some countries of limiting ACTA civil enforcement provisions to trademarks and copyrights and not to all intellectual property.
• The EU is seeking injunctive powers against infringing intermediaries.

For more information check out the article on Michael Geist’s Blog.

An alleged excerpt of the secretive Anti-Counterfeiting Trade Agreement (ACTA) has been disseminated as a PDF on a Google file share site.  The PDF is allegedly the proposed language for Article 2.17 of the act providing for internet and digital transmission restrictions.  The file is titled  “Enforcement procedures in the digital environment” and is divided into 7 numbered paragraphs and subsections.

The key provisions revealed in the document include:

• a duty to technology firms to shut down infringement where they have “actual knowledge” that such is taking place;
• a trademark takedown procedures similar to the current copyright takedown procedures;
• an expansion of the DMCA’s injunction against breaking digital locks;
• civil and criminal remedies to be supplemental and cumulative to other remedies;
• a provision for forcing ISPs to implement procedures to monitor for infringements and to address violations. (a footnote suggests that terminating user accounts for repeat infringers)

If genuine, this excerpt discloses many of the concerns with the Act that Internet advocates have been condemning.  For example, the duty to shut down infringement on actual knowledge that infringements may be occurring has previously been suggested in legal arguments.  Critics have characterized the argument as equivalent to requiring a Xerox to stop selling copiers to Kinkos because it has actual knowledge that infringements take place at Kinko’s outlets.  Likewise the termination of accounts are criticized because an entire family’s account is cancelled because of acts which may have been committed by third parties or by a child.  Furthermore, denial of service would arise without legal process and without a specific guaranteed appeal process.

There has been no confirmation that the document is genuine.

Costco Wholesale Corporation (“Costco”) has filed a petition for writ of certiorari with the U.S. Supreme Court seeking to revisit and reconsider the proper interpretation of the first sale rule for foreign manufacturing and sales of products.  The Petition arises in Costco v. Omega, S.A. a case out of the 9th circuit.  This action arises out of the efforts of respondent
Omega, S.A. (“Omega”), to prevent petitioner Costco from reselling watches originally sold by Omega to authorized for-
eign distributors.  Omega affixed a symbol to its watches that it later registered under the Copyright Act in order to claim that, as foreign manufactured goods, under the rationale set forth in Quality King Distribs., Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998).  The Ninth Circuit upheld that the resale of the products was not protected by the first sale doctrine.  According to Costco: “The words “lawfully made under this title” quite clearly do not mean “manufactured in the United States,
and also manufactured abroad, but only in instances where the copyright holder sells into the United States.”  We will continue to monitor.

On Friday the Senate approved passage of the PRO-IP act after stripping out provisions which would have given the department of justice the power and obligation to litigate civil suits on behalf of content owners. Initially known as the Enforcement of Intellectual Property Rights Act, s.3325, the bill was recently renamed the “Prioritizing Resources and Organization for Intellectual Property Act.” (PRO-IP) The civil enforcement provision was one of the most controversial about the new law and had induced the Department of Justice to submit a letter to the Senate complaining that the law threatened to turn government attorneys into “pro bono lawyers for private copyright holders regardless of their resources.”

A remaining provision which has drawn fire is the creation of an IP “czar” within the White House. The Bush administration has objected to this as an usurpation of executive authority. Nevertheless this latter provision remains in the act and raises the questions of whether the White House will exercise its veto.

Finding good books on the parallel market is not an easy task. Despite its long and prominent history in US and European legal practice, the parallel market is usually relegated by most writers to a chapter regarding diversion of goods. It is therefore a treat to find an entire treatise devoted to the parallel market. The fact that it is both readable and intelligent is a plus.

Parallel Trade In Europe, by Christopher Stothers, published by Hart Publishing is just such a treat. As revealed by its title, it explores the history and development of the parallel market trade in Europe. Mr. Stothers, a solicitor working for Milbank, Tweed, Hadley & McCloy LLP, in London, clearly has developed a broad and rich understanding of the topic.

The experience with the parallel market in Europe is very different from that in the US. The difference in how parallel market rights apply “inside the community” versus “outside the community” has no familiar parallel in US practice. Similarly re-packaging restrictions follow unique restrictions. As a result, the book provides European practitioners with a great refresher and non-European practitioners with a very readable introduction.
Sample chapter headings include:

2.I.B. Industrial and Commercial Property
2.IV.A. General Rights to Prevent Repackaging.
2.VI. Rights which are not Subject to Exhaustion
3.I. Art. 81. Anti-compettitive Agreements
5.I.B. International Exhaustion under Community Legislation
5.I.E. Internal Enforcement.

Overall, Parallel Trade in Europe will provide the casual reader with a great overview of the fascinating history and status of parallel market law in Europe and will provide the professional practitioner with an invaluable reference resource. I enjoyed the book and highly recommend it.

Apple, Inc., manufacturer of the well known line of computers and software, filed suit on July 3 in the federal district court for the northern district of California against Florida company Psystar, Inc.   The suit alleges counts for violation of its shrink wrap license, trademark and copyright infringement.  Psystar has been manufacturing and selling a line of computers which sell pre-installed with Apple’s OSX operating system.  Apple’s shrink wrap license which comes with OSX specifically requires that the software be installed only on Apple branded computers.  Psystar has previously expressed defiance at claims that it might be violating Apple’s rights.  Statements that Apple’s license might violate US monopoly law have been attributed to Psystar employees.  We will monitor.

In an important opinion regarding the first sale doctrine, judge James S. Otero of the United States District Court for the Central District of California has ruled in UMG Recordings v. Augusto, No. CV 07-03106 (C.D.Cal.June 28, 2008), that the first sale doctrine protects the sale of promotional music CDs originally distributed with alleged restrictive licenses.

UMG Recordings, Inc. (“UMG”) owns the copyright to numerous songs and produces CDs containing those songs. As a pre-release promotional item, UMG often creates and distributes by unsolicited mail promotional CDs which may contain different art work or songs. These promotional CDs are labeled with the following language:

This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws.

Augusto purchased a large collection of promotional CDs. He then sold them on the online auction site eBay as rare collectibles not available in stores. UMG sent Augusto a cease and desist letter accusing Augusto of copyright infringement. When Augusto continued to sell the CD’s UMG filed suit for copyright infringement. Augusto brought a counterclaim against UMG for violation of section 512(f) of the Digital Millenium Copyright Act (“DMCA”) alleging that UMG knowingly misrepresented to eBay that Augusto’s auctions infringed UMG’s copyrights in order to induce eBay to stop Augusto’s auctions. The parties filed cross-motions for summary judgment in the lawsuit.

The Court rejected the existence of a license and held that the sales were protected by the first sale doctrine on two independent grounds. First the Court analyzed the nature of the alleged license. One hallmark of a license is the owner’s intent to regain possession. In this case UMG did not intend to regain possession of the promotional disks. Another Hallmark of a license is a recurring benefit to UMG from the CDs. The absence of a recurring benefit suggested a gift rather than a license. Finally, the only apparent benefit to UMG from the alleged license is to restrain trade, a purpose contrary to law and public policy. Although the promotional CDs were distributed for free, the Court noted that the first sale doctrine applies after the “first authorized disposition by which title passes.” 2 Nimmer § 8.12[B][1][a]. Based on these grounds, the language on the CDs did not constitute a restrictive license and its conveyance to the initial recipient exhausted UMG’s rights to the CDs.

As a second ground for finding that the first sale rule applied, the Court also ruled that the promotional CDs constituted a gift under federal postal law since they were distributed by mail. The Postal Reorganization Act prohibits “the mailing of unordered merchandise” without “the prior expressed request or consent of the recipient.” 39 U.S.C. § 3009(a), (c).5 This merchandise “may be treated as a gift by the recipient, who shall have the right to retain, use, discard, or dispose of it in any manner he sees fit without obligation whatsoever to the sender.” 39 U.S.C. § 3009(b).

Notwithstanding its finding that the promotional CDs were gifts and that their sale was protected by the first sale rule, the Court rejected Augusto’s counterclaim. The Court stated that 9 under § 512(f) of the DMCA, a copyright owner may be held liable for damages caused by an erroneous invocation of the notice and takedown provision only if the owner did not possess a subjective good faith belief that its copyright was being infringed. The Court found that UMG had a subjective good faith belief that Augusto was infringing its copyrights. This belief was buttressed by consent judgment which Augusto had signed in a prior case accepting that selling promotional CDs constituted copyright infringement.

In non-gray market news, the Court of Appeal for the Tenth Circuit has held that a computer wireframe model that is unadorned and lacks any creative context, one that merely reproduces the image of a car without shading lighting or surrounding objects, does not constitute copyrightable content. In Meshwerks, Inc. v. Toyotta Motor Sales U.S.A., Inc. No. 06-4222 (10th Cir. June 17, 2008) the Court affirmed a ruling from the lower court denying copyright protection to such works. The Court nonetheless denied a motion claiming that the suit had been frivolous and seeking attorneys fees and stated that “[f]ar from being frivolous, this suit presents a novel and consequential question focused on the copyrightability of images in a relatively new technological medium.”

As part of its 2003 advertising campaign, Toyota decided to use digital models of some of its vehicles on its website and on various other media. Through its advertising agency Toyota hired Meshwerks, a Utah corporation to do the digital modeling. “Digitizing involves collecting physical data points from the object to be portrayed. In the case of Toyota’s vehicles, Meshwerks took copious measurements of Toyota’s vehicles by covering each car, truck, and van with a grid of tape and running an articulated arm tethered to a computer over the vehicle to measure all points of intersection in the grid. Based on these measurements, modeling software then generated a digital image resembling a wire-frame model. In other words, the vehicles’ data points (measurements) were mapped onto a computerized grid and the modeling software connected the dots to create a “wire frame” of each vehicle.” At this point further manual shaping had to be done to accurately map every element and shape of the vehicle.

Meshwerks completed the project and delivered the work to Toyota for use in its advertising campaign. The dispute arose when Toyota and its advertising company tried to use the digital models for new advertisements. Meshwerks claimed that they had only authorized a single use of the works. Furthermore, Meshwerks sought and obtained copyright registration for the models. Presumably a work made for hire agreement was not executed as part of the engagement.

Much of the decision was devoted to a comparison with photography related copyright cases. In that respect the Court stated that “the photographer is entitled to copyright solely based on lighting, angle, perspective, and the other ingredients that traditionally apply to that art-form.” quoting Nimmer on Copyright § 3.03[C][3]. By contrast “Meshwerks had nothing to do with designing the appearance of Toyota’s vehicles, distinguishing them from any other cars, trucks, or vans in the world. That expressive creation took place before Meshwerks happened along, and was the result of work done by Toyota and its designers; indeed, at least six of the eight vehicles at issue are still covered by design patents belonging to Toyota and protecting the appearances of the objects for which they are issued.” To the extent that the wiremesh models were later placed in ads which showed lighting, angles, colors and other creative context, those were creative additions which would follow but where not inherent in the original wireframe models. Those were creative additions by those “who came after Meshwerks left the scene.”

The Court concluded that merely copying a copyrighted work without adornment does not create a new copyrighted work. To the extent that the copy is adorned, the only that which is added is apt to be protected. “[A] putative creator who merely shifts the medium in which another’s creation is expressed has not necessarily added anything beyond the expression contained in the original.”

The House of Representatives has passed the Prioritizing Resources and Organization for Intellectual Property (PRO IP) Act (H.R. 4279) a bill which creates a new position of “copyright enforcement czar” in the executive branch called, the Intellectual Property Enforcement Representative. The position is established in the White House to represent and advise the president on IP issues. The bill was introduced by House Judiciary Committee chairman John Conyers Jr. last December and passed the house with a strong vote.

Amongst the other features of the bill, it creates a special IP police with the right to seize property from alleged copyright infringers. The bill would also amend other laws as follows: (1) provide a safe harbor keeping minor errors in a copyright registration from preventing judgment for infringement; (2) allowing criminal prosecution of non-registered copyrights; (3) require courts to basically issue gag orders preventing disclosure of evidence in copyright infringement cases; (4) revise guidelines for civil damages in copyright infringement and counterfeiting cases; (5) enhanced civil and criminal provisions (including restitution) and (6) prohibit importing and exporting of infringing copies of copyrighted works.

While this law is heralded as providing additinal protection to copyright owners, it seems to ignore the experience of the accused in similar areas of law. In the drug area, for example, the accused are often deprived of their property through seizure for months or years while litigating cases which may, if the accused has the funds to support the litigation, be ultimately overturned without any remediation to the wrongly accused. Provisions in the law extending criminal protection to unregistered works and the mandated judicial gag order create potential dark holes of into which the inocent might wander.

The law provides no requirement that the consumer be provided with adequate notice of copyright or with publicly discernible methods for identifying infringing works. No companion bill has been introduced in the Senate.

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