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.

In Office Depot v. Zuccarini the Ninth Circuit has affirmed a district court decision ruling that a creditor may levy against a domain name in the jurisdiction where the domain name registry is located.  This decision is significant in that it verifies that domain names are property subject to levy.  By ruling that jurisdiction arises were the registry is located, this decision also opens the door to enforcement against foreign owned domains housed in US registries.

At trial, Office Depot obtained a judgment and assigned it to DS Holdings in 2000.  DS went after 190 domain names that were registered in Zuccarini’s name. DS sought to have a receiver appointed over the domain names. The district court granted DS’s request to have the receiver appointed, and Zuccarini appealed. Zuccarini’s appeal focused on whether it was proper to appoint the receiver in the Northern District of California, since the domain names were not necessarily “located” there.

The court of appeals applied California law to the question of whether domains constituted property.  The Court ruled that domains were intangible property subject to seizure.  Then, taking guidance from elements of the Anti-Cybersquating Consumer Protection Act (ACPA), although ACPA was not implicated in the case, the Court found in rem jurisdiction where the “registrar, registry, or other domain name authority” is located.

For a more thorough review of the decision see Eric Goldman’s Blog.

In the recent case of Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, No. 07-3340 (10th Cir. April 9, 2009), the 10th Circuit ruled that differences in warranty and service terms can constitute a “material” difference which prevents resale despite under the first sale doctrine.  Beltronics is a manufacturer of electronics equipment which it sells under its Beltronics trademark.  Beltronics maintained at least two authorized distributors who agreed to sell the products for a specified minimum price.  Apparently in violation of their distribution agreements, those distributors sold Beltronics radar detectors to Midwest, which in turn resold them as “new” on the internet auction site eBay.

To prevent Beltronics from discovering that Midwest’s inventory had been supplied by the two distributors, the distributors either replaced each radar detector’s original
serial number label with a phony label or removed the original label altogether
before shipping equipment to Midwest.  On rare occasions, when the distributors
supplied Midwest with a radar detector bearing an original serial number label,
Midwest removed the label prior to resale.

In September 2007, Beltronics filed suit against Midwest alleging (1) counterfeiting and federal trademark infringement under 15 U.S.C. § 1114; (2) false designation or origin under 15 U.S.C. § 1125; and (3) trademark infringement, unfair competition, and passing off in violation of state law.  Beltronics also sought a preliminary injunction.  The preliminary injunction was granted and Midwest appealed.

On appeal the 10th Circuit rejected the argument that “material” differences should be limited to physical differences.    The absence of manufacturer warranty service was material difference enough.   While affirming that adequate disclosure could insulate the sale, the 10th Circuit affirmed the lower court’s rulling that the disclosure placed on the product listing by Midwest was insufficient.  Midwest’s disclosure stated:

WARRANTY – WE PROVIDE A 1 YEAR DEFECTIVE
REPLACEMENT WARRANTY.  THE MFG WILL NOT HONOR
THE WARRANTY IF PURCHASED OFF EBAY.  SINCE WE
HONOR THE WARRANTY, THE SERIAL NUMBER HAS BEEN
REMOVED AND RETAINED BY US.

The district court rejected this disclosure as insufficient because no notice was provided on the products themselves and the disclosure failed to address software updates and other support elements.  Evidence of actual confusion by consumers contacting Beltronics for warranty service further sealed the decision.

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.

Well Summer approaches and the Gray Blogger was brought out of his slumber by a new book.  GRAY MARKETS by David R. Sugden, Oxford University Press © 2009, ISBN: 978—0-19-537129-1 (Trade Paperback).   The book jacket describes GRAY MARKETS as “the first comprehensive analysis of the gray market and a blueprint for attorneys and businesses to prevent, detect, and litigate gray market cases.”  To a great extent the book lives up to its description.

But first the caveat.   In approaching this book the reader is warned to be aware of a potential blind spot for the practitioner.   The author, while clearly accomplished and well informed in the area of law, falls prey to the persuasiveness of his own arguments and ignores potentially persuasive rebuttals.   His position is one that sees no good in the parallel market.  A practitioner’s reliance in such arguments without an adequate appreciation of the counter-arguments can undermine the attorney’s credibility with the Court.  Reading the book one often feels that he or she is reading a brief without reading the response.

The author’s clear bias against the parallel market is nowhere more clear than where he lectures manufacturers who knowingly exploit the parallel market as a vehicle for developing brand identity or for selling off excess goods.   Since the manufacturer has a right to control the manner of distribution of his or her brand, it is certainly the height of hubris to preach to them when they themselves exploit the parallel market for their own purposes.  One is left feeling that in the author’s opinion the parallel market is not gray but black.

So after this introduction you might expect a negative review of GRAY MARKETS.  On the contrary, I think that for the attorney or businessman seeking to obtain a good general understanding of strategies and tactics that can be used to discourage and combat parallel market sales, Mr. Suden’s book provides a well informed survey of legal and market strategies.  The book is broad in its coverage if somewhat US centric.  It does not cover all strategies, particularly market techniques that have been employed in Europe to identify regional parallel market sales.   That said, what it does cover is far more comprehensive and well informed than anything that I have previously seen.

I therefore recommend this book to anyone seeking to structure a comprehensive anti-parallel market strategy for his or her company or clients with the caveat that it be read with a clear vision of its obvious bias and with great caution in its mingling of counterfeiting with legitimate parallel market trade.  Likewise, for the parallel market reseller, this book provides a great preview of likely court arguments and legal strategies that need to be anticipated in this challenging trade.

To buy a copy of the book please click the following link: Gray Markets: Prevention, Detection and Litigation

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.

U.S. Customs and Border Protection (“CBP”) has released its mid year intellectual property (“IP”) seizure statistics for 2008.  Patterns that are evident from these numbers are a significant increase in value of goods seized per shipment and the continued growth of China as a source of IP violations.

The domestic value of goods seized for IP violations at the mid-year point of Fiscal Year (FY) 2008 increased by 2.7% to $113.2 million (M) from $110.1M at the mid-year point of FY 2007.  The total number of IP seizures decreased by 1%, from 7,245 to 7,166.   This suggests a higher value per seizure.  It is important to remember that at least some portion of these seizures are genuine parallel market goods which CBP detains under dubious claims that they may be counterfeit.  CBP demands a letter of authorization from the brand owner which is invariably denied and leads to seizure of the merchandise.

China was the source of the largest number of CBP IP seizures at mid-year FY 2008 with a domestic value of $96.7M, accounting for 85% of the total value seized.  In FY 07, China accounted for 80% of seizure value.  Of even greater concern is the fact that China is the source of 90% of “safety & security” IP seizures.  Safety & Securty seizures generally involve pharmaceuticals and other items viewed as dangerous to the health and safety.

As if the China numbers were not already significant, Hong Kong is treated as a separate entity by CBP for statistical purposes.  That said, Hong Kong qualified as the second largest source of IP related seizures.  Total seizures amounted to more than $5.5 million.  No other country amounted to more than $2 million in seized goods or more than 1% of total seizures.

Clearly the problem with counterfeits originating from China seems to be worsening.  This is not surprising considering the soft glove approach towards China’s IP enforcement policies.
Footwear was the top commodity seized at mid-year FY 2008 with a domestic value of $40.3M, which accounted for 36% of the entire value of infringing goods.

The categories of Handbags/Wallets/Backpacks, Cigarettes, and Sunglasses had significant increases in domestic value at mid-year FY2008 over mid-year FY 2007 values.   Overall the number of footwear seizures has declined by 48% indicating a large increase in the value of the shipments seized.

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.

After a devastating ruling from a French Court, reported previously in the Gray Blog, and a user revolt over terms of payment, E-Bay has finally received some good news.  In a sixty page decision District Court Judge Richard J. Sullivan of the  U.S. District Court for the Southern District of New York has ruled against Tiffany on all counts.  The Court vindicated anti-counterfeiting procedures presently employed by eBay and other online auction services and confirmed that the burden of policing online sellers rests squarely on the shoulders of the trademark owner.  The decision in this case is in stark contrast with recent decisions by French courts which seek to obligate the on-line services to serve as gatekeepers, content monitors and policemen for their users.

The lawsuit filed by famous jeweler, Tiffany Inc., sought damages against online auction house dBay for the sale of counterfeit silver jewelry items sold in the service from 2003 to 2006.  The suit alleged counts for direct and contributory trademark infringement, false advertising, unfair competition, and direct and contributory trademark dilution.

Tiffany acknowledged that the users of the eBay service rather than eBay listed and sold the counterfeit articles.  Tiffany argued, however, that eBay was on notice that the problem existed and that this created an obligation to investigate and control the problem.  Tiffany effectively wanted eBay to refuse to post any listing with five or more Tiffany items and to suspend any seller whom Tiffany suspected to be involved in infringing activity.  eBay defended that it was Tiffany’s burden to monitor the site and to bring violations to its attention.

The Court rejected Tiffany’s position on various grounds.  The Court concluded that the generalized allegations of trademark infringement made by Tiffany were insufficient to impute knowledge or a reason to know of trademark infringement to eBay.  Although eBay had a generalized knowledge of counterfeiting activities on its site, “it took reasonable steps to address the wrongdoing through general anti-fraud measures.”

In conclusion the Court stated that while it is not unsympathetic to Tiffany’s plight “the law is clear: it is the trademark owner’s burden to police its mark and companies like eBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their websites.”

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.

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