The Gray Blog

The European Commission has issued revised antitrust rules that allow luxury goods manufacturers who own less than 30% market share in any particular market to restrict the distribution of their goods through online resellers. The press release issued by the Commission states that the “Regulation allows manufacturers to protect an exclusive distributor from active sales by other distributors, in order to encourage that distributor to invest in the exclusively allocated territory or customer group.”

This new rule is of particular importance to online retailers such as EBay and Amazon. Under the new rules manufacturers could impose “hardcore” restrictions on on-line resellers forcing them to refuse sales in particular markets or to reroute customers to particular resellers. These new rules are valid for 12 years.

The commission has indicated that it will monitor the application of the law for any abuses.

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.