The US Court of Appeals for the Ninth Circuit on Wednesday reversed a district court's grant of summary judgment to retailer Costco in a copyright infringement action brought by watch manufacturer Omega. Omega claimed that Costco's unauthorized sale of its imported watches constituted infringing distribution and importation. The decision turned on whether the US Supreme Court's decision in Quality King Distributors, Inc. v. L’anza Research International, Inc. required the Ninth Circuit to overrule its precedents that the "first sale doctrine" raised by Costco as a defense provides no protection against an infringement claim involving

  (1) foreign-made, nonpiratical copies of a U.S.- copyrighted work, (2) unless those same copies have already been sold in the United States with the copyright owner’s authority.

The Ninth Circuit held that the Supreme Court's ruling could be reconciled with its own case law:

  Perhaps most compelling is the objection that the precedent would provide substantially greater copyright protection to foreign-made copies of U.S.-copyrighted works. A U.S. copyright owner, for example, would be unable to exercise distribution rights after one lawful, domestic sale of a watch lawfully made in South Dakota, but, without the limits imposed by the first sale doctrine, the same owner could seemingly exercise distribution rights after even the tenth sale in the United States of a watch lawfully made in Switzerland. The difference would likely encourage U.S. copyright owners to outsource the manufacturing of copies of their work overseas. The Court has resolved this problem by clarifying that parties can raise [the defense] in cases involving foreign-made copies so long as a lawful domestic sale has occurred. Insofar as Costco contends that [the doctrine] should apply to foreign made copies even in the absence of a lawful domestic sale, the surviving rule...requires otherwise.

The court went on to find that "Because there is no genuine dispute that Omega made the copies of the Omega Globe Design in Switzerland, and that Costco sold them in the United States without Omega’s authority, the first sale doctrine is unavailable as a defense to Omega’s claims."

The Supreme Court's decision in Quality King had reversed the Ninth Circuit's rejection of the first sale defense, holding that "The whole point of the first sale doctrine is that once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution." Wednesday's ruling does not fall squarely under that precedent, because while Omega's watches were produced abroad, the goods in Quality King had been produced in the US, exported, and then returned to the US for domestic sale. The first sale doctrine lies within Section 109(a) of the 1976 Copyright Act, and its application is murky in such transactions, which are said to occur on the "gray market" and involve the resale of goods with US trademarks or copyrights.