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Court Case Creates New Tool to Protect U.S. Distributors from Dumping Grey Market Products

The decision in Omega S.A. v. Costco Wholesale Corp., (Sept. 3rd 2008) 2008 WL 4058640 (C.A.9 (Cal.)) distinguishing the Supreme Court Decision in Lanza v. Quality King which I handled at the trial court level gives companies manufacturing their goods oversees a strong tool to protect their U.S. market from dumping of product intended for foreign markets.

In Omega, the 9th Circuit Court of Appeal found that Omega, a Swiss watch designer and manufacturer, could prevent Costco Wholesale Corp. from selling Omega “grey market” watches.

“Grey market” goods are genuine new or used products that are imported into and sold in the United States when the dollar declines or other factors occur that allow the importer to profitably flood the U.S. market with oversees goods at below market prices. This practice can devastate the existing distributor network, deplete oversees supplies and lower the perceived value in the U.S. of the brand or product.

Like many high end manufactures, Omega sells its watches exclusively through a world-wide network of authorized distributors thereby controlling which of its products are sold in various global markets, prices, and each consumer’s overall buying experience. Each Omega watch has the phrase “Omega Globe Design” imprinted on the back. The phrase is a copyrighted work which Omega registered with U.S. Patent & Trademark Office.

Omega sued Costco for copyright infringement for importing and selling “grey market” watches. Costco acquired the watches, from a New York corporation which had purchased them from an unknown third party. The watches were new genuine Omega products, manufactured by Omega in Switzerland and sold to an authorized Omega distributor, who in turn sold them to an unknown third party who then sold them to the New York Corporation.

The right to import and sell copyrighted works in the U. S. is governed by The Copyright Act of 1976. Section 602(a) of the Copyright Act restricts the importation of copyrighted works without the owner’s consent. However, Section §109(a) called the “first sale doctrine,” grants purchasers of copyrighted works the right to sell or otherwise dispose of the copyright work in the manner they choose.

The leading case interpretation these conflicting provisions is the U.S Supreme Court decision in L’anza Research International, Inc. v. Quality King Distributors, Inc., 523 U.S. 135 (1998). In the Quality King that case, I represented L’anza in the trial court. Quality King involved a complicated series of sales involving “round trip” importation: L’anza hair care products were manufactured in California, sold, exported and then shipped back into the United States without the copyright owner’s permission. The products were then sold to consumers by unauthorized retailers who undercut L’anza’s exclusive distribution network. L’anza registered copyrights on the text imprinted on each of its bottles and then sued Quality King for copyright infringement. L’anza won at the trial court level, and at the 9th Circuit of Court Appeals but lost before the U.S. Supreme Court.

In Omega the 9th Circuit Court of Appeals distinguished the Quality King decision and found for Omega reasoning that the First Sale Doctrine did not apply because the copyrighted products were not manufactured in the U.S.

The Omega decision is significant in that it gives companies who manufacturer their goods oversees a viable method to prevent the sale of gray market products in the United States and to thus prevent their U.S. Distribution Network from being harmed by lower priced grey market goods.

Please feel free to contact John if you would like our assistance.

Written by:
John McKasson