A federal court in California has rejected a watchmakers' attempt to use copyright law to prevent the grey market importation of its watches into the U.S. Omega S.A. v. Costco Wholesale Corporation, No. CV-04-054443 (C.D. Cal. Nov. 9, 2011). The case demonstrates once again that manufacturers operating in worldwide markets must show that their products sold in other markets are "materially different" from those authorized for sale in the United States if they want to use the U.S. legal system to stop grey market imports.

"Grey market" products are products that are sold in other markets, often for lower prices than the same products are sold in the U.S. This situation creates an opportunity for importers to purchase those products from overseas distributors and sell them in the U.S. for significantly lower prices than the U.S. counterpart products.

This particular case dealt with the importation and sale of grey market Omega Seamaster watches by Costco, the large warehouse retail chain. Costco bought the watches from a dealer in Paraguay, where Omega sold the watches for much less than their retail prices in the U.S. Costco was then able to sell the watches in its stores for $1,299, well short of the $1,999 that Omega sells the watches for.

Omega's options to prevent this importation and sale by Costco were limited. The watches were authentic, so Omega couldn't have them seized by U.S. Customs on the grounds that they were counterfeits. In addition, trademark law only allows a trademark owner to prevent the importation of grey market goods when the goods are "materially different" from the goods authorized for sale in the U.S. These material differences can include different features, differences in warranty coverage, different types of packaging, and other differences. However, in this case the Omega watches imported by Costco were identical to those sold by Omega within the U.S.

Thus, Omega tried to prevent the importation of the grey market watches via copyright law. The watches themselves were not protected by copyright. However, Omega created a new globe logo design which it registered as a U.S. copyright and engraved on the back of all of its watches. Omega then alleged that the importation and sale of these watches by Costco, without Omega's consent, infringed Omega's copyright in the globe design.

The district court initially ruled against Omega on the grounds of the "first sale" doctrine, which limits the ability of a trademark or copyright owner to prevent the re-sale of its products after the initial sale (which in this case was to the distributor in Paraguay). However, the Ninth Circuit overturned the district court in 2010, finding that the first sale doctrine did not apply because the first sale of the watches was outside of the United States. On appeal, the Supreme Court deadlocked at 4-4 (one Justice did not participate), which had the effect of affirming the Ninth Circuit's decision.

However, the appeal to the Ninth Circuit dealt only with the narrow question of the first sale doctrine. Once the case went back to the district court, the district court surprisingly granted summary judgment to Costco in December of 2011 on the grounds that Omega had engaged in "copyright misuse." According to the court, Omega improperly leveraged its ownership of the copyright to prevent competition and thus "used the defensive shield of copyright law as an offensive sword." Among other things, the court relied on a letter from Omega to Costco in which it admitted that it registered the globe design copyright specifically for the purpose of preventing the importation of grey market watches.

The case is likely to go back to the Ninth Circuit for further review. The copyright misuse defense is fairly rare, and the district court's disapproval of Omega's use of its copyright as an "offensive sword" is somewhat surprising since it has long been recognized that one of the rights granted by copyright is the right to prevent others from using the copyrighted work.

However, for now, the district court's opinion has cast significant doubt on whether copyright law can be a viable means to prevent the importation and sale of grey market products. Therefore, the best strategy for blocking grey market imports is still to ensure that the products authorized for sale in other markets are "materially different" from the products authorized for sale in the U.S.